The Effects of Global Free Trade
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
May 7, 2022
The Effects of Global Free Trade
Free trade is the hallmark of capitalism – and has been since the publication, in 1776, of
Adam Smith’s classic, The Wealth of Nations. Free trade is widely embraced by economists as a
beneficial policy for nations to adopt, and an increasing number of countries have revised their
trade policies or entered into free trade agreements as a result. Although the benefits of free
trade can be substantial, there are negative consequences as well, causing many to rethink
their commitment to this bedrock of economic theory.
What Is Free Trade?
Free trade is the notion that the marketplace should be fairly transparent in terms of
international boundaries. That is, goods should be able to be bought and sold freely between
nations without much in the way of government interference in the resulting trade.
Specifically, free trade seeks to eliminate or minimize the role of economic tools meant to
favor one country’s goods over another’s – tariffs, quotas and subsidies:
Tariffs: A tariff is a specific government-imposed cost on imports. A tariff raises the cost
of imported goods, thereby allowing domestic manufacturers of the same items to charge more
for their products.
Quotas: A quota policy restricts the quantity of certain goods that can be imported. A
country that wants to encourage its domestic automobile industry, for example, may set a
quota limit on the number of cars that can be imported from foreign manufacturers.
Subsidies: A national government may decide to provide financial incentives directly to
a domestic industry in order to encourage production. These incentives, or subsidies, can be
direct transfers of money or indirect, such as tax breaks and fee waivers.
Another area that often becomes embroiled in discussions of free trade is
government regulation. Environmental rules, in particular, can make it difficult for the goods
made in one country to be legally acceptable in another country. For example, emissions
controls on automobiles and trucks differ from nation to nation and may restrict a
manufacturer from exporting cars without expensive retrofits of the emission control system.
The Benefits of Free Trade
People are keen on free trade because of the belief, first championed by Adam Smith, that
it helps the market operate in an economically efficient manner. That is, free trade encourages
manufacturers to make the “right” things and to set the “right” price for their goods. The end
result is that manufacturers earn a reasonable profit; consumers don’t overpay for goods, and a
greater amount of new wealth is generated and distributed broadly around the globe.
For example, if a manufacturer in Bangladesh can make good quality running shoes at half
the cost of a manufacturer in the U.S., a free trade policy would naturally shift more production
of these goods over to Bangladesh, thereby creating jobs and wealth in that country and
lowering the cost of running shoes for customers in the U.S. and elsewhere in the world.
Externalities: The Down-Side of Unrestricted International Trade
Free trade may sound pretty good in theory, but it can have some dire consequences in
actual practice. For one thing, the reduction of protective policies like tariffs and quotas can
leave domestic industries suddenly vulnerable to large-scale disruptions. The creation of the
North American Free Trade Agreement, NAFTA, in 1994 removed some of the trade restrictions
between the United States, Mexico and Canada, thereby encouraging many U.S. manufacturers
to close their domestic plants in favor of cheaper production costs in Mexico. Thousands of U.S.
workers lost their jobs.
This “path of least resistance” approach to doing business can lead to other dangerous
disruptions as well. Companies may choose to move their operations to places where
environmental regulation is weak, where laws do not protect children from harsh labor
conditions, or where fire safety standards for factories are not enforced. This can lead to
dramatic exploitation of workers, communities and ecosystems, an effect that economists have
labelled “externalities,” since the impacts are not taken into consideration in ordinary financial
accounting.
The negative consequences of free trade have given many people pause. Politicians as
diverse as Bernie Sanders and Donald Trump have voiced opposition to free trade agreements
that are not sufficiently protective of American interests. Indeed, NAFTA was scuttled in 2018
and a new international agreement is set to take its place – provided the U.S., Canada and
Mexico all agree to its terms.
About Human Rights & Free Trade
Free trade, while opening world markets, is feared in many quarters as degrading human
rights. As poorer countries try to expand exports in a free-trade market, wages and working
conditions can drop in order to offer the best price for a product. The World Trade
Organization, as the chief instrument for supporting and regulating free trade, has become a
center of controversy because of those fears.
Banana Republics
1. The term “banana republic” refers to past practices of large agricultural corporations to
“install” leaders into power in Latin America who would favor conditions that ensured cheap
export of bananas. While the days of the corporate installed banana republics are gone,
Rebecca Cohen writes in the "Science Creative Quarterly" in 2008 that the banana trade still
exploits workers by a “race to the bottom” in countries striving to limit costs to meet the
demands of supermarkets to offer the lowest price to their shoppers. The WTO rules, she
writes, prevents importing countries from prohibiting buying bananas from exporting countries
based on the treatment of workers or lax environmental practices.
Shoes, Toys And Cola
1. The website Global Issues writes that multinational companies lobby for international
trade agreements that foster the race to the bottom in exporting countries supplying many
different products. Nike has been criticized for using cheap labor in Asia, where loose
regulations and lax oversight of working conditions allow suppliers to use sweat shop
operations, and in some cases child labor. The "Nation" ran a cover story in 2006 about
international protests against Coca-Cola’s human rights record, including intimidation and even
the use of death squads by its partner bottlers in Colombia, and pollution and depletion of
water supplies in India. Even toy companies come under criticism for the harsh labor conditions
that exist in such countries as China where plants produce name-brand toys for American and
European markets.
Human Trafficking
1. The Corporate Social Responsibilities in Asia website cites the International Labor
Organization’s estimate of 12.3 million people subjected to forced labor, bonded labor and
forced child labor. CSR Asia contends the economic globalization of free trade has created an
“unprecedented mobilization of unskilled and low-skilled labor.”
Market driven responsibility
1. Kathryn Dovey, writing on the “The Business of Sustainability” for the "Berskshire
Encyclopedia of Sustainability" notes that a number of multinational corporations that were
subjected to protests, bad press and lawsuits have been driven by market pressures to examine
the impacts of their global business operations on human rights. By 2009, according to Dovey,
242 companies had a human rights policy, and more than 5,000 companies had signed the
United Nationals Global Compact, described as the world’s largest corporate responsibility
initiative.
WTO Response
1. The WTO states on its website that there has been ongoing discussion and controversy
for the WTO to include workers' rights in its international trade regulation. But the call for such
regulation from governments in Europe and North America is countered by a fear from
developing countries that provisions on workers' rights would undermine their comparative
advantage of lower-wages, and would perpetuate poverty and low workplace standards. As of
2010, “labor standards are not subject to WTO rules and disciplines.”
