What are the main advantages and disadvantages of global free trade? Does it exist in practice?

What are the main advantages and disadvantages of global free trade?

Does it exist in practice?

1. Introduction

The posed question comprises three different issues which have to be investigated. The first thing, implied in this question is, whether or not there are more arguments for or against global free trade both in theory and in practice. Secondly, we have to ask, if real global free trade is being practised in our times. The third issue deals with the question of how we should go on in the future. Is global free trade worth being expanded or should we better tend to protectionism?

In this essay I will argue that although free trade is said to cause some unintentional side-effects it is a better way of achieving economic and social development than protectionism. Most of the problems concerning free trade only exist due to the fact, that protectionist barriers set up by Northern countries still disturb a real free trade system and therefore constitute a disadvantage for developing countries.

I first want to work out the opportunities and benefits but also the challenges and problems of global free trade, as they are seen in our times. I will refer to the question of gains and losses for both, industrialised and developing countries. Firstly, I want to look at economic effects and will then turn to political and environmental issues and to the linking of the recent terror attacks with free trade. I will then ask the question how free trade is being practised today. Finally, I will sum up my results and will conclude with answering the question whether free trade is worth a greater expansion in the future or not.

2. Free Trade – The discussion

2.1. Advantages and disadvantages of global free trade

Foreign trade policy has two different centuries-old conceptions concerning free trade. The mercantilistic idea was already represented by the absolutist rulers of the 18th century and is gaining more and more popularity in our times. Due to this concept, imports from foreign countries endanger domestic jobs. Therefore imports should be controlled through customs duties and other trade barriers. On the other hand, exports should be supported, because they mean more jobs for the exporting country (Frey, 1984: 27). But what happens, if all countries follow this idea of minimising their imports and maximising their exports? If we do not import from other countries, they would not be able to pay for our exports.

The liberal conception was basically formulated by Adam Smith in 1776 in his work An Inquiry into the Nature and Causes of the Wealth of Nations. According to his view, free trade leads to international division of labour and therefore to interdependence between countries. This supports co-operation between countries and results in stability, prosperity and peace for all nations. In contrast to that, any kind of governmental trade restriction leads to diminishing of prosperity both at home and abroad (Tribe, 1995: 24).

There are many different arguments concerning economic, political and environmental issues, which support but also criticise free trade. Nevertheless, economic arguments played the most important role in the history of free trade. Firstly, national customers gain from free trade. They can choose the cheapest products from all over the world. This means an increase in turnover for the foreign supplier who offers the cheapest goods. Therefore he can expand his production. Due to the fact that foreign producers use a part of their proceeds on imports from their customers’ countries, they also promote the domestic economy.

Nonetheless, the protectionist view is another one: If customers can decide between domestic and imported products, some domestic suppliers would not be competitive anymore and would not be able to sell their products, because they are either too expensive or low-quality. They would only be able to survive, if they lower their costs of production with no consideration for social and economical losses. This leads to job cuts and therefore to higher unemployment (Wood, 1994, p. 290). Or as Bhagwhati says it in a more general way, protectionists fear that “trade with countries with paupers will produce paupers in our midst” (1995, p. 14). Therefore protectionists think that goods should not be imported if domestic industries get hurt from this (Irwin, 1996, p. 39). However, this pressure of competition can also be seen in the case of domestic trade. Every day, businesses have to close down due to the fact that customers prefer other brands out of the same country. So, why should suppliers be more protected in foreign trade than in domestic trade? And: Isn’t the reason for unemployment in Northern countries rather technical change than trade with the South (Bhagwhati, 1995, p. 16)?

Nevertheless, workers get unemployed in fields of economy, which are no longer competitive. Due to the liberal argument this is only a temporary problem. The private sector offers many other much more productive possibilities of work which has a positive result on the national economy. However, in many countries there are too less jobs to absorb the unemployed (Wood, 1994, p. 3).

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