Pros and Cons of Free Trade Agreements

Written by ron finberg
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Pros and Cons of Free Trade Agreements
(Image by Flickr.com, courtesy of kamshots)

Free Trade Agreements (FTA) are treaties between two or more countries that allow imports between the countries to receive a complete or partial reduction of normal tariffs. According to the World Trade Organization (WTO), by 2010 there will be about 400 Regional Trade Agreements, 90 per cent of which will be FTAs. Some of the largest and most well-known FTAs are the North American Free Trade Agreement (NAFTA) and European Free Trade Association (EFTA).

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History

The value of FTAs and free trade in general have been debated by economists since the beginning of global trade. In fact, the Jewish Talmud suggests that biblical Sodom's downfall was based on its desire to prevent outside merchants from trading with their lush society. As a result, they used an advanced form of protectionism and used violent force and trickery towards visitors.

The modern-day free-trade debate is based on mercantilism versus free-trade economic theories. Mercantilists believe that a nation's prosperity is tied to its supply of capital (i.e., money, gold, silver, etc.). Therefore, they propose the use of tariffs to prevent imports from draining away their capital and advocated exports to sell the country's goods and increase capital. Free-trade theory advocates decreasing tariffs between nations in order to stimulate trade and thereby increase capital.

Benefits of Free Trade

Consumers are the biggest beneficiaries of free trade due to the increased supply of goods it provides to their countries, as well as the lower prices and increased selection. Exporters benefit from the ability to sell their goods to multiple locations without having their prices raised as a result of tariffs.

Also, FTAs force participating countries to collaborate between themselves for a united good, which can lead to peace between the countries.

Opposition to Free Trade

Opposition to FTAs is commonly known as protectionism and mercantilism. The main risk cited with free trade is that it causes demand for domestic production to decrease, and therefore causes a drop in sales/profits at domestic businesses and potential job losses. Also, government revenues are decreased by the reduction in tariff charges collected.

Human rights and the environment are also cited as detrimental effects, because free trade can cause participating countries to produce goods at the lowest price possible even if worker's rights and the environment is sacrificed as a result.

NAFTA

NAFTA stands for the North American Free Trade Agreement. It is the largest FTA in the world in terms of purchasing power, and includes the USA, Canada, and Mexico. Like all FTAs, the benefits of NAFTA have been debated by economists. Canadian critics contend that their environment has been damaged as a result of their natural resources being sold off for profit gain. Also, both Mexican and Canadian businesses have complained about increase foreign competitors that have created businesses for the sole interest of selling goods to the lucrative U.S. market. American complaints are that NAFTA has caused American companies to move manufacturing plants to Mexico and Canada to take advantage of cheaper labour, leading to job cuts in the U.S.

On the other hand, the upside of NAFTA is that trading partners have benefited from increases in agricultural sales, and additional supply of goods to consumers.

Bottom Line

Like any treaty or agreement, many of the pros and cons of FTAs are subjective. Job losses can be offset by reduced prices of consumers, and increased cross border trading can lead to innovation. Additionally, commerce tends to be cyclical; therefore, a trading partner that is disproportionally benefiting from an agreement may lose out in the future.

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