Why Nations Should Implement Free Trade Policies
It can be best stated that free trade provides the most benefits and stability to a nation’s economy over the long term. The vast majority of mainstream economists agree that this is the case, with many of them rejecting protectionist policies. Still, many people have blamed free trade policies for causing the loss of jobs in certain industries and for allowing companies to relocate overseas to better take advantage of cheap labor costs. While there is truth to these criticisms, countries that have implemented free trade policies have mostly seen tremendous economic growth, which has lifted millions of their citizens out of poverty. Critics of free trade routinely point to the North American Free Trade Agreement (NAFTA) as being an example of free trade causing job losses and wage depression for domestic industries. This is a reality of NAFTA, as this trade agreement caused many American jobs to be sent down to the neighboring country of Mexico. However, what critics fail to point out about NAFTA is that this agreement actually led to to lower rates of unemployment and to wage increases in the United States over time. It also helped the Mexican economy as well, by allowing the country to be one of the largest trading partners with the United States. Simply ending NAFTA would cause great harm to Mexico the very country that has benefited from this agreement the most.
Many of the countries that have embraced free trade have seen their countries develop into leading world economies, with rising annual GDP. The most well-known examples of this have been the cases of China and India. Both of these countries have opened themselves up to the international marketplace, which has resulted in long-term economic success for both countries, and has also led to the development of a growing middle class.
In contrast to free trade is protectionism, which seeks to limit unrestricted trade and place high tariffs on goods coming from foreign nations, or providing major subsidies for specific industries with the goal of keeping domestic industry competitive. Protectionists frequently argue that free trade policies hurt domestic companies by causing job losses and wage reductions and introducing foreign competition. It is important to note that the implementation of protectionist measures actually hurts a nation’s economy, rather than helping it. A notable example of this occurred during the Great Depression of the 1930s, where many countries responded to the economic crisis by placing tariffs upon one another. These actions ended up making the worldwide depression much worse due to the fact that it became much more expensive to conduct international trade. The United States responded to the Great Depression by implementing the Smoot-Hawley Tariff in order to protect domestic producers. This tariff, which was the use of government intervention to interfere with trade, ended up causing more harm than good. Although this tariff was not the cause of the Great Depression, it definitely prolonged it by shutting the United States out of the foreign marketplace.
When governments seek to intervene in economies, they have the ability to pick which industries they support and which ones they do not. This is problematic because they may find themselves propping up industries that are no longer productive for the economy, or even serving as a hindrance for overall growth. The law of supply and demand by contrast do not choose winners and losers, but rather allow for the market to decide what industries are relevant and which ones are not. The market, rather than the government, is the best option for creating economic growth, even if there are some downsides during the process, because in the long-term, the market will correct any deficiencies that arise and continue to shape the economy for prosperity and sustainability over time.
It is also important to point out that under a free trade system, there will inevitably be people who are impacted negatively: companies close down or relocate overseas and the result can be large numbers of unemployed workers within specific communities or regions. Wages in some sectors can also be depressed as there is more competition from foreign producers. The market may even cause pressure to bring foreign workers in from various fields, making it harder to get a job domestically. This can cause friction, tension, and even violence, which can result in different groups clashing, thus causing political upheaval. Also, if major industries are negatively impacted without a means to employ those who have lost their jobs, this can cause unemployment to grow.
The key to success of free trade over time is not to leave those adversely impacted by these trade policies behind. Instead, the government should provide a worker relief fund that helps those unemployed as a result of global trade policies to get retrained for new jobs so that they can become productive again and contribute positively to their communities. This program can also be supported through state, local, and private investments as well. It is true that certain industries may die off or weaken as a result of these trade policies, but other industries can form and existing ones can grow. Giving new opportunities to those who have been negatively impacted by free trade policies then helps to reduce the negative effects (and blunt political opposition) and make free trade policies overall beneficial for everyone over the long-term. Free trade policies generally allow nations to improve their economic situations, and even if some jobs or industries may be lost in the short-term, the long-term benefits are more than enough to balance out any losses. In our current international and globalized world, this is the exact type of economic policy that should be pursued for the most long-term prosperity.
If you are interested in learning more about these ideas, please get your own copy of Isolation Moderation.