Free Trade Advantages Disadvantages Essay

Readers Question: What are the advantages and disadvantages of the WTO formally the GATT?

The WTO is a body designed to promote free trade through organizing trade negotiations and act as an independent arbiter in settling trade disputes. To some extent the WTO has been successful in promoting greater free trade. The principles of the WTO are
  1. Promote free trade through gradual reduction of tariffs
  2. Provide legal framework for negotiation of trade disputes. This aims to provide greater stability and predictability in trade.
  3. Trade without discrimination - avoiding preferential trade agreements.
  4. WTO is not a completely free trade body. It allows tariffs and trade restrictions under certain conditions, e.g. protection against 'dumping' of cheap surplus goods.
  5. WTO is committed to protecting fair competition. There are rules on subsidies, dumping
  6. WTO is committed to economic development. For example, recent rounds have put pressure on developed countries to accelerate restrictions on imports from the least-developing countries.

Advantages of promoting free trade

  1. Lower prices for consumers. Removing tariffs enables us to buy cheaper imports
  2. Free trade encourages greater competitiveness. Through free trade, firms face a higher incentive to cut costs. For example, a domestic monopoly may now face competition from foreign firms.
  3. The law of comparative advantage states that free trade will enable an increase in economic welfare. This is because countries can specialise in producing goods where they have a lower opportunity cost.
  4. Economies of scale. By encouraging free trade, firms can specialise and produce a higher quantity. This enables more economies of scale, this is important for industries with high fixed costs, such as car and aeroplane manufacture. In new trade theory, it is this specialisation and exploitation of economies of scale that is most important factor in improving economic welfare. See also: Advantages of Free Trade

Successes of WTO

To what extent has the WTO being able to promote free trade?
  • The WTO has over 160 members representing 98 per cent of world trade. Over 20 countries are seeking to join the WTO. 
  • An increased number of trade disputes have been brought to the WTO, showing the WTO is a forum for helping to solve disputes.
  • WTO regulations and co-operation helped avoid a major trade war; this was significant during 2008/09 global recession. We could compare this to 1930s, where trade wars broke out causing a fall in global trade. According to (Bagwell and Staiger 2002) the average tariff in 1930s was 50%. In 2000s, average tariff is 9% (VOX)
  • According to Ralph Ossa, "WTO success: No trade agreement but no trade war"  11 June 2015. the value of WTO in preventing trade wars could be estimated at up to $340 billion per year.

World exports as a % of GDP have increased from 22% of GDP in 1995 (when WTO formed to just under 30% in 2015. Indicating importance of trade to global economy.

Disadvantages of WTO

  • However, the WTO has often been criticised for trade rules which are still unfavourable towards developing countries. Many developed countries went through a period of tariff protection; this enabled them to protect new, emerging domestic industries. Ha Joon Chang argues WTO trade rules are like 'pulling away the ladder they used themselves to climb up' (Kicking away the ladder at Amazon)
  • Free trade may prevent developing economies develop their infant industries. For example, if a developing economy was trying to diversify their economy to develop a new manufacturing industry, they may be unable to do it without some tariff protection.
  • WTO is being overshadowed by new TIPP trade deals. These deals are negotiated away from WTO and focuses mainly on US and EU. It excludes China, Russia, India, Brazil and South Africa. It threatens to diminish the global importance of WTO
  • Difficulty of making progress. WTO trade deals have been quite difficult to form consensus. Various rounds have taken many years to slowly progress. It results in countries seeking alternatives such as TIPP or local bilateral deals.
  • WTO trade deals still encompass a lot of protectionism in areas like agriculture. Protectionist tariffs which primarily benefit richer nations, such as the EU and US.
  • WTO has implemented strong defense of TRIPs ‘Trade Related Intellectual Property’ rights These allow firms to implement patents and copyrights. In areas, such as life-saving drugs, it has raised the price and made it less affordable for developing countries.
  • WTO has rules which favour multinationals. For example, 'most favoured nation' principle means countries should trade without discrimination. This has advantages but can mean developing countires cannot give preference to local contractors, but may have to choose foreign multinationals - whatever their history in repatriation of profit, investment in area.
  • In response to this the WTO may say that free trade has been an important engine of growth for developing countries in Asia. Although there may be some short term pain, it is worth it in the long run.
  • Also the WTO has sought to give exemptions for developing countries; enabling in principle the idea developing countries should be allowed to limit imports more than developed countries.

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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