Free trade agreements like the proposed Trans-Pacific Partnership are controversial. Many nations have embraced the idea of “free trade” as they consider it as one of the best ways to lower prices for consumers, increase exports and benefit from economies of scale. In February 2016, 12 countries that border the Pacific Ocean signed the Trans-Pacific Partnership (TPP) agreement in a bid to deepen economic ties between these countries and eventually create a new single market in the region (Amari 2016). President Trump and other critics have openly opposed the deal saying it would cost U.S. jobs and also pave the way for companies to take governments that change their various policies to favor state provide services to the court. According to Simões (2017), the Transatlantic Trade and Investment Partnership (TTIP) is another deal that might not be ratified given the current political environment. While free trade agreements are not perfect, they benefit organizations and employment relations stakeholders such as employees, their associations, and their managers, and the controversies sometimes have a lot to do with politics.
Whichever way one looks at this debate, it remains clear that free trade agreements have comparative advantage benefits. When countries enter into free trade agreements, it can specialize in the production of goods where they have a lower opportunity cost. The chance that the economic welfare of all the involved partners will increase becomes significantly high. Experts say that if any free trade agreement enables a country to specialize in these class goods, the country should consider ratifying it (Baldwin & Jaimovich 2010).
Countries can also ratify free trade agreements if they want to record an increase in their exports. While consumers who import goods also benefit from these policies, traders exporting their products where their country has a comparative advantage also record a significant improvement in their economic welfare (Baldwin & Jaimovich 2010). A zero-rated or lower tariff on the country’s exports makes it possible to have a higher quantity of exports. When this happens, the exporting country is guaranteed of registering an increased number of jobs locally as well as rapid economic growth.
Organizations and other employment relations stakeholders in the host countries can also benefit from economies of scale. Through free trade agreement, countries are able to specialize in certain types of goods that can help them to lower average costs. Countries with industries that incur fixed cost or require high amounts of capital stand a significant chance to reap from economies of scale. When prices are lowered for consumers, they have a higher economic power. Additionally, exporting firms experience a higher efficiency (Eliason 2015; Stewart 2016).
Free trade agreements are also great ways of encouraging competition. Governments have the responsibility of protecting their strategic and infant companies from unhealthy competition. However, this does not mean a government to outlaw competition. Ervine and Fridell (2015) says the only way to create room for competition is to ensure foreigner companies help in the creation of more trade and have clauses in the deal that ensures no market is disadvantaged. When there is healthy competition, the incentives to cut costs as well as efficiency increase. Healthy completion can also help to prevent domestic monopolies from over-pricing their commodities or services (Schott 2004).
Trade is a key ingredient of growth. According to Schott (2004), since 1945, world trade has increased by close to 10 percent. This increase has played a central role in the economic growth of many countries across the world. When global companies set foot in a foreign country, they rely on their expertise to develop local resources. Local businesses have an opportunity to learn from them and become more competitive.
Free trade agreements also make international trade possible, and as result of this, many countries are able to use their surplus raw materials. Some countries in the Middle East like Qatar boast of having rich oil reserves. However, without trade agreements, they would not benefit so much from this resource. Japan with its very limited raw materials would have a low GDP if there were no free trade agreements (Nomura 2016).
Free trade agreements also lead to lower government spending. In many cases, governments subsidize their local industries substantially to protect their interests. However, researchers say after entering into a trade agreement to remove subsidies, these governments save a lot of money and can, therefore, put these resources to better use (Nomura 2016).
Another contribution of free trade is that it allows the transfer of technology. It enables local companies to have access to the latest technologies. When this happens, local economies have an opportunity to grow, and consequently, job opportunities also increase. Many international organizations provide job training, which ultimately contributes to the success of the local economy. When the number of jobs increase and the economy begins to do better, organizations, employees, their associations, and employers benefit both directly and indirectly (Nomura 2016).
There is also criticism of free trade, which should not be taken for granted given that free trade can cause many problems if the negotiators fail to put all factors into consideration before rallying their countries to ratify. Some leaders are often concerned when they hear that free trade can lead to increased outsourcing of jobs.
When a country reduces the tariff on its imports, many of their companies have a great opportunity to expand into other countries. Imports from countries with high cost of living always cost more. However, without tariffs, these goods cost less in countries with low cost of living. Some companies in the United States might find it difficult to compete in such scenarios and be forced to lay off part of their labor force. When the U.S. ratified NAFTA, for example, many manufacturing firms in the country laid off a significant number of their workers. Critics of this free trade agreement hold that NAFTA sent jobs to Mexico and left locals to fend on their own (Czarny & Folfas 2015).
Other than increased outsourcing of jobs, some experts fault free trade as a major tool for stealing intellectual property. They argue that many developing countries are often concerned that they lack the same protection patents as countries in the developed world such as the United States. Besides, they are also concerned that the laws they have are often not enforced strictly. Because of these problems, there are some companies in the emerging markets that international companies have stolen their ideas. When this happens, companies that take advantage of this agreement in the emerging market countries often remain in the market to compete with lower-priced domestic companies that cannot without standing the slightest completion (Intellectual Property 2007).
In addition, free trade can crowd out domestic industries. Most emerging markets in the international market are economies that still rely heavily on traditional businesses, especially farming, for employment. Farms in these markets can fail without any negative contribution on the part of an international organization. They are often small family farms. When subsidized international agri-businesses start to operate within the same market, they naturally die off, and consequently, their owners are forced to look for work in the cities. The eventual result of this trend is aggravated joblessness, poverty, and crime levels (Quiggin 2010).
Free trade can also lead to degradation of natural resources and local cultures. In most emerging markets, there are often limited environmental protection policies. Firth (2012) holds that, in a free trade zone, there is a high demand for resources such as timber and others, and the lack of laws allows the depletion of these resources. Strip-mining and deforestation expose the land to erosion and other elements that ultimately render the land useless. As development moves into these regions, the foreigners come and ensure that their strong cultures uproot the cultures of the locals. Native cultures get destroyed.
While the intention of free trade is to increase the revenue of their partner countries, the opposite can be the reality. Free markets require that tariffs and others fees do not restrict trade. Without these sources of revenue, small countries can experience reduced tax revenue (Firth 2012).
Free trade can benefit organizations and employment relations stakeholders as has been demonstrated in this paper. However, it can also bring emerging economy countries on their knees, but this does not mean protectionism is the answer. Countries have to take some risks to increase their chances of growing economically.
Countries that choose high tariffs over free trade can succeed for a short term. The best solution is enacting regulations and laws with free trade agreements to cushion risk-countries from these problems. Emerging economies should insist on outing environmental safeguards to prevent the possible depletion of natural resources. There should also be labor laws and the right institutions that can ensure working conditions are favorable. Moreover, countries that are concerned that outsourcing can lead to losing of jobs in their local markets need to insist that, as part of the deal, foreign companies have to build local factories. Additionally, they should insist that these companies train local workers in the latest techniques and share the latest technology with them.
Amari, A, 2016, The Trans-Pacific Partnership (TPP) Agreement, Asia-Pacific Review, 23(1), 11-20, doi:10.1080/13439006.2016.1195948
Baldwin, R, & Jaimovich, D, 2010, Are Free Trade Agreements Contagious? doi:10.3386/w16084
Czarny, E, & Folfas, P 2015, World trade and regional trade orientation in the context of forthcoming Transatlantic Trade and Investment Partnership, Equilibrium, 10(3), 105. doi:10.12775/equil.2015.027
Eliason, A 2015, The trade facilitation agreement: a new hope for the World Trade Organization, World Trade Review, 14(04), 643-670, doi:10.1017/s1474745615000191
Ervine, K, & Fridell, G 2015, Introduction: beyond free trade, Beyond Free Trade, 1-13. doi:10.1057/9781137412737_1
Firth, L 2012, Globalisation and trade, Cambridge: Independence
Intellectual Property and Free Trade Agreements, 2007, doi:10.5040/9781472564160
Nomura, R, Ohkawa, T, Okamura, M, & Tawada, M 2016, Expansion of free trade agreements, overlapping free trade agreements,and market size, New Frontiers in Regional Science: Asian Perspectives Regional Free Trade Areas and Strategic Trade Policies, 3-19, doi:10.1007/978-4-431-55621-3_1
Quiggin, J 2010, Lessons from the Australia–US Free Trade Agreement, No Ordinary Deal: Unmasking the Trans-Pacific Partnership Free Trade Agreement, 98-108. doi:10.7810/9781877242502_6
Schott, J 2004, Free trade agreements: US strategies and priorities, Institute for International Economics, Washington, DC
Simões, F 2017, Amicus curiae in the Trans-Pacific Partnership, American Business Law Journal, 54(1), 161-238, doi:10.1111/ablj.12097
Stewart, J 2016, Economies of Scale and Imperfect Competition, International Trade, 73-87, doi:10.1142/9789814725088_0009
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