A Closer Look at Free Trade and What it Has Brought to Us

"Free trade has generated economic prosperity for all." Has it? Free trade is the cause for the rise of the world economy, allowing money to flow freely between countries. However not all is well with this concept.

Free trade has allowed countries with large and well-funded industries to prosper, especially if they can beat other countries to the punch. Foreign investment has allowed companies to expand their assets and profits abroad, giving them more stability in case of trouble. Because of the large share of the market taken up by the companies, a country which is strong in one industry, such as iron, can effectively monopolise that industry globally by itself or with a few other select countries, cutting out other competitors. This bodes well for the economy of such a country.

Furthermore, foreign competition has raised the standard of domestic industries which have to improve to remain competitive. Thus consumers get the pickings from this competitive economy. Prices will also be lowered as an incentive for consumers to buy their goods.

Free trade has also helped the development of the world economy. Multinational companies boost the economies not only of their home countries but also those where they operate. This in turn has led to the mutual strengthening of diplomatic ties and the increase in trade. This results in the interconnection of different markets which stabilises the economic differences between countries and benefits all when the going is good.

However, although some see free trade as a bed of roses, roses have thorns too. Free trade has resulted in the Collapse of local industries, rising unemployment, accumulation of a trade deficit and other adverse effects. When foreign competition in a country gets out of hand, local industries will begin to find it difficult to keep up, especially since large multinational companies are well financed. The domestic market finds itself flooded with foreign consumer goods. If these foreign goods turn out to be of better quality, or in some cases more fashionable, local companies will find themselves shut out of their own markets.

In order to handle this loss of income, domestic companies have to try to cut corners. This results in a rise in unemployment as workers are retrenched. In some cases, as working capital becomes scarce, the quality of these goods fall and some companies eventually go bust.

Foreign competition also leads to political influence. When a small country relies too much on foreign capital, it becomes dependent on foreign companies and falls under their influence. Encroachment of sovereignty does not occur in all out wars.

A classic example of a developing trade deficit is the United States of America. The United States has long been an active proponent of free trade. This policy evolved after the disastrous Smoot-Hawley tariffs which contributed to The Great Depression of the 1930's. America has championed free trade from that period onwards, even giving special advantages to small developing countries.

The United States is now running a massive trade deficit numbering billions of dollars. The main reason for this huge deficit is that while the United States was letting in foreign competition, other countries, mainly Japan, have been closing up their domestic markets. Thus, America found herself flooded with foreign products while unable to compete with others abroad. Coupled with the trade benefits she gave to developing nations, this brought about a disparity between the imports and exports and hence a trade deficit. Some politicians are now lobbying for 'managed trade', an euphemism for protectionism.

The interconnection of markets may be beneficial during times of plenty, but when the stocks and futures in an economy with large economic clout crash, everybody will come tumbling down as well. This was one of the main reasons why Black Monday had such global implications.

Thus, free trade does not mean prosperity for all. It lets countries which are strong in certain industries monopolise that particular industry, causing ruin for others. It leads to trade deficits, especially if other countries are practising protectionism. However free trade does help world economic growth and it raises the standard of living.