Free trades policy provides countries with the opportunity to trade among themselves without any restrictions or paying additional tariffs. It aims at eliminating any barriers placed by governments to limit how goods and services flow between trading nations. The trade barriers including tariffs and subsidies are put in place so that domestic producers can be protected from the effect of international competition. However, these barriers do not create trade flows but instead redirect trade flows. Free trade has been considered beneficial as well as harmful to global economies. There are consequences which will be involved if the US decided to limit imports in order to protect domestic jobs. Even though free trade has been argued to increase production, efficiency, and create employment opportunities in exporting industries, it is also said to create structural unemployment and domestic economic instability.
According to the free trade policy, the determinant of resource allocation is the supply and demand. It is out of the supply and demand that prices of commodities emerge from. This distinguishes free trade from other forms of trade policies by the different pricing strategies used. The restrictions put in place by government to protect domestic industries have benefits as long as there is a balance between foreign and domestic producers. For instance, the David Ricardo’s theory of comparative advantage demonstrates the benefits of tariffs and similar restrictions on international trade. For example, if a country produces a good at a certain price and then imports the same good at a lower price, then the local industry would be threatened and may run out of business. Therefore, the tariffs act as an advantage in such a case.
Free trade increases production and efficiency. For instance, some countries cannot produce certain goods or services cheaply. However, the same goods and services can be produced in other countries at a cheaper cost. It is therefore better for these countries to buy the goods and services from foreign countries at a cheaper cost. This introduces the issue of specialization where different countries specialize in producing specific goods and services based on the low cost of production. Through specialization, countries can increase their production and become more efficient. This implies that countries can allocate resources effectively and purchase goods and services they are not able to produce cheaply from other countries. According to Freidman (56), outsourcing is a common practice in the free international market. For instance, US companies outsource manufacturing of products in other countries where they are able to produce cheaply.
With regards to the labor market, the free trade policy can cause employment opportunities within a particular industry to end up overseas. The sides of importing and exporting will have increased labor opportunities. This further implies that free trade policy affects wages. Because productivity increases in one particular industry, wages paid out to laborers is likely to increase over time. Liberalization of trade generally creates a situation where there are losers and winners. This is because with increased productivity particular industries, more resources tend to move towards the highly productive industries. Therefore the exporting industries will experience increased employment opportunities as more workers will be needed to meet the demands. At the same time, the importing industries will begin to experience reduced employment opportunities as more workers get displaced. The importing industries will therefore close down as the market becomes more competitive. With the free trade policy, many employment opportunities have been created in countries such as the US, and several other European countries. Most of the employment opportunities have been created in the service and manufacturing industries. These industries have also been able to absorb the unemployed multitudes that were laid off as result of other industries closing down or downsizing their labor force. The impact of free trade policy is also felt within an entire economy. For instance, this policy has contributed to economic growth of countries that have adopted it. Within these countries there is increased living standards for the people, there are higher rates of economic growth and increased real incomes. As a result, the there is a lot of competition within industries, high productivity levels, and high efficiency.
Despite the benefits of free trade policy, there are also numerous arguments against the policy. These arguments are diverse and not only focus on the labor market. However, with regards to the labor market, liberalization of trade is seen to create structural unemployment over a short period of time. This is experienced especially when certain industries begins to have high productivity and efficiency at the expense of the some other industries. The victimized industries will go through a moment where they have to downsize their workforce because of reduced employment opportunities. Despite the productive industries being able to absorb the unemployed, there will be a short term period for structural unemployment. According to a report from the Economic Policy Institute, workers displaced as a result of the impact of free trade policy may sometimes fail to find employment opportunities in the growing industries; government intervention is usually required. The report further states that ever since the free trade policy was enacted between the US and Mexico, more than 600000 workers have been displaced out of their jobs in 2010 alone. This therefore implies that proponents of free trade policy only focus on one side of the coin by taking into account export oriented jobs. They fail to consider trade balance. The report also says that employment in the manufacturing industry in the US has so far fallen by 5 million jobs and most of the victims have not been absorbed into the growing industries. For example flower farmer in North America and Europe do not have profitable businesses because cost of production is high. These farmers therefore have to outsource their production or venture into other productive farming. This therefore means that the free trade policy is affecting the labor market by reducing its size.
Free trade policy is also said to create domestic economic instability. This happens especially when economies depend entirely on the global market and focus little attention on their domestic markets. This implies that the consumers, businesses, and employees can be affected by economic crisis of a country’s trading partners. For instance, if economies in Europe experience a recession, there will be decreased demands for goods and services exported to Europe from the US. Such a concern affects the labor market since with reduced demands, production levels will also reduce and there will be job opportunities for laborers. Issues such as rising unemployment, low domestic demands, lower incomes, lower gross domestic products, and falling export incomes will begin to be witnessed simply because of the effect of free trade policy. For example, the world economic crisis of 2008, started by a downturn of the US economy. In effect, economies in Europe declined. They experienced reduced GDP and most companies reduced their labor force or employees income.
In addition to the above mentioned arguments against free trade policy, there is no level playing field within the international market. Some countries may have surplus products and use the international market to dump the products at costs below the global market price. This may affect efficient industries causing them not to be able to compete well within such circumstances. At the same time, the agricultural industry experiences biasness in its terms of trade. Therefore, if the US entirely depends on this sector, then the global playing field may be unfavorable for them. For instance, there is an unfair balance of the ratio of export prices to import prices. This means that sometimes, income from exports can be lower than the payments made towards import leading to losses and debts.
In conclusion, this paper has developed a detailed analysis of the arguments for and against free trade and the impact it has on the labor market. From the discussion it has been established that if there are consequences that the US government will face if it tries to limit imports in trade in order to protect domestic jobs. Some of these consequences relate to the benefits that accompany free trade policy. It has also been established that free trade affects the labor market both positively and negatively. The main points regarding the benefits of free trade include increasing level of production and efficiency, and increasing employment opportunities. On the contrary free trade policy has also been seen to create domestic economic instability and a lack of level international playing field.
Works Cited
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Freidman, Thomas. The world is flat. United States: Farrar, Straus and Giroux, 2005.
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Pugel, Thomas A. International economics. New York: McGraw-Hill, 2007.
Ricardo, David. On the principles of political economy and taxation. London: John Murray, n.d. Library of economics and liberty.
Scott, Robert E. "U.S.-Mexico trade and job displacement after NAFTA." Report. 2010. Document.
