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Are Free Trade Agreements good?

How Good Are Free Trade Agreements?

Trans Pacific Partnership has widely been seen as a flawed trade agreement citing various reasons including that it fails to raise the minimum wage and create new jobs but outsource them, puts the environment under threat by undermining the accords reached at the Paris conference and many other. The US presidential candidates have clearly reflected this thought by taking a stand against the deal, which is endorsed by the Obama administration that has turned things around since the Great Recession of 2008 that put in jeopardy, the entire world economy. The deal includes 12 countries in the Pacific Rim that contributes to 40% of the world’s GDP and one third of the global trade with 800 million people.

It can be said that what is controversial is the concept of free trade long before anyone even had a hint of TPP.  The ideas of free trade and protectionism have been debated by economists for nearly two centuries. Throughout history, free trade has been favored by economists including Adam Smith and John Maynard Keynes, except in a few circumstances. For instance, Keynes argued that the introduction of tariffs would help the British economy recover from the Great Depression and accordingly the General Tariff imposed by the government helped the economy recover during the period.

Even, Keynes had believed that in the long run free trade will result in the overall economic improvement of the countries involved. Evidences suggest that free trade is not a win-win situation; it creates both winners and losers but the magnitude of winning outdoes losing, whereas it is the vice-versa in protectionism.

The following analysis in Wikipedia tells us how tariffs are bad for the society.

A graph of supply vs demand with the effect of tariff on the society

Effect of Tariff on the society [Source: Wikipedia]

As the price of the product goes up, the consumer surplus is reduced and the producer surplus is increased making the consumer worse off and the producers and the government (as it gains tax revenue) better off.

Today, many argue or preach the idea that free trade agreements are economic mergers that will establish a common government or an agency that would dictate the constitution of a country and hence the lives of its citizens, which is not true. Corporate greed is a factor that would undermine the benefits of a free trade agreement, but the solution is not in abolishing free trade out of the system but to frame strict guidelines that prevent corporate from taking over the deal.

Read More: The Great Depression, The Greed and Ethics of Banking 

The argument for free trade is very elementary and that is our problem: we do not stick to the basics. Not all countries are built equal and not all of them are wholly effective in producing all what they need, may it be products or services. Every country has a comparative advantage over the others that they specialize in producing a few things. When they focus in their specialization and produce more of what they are good at, they can exchange them in return for what they are less effective in producing. This would help increase productivity and improve standard of living across the borders and this is what exactly free trade would do to us. Any noble cause comes with its own challenges and our job is to address them so that we keep alive our hopes of global well being. Again, not all countries are built equal. They have different tax structures, labor wages, trade laws and policies differ. Finding some common grounds and doing trade together would promote concomitance and avoid conflicts. Sounds basic, isn’t it?

In fact, the argument against free trade is by far very much outdated as the world has become well connected and widely open. Protectionism may safeguard the domestic industry from foreign competition but in fact, free trade levels the playfield for the domestic businesses to remain competent with the international brands by raising the bar. 

After some initial success in the earlier days, to be somewhat exact, until 1840, protectionism has lost its ground to free trade. As already said, corporate greed will exist with or without free trade agreements, but the latter cannot be held primarily responsible for all the bad things that happen with it.

If there is trade, there are going to be winners and losers. A prudentially well crafted free trade agreement can bring wins, not without losses, but the win-loss composition would be better than the one that would happen in its absence.


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