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How Free Trade Agreements Work

Much of the discussion and debate over free trade agreements stems from determining whether or not they are healthy for the economies and the people living in the countries involved.

A woman making a purchase from a clothing store.

You hear about free trade agreements in the news, but do you understand their purpose, advantages, and disadvantages?

Free trade agreements (FTAs) exist between two or more countries for the purpose of controlling restrictions and costs such as taxes, duties, and tariffs which would hinder imports and exports made between the countries involved.

The most commonly discussed FTA is the North American Free Trade Agreement (NAFTA), which first took effect in 1994 and secured virtually free trade between the United States, Canada, and Mexico. Though we mainly hear about only one of these trade agreements, the United States currently has free trade agreements with 20 countries worldwide and is negotiating regional agreements with the European Union and Asia (the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership Agreement, respectively).

Much of the discussion and debate over FTAs stems from determining whether or not they are healthy for the economies and the people living in the countries involved. Like many complex global issues, free trade is not black and white. These agreements often create several benefits, which come at a price. Consider the following advantages and disadvantages of free trade agreements to see how these agreements affect you and the ideals about which you care.

Advantages

  • Transfer of Technology and Expertise- Manufacturing and developing a product in a foreign country brings the technology necessary for development to that country. These companies also train a local workforce, providing the community with new skills, technology, and infrastructure.
  • Economic Growth - Increased product availability and opportunities in manufacturing and distribution lead to steady economic growth.
  • Increase Business Opportunities - Opening up trade allows businesses to expand and compete globally. Not only does this present better opportunities for business, but also tends to lead to improved technology and products due to the more competitive global environment.
  • Reduce Government Spending - Free trade eliminates the need for the government to subsidize certain local industries.
  • Foreign Direct Investment - Free trade allows U.S. investors to invest in foreign companies, building up formerly isolated areas and providing opportunities for U.S. citizens to grow their wealth.

Disadvantages

  • Transfer of Technology and Expertise - Also an advantage, transferring ideas to developing countries leads to intellectual theft. Less developed countries do not enforce patent law like the United States. As a result, companies developing or manufacturing technology in foreign countries often face the theft of intellectual property, which forces them to compete with knock-offs of their own products
  • Outsourced Jobs - One of the biggest criticisms of& FTAs are the jobs lost to foreign countries through outsourcing.
  • Poor Working Conditions - Manufacturing in countries without labor regulation means workers, including children, are subjected to harsh conditions with little compensation.
  • Degradation of Resources - When large industries set up camp in underdeveloped countries, the natural resources often become over-used leading to deforestation.
  • Hinders Domestic Industry - Large industrial agriculture operations establish themselves in communities where small farmers cannot compete, forcing them to give up land and seek different work.
  • Reduced Revenue - Taxes and fees are a major source of revenue for smaller countries. FTAs force these countries to find other sources of revenue.

Is There a Simple Solution?

Monitored and enforced by the World Trade Organization, free trade agreements could be better imbued with regulatory language which allows consumers and our economy to benefit from FTAs while ensuring protections against harmful consequences. In the meantime, consumers can look for sustainably sourced products to offset negative effects of free trade. Sustainable sourcing means the product was created with social, environmental, and economically beneficial practices.