Free Trade Implications: Benefits and Pitfalls

Running head: FREE TRADE IMPLICATIONS
FREE TRADE IMPLICATIONS
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Introduction to free trade
Free trade emerged with the introduction of the concept of globalization.
Globalization helped different nations of the world to come forward and benefit from opening
up to trade. This phenomenon aimed at increasing world welfare and growth in business.
Additionally, the concept of globalization aimed at integrating nations, its population, culture
and knowledge (Grumiller, 2014). Globalization gave rise to the concept of free trade with
the help of the World Trade Organization (WTO). Under a free trade regime, countries freely
trade with one another and increase export and import. Together, this increases the total
volumes of trade for a country. These are different kinds of free trade agreements or treaties,
which aims at reducing duties on trade, taxes and tariffs. This reduction of trade barriers is
performed mutually among the member nations to increase the total benefit of the countries.
However, there are both advantages as well as disadvantages of free trade in a country, and
WTO has a substantial amount of contribution to both the negative and positive impact
generated by free trade agreements. Therefore, the following paper is aiming to provide
arguments in favor as well as against the free trade regime.
Benefits of Free Trade Agreement
Free trade yields several benefits to its member nation, which attracts countries to join
the agreements on free trade. The free trade agreement includes NAFTA, CAFTA-DR,
Customs Unions and several other forms of a free trade agreement. Countries accept a free
trade agreement to increase their revenue, investment opportunities and business growth (Hill
& Hult, 2018). Therefore, free trade creates new opportunities for economic growth. The
North American free-trade helped America to achieve an average growth rate of 0.5 percent
(tradingeconomics.com, 2019). This is because of the competitive advantage that America
gained after entering into the free trade agreement. In addition to this, the country gained
substantial revenue in its manufacturing, industrial and commercial sector. Free trade helped

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the country to gain strength in several exporting sectors and achieved success in reducing cost
in production. Moreover, the healthy competition from different companies maintains the
efficiency level of the product sector (Boudreaux & Ghei, 2017). This is again evident from
the robust growth of ASEAN countries.
Benefits from free trade are not limited to the creation of economic growth, and it
helps in attracting various investment opportunities in a country. Opening up trade attracts
foreign investments to enter and invest in different companies in a country. These
investments can be in the form of foreign direct investment (FDI) and foreign portfolio
investment (FPI). Investments help in the growth of the business by creating new
partnerships, collaborations, expansion and movement to another economy (Hill & Hult,
2018). In addition to this, economies sharing border or having a peaceful collaboration with
the neighboring countries makes the growth of business and living standards easy. Since the
1990s, there is about 25.6 billion-dollar increase in the number of FDIs in different American
companies, whereas 2018 alone recorded a 55.83 billion dollar increase in investments
(tradingeconomics.com, 2019). This boosted the growth of American companies and
increased their expansion in various emerging and advanced economies of the world.
Moreover, the MNCs shift to other economies to reduce their cost by acquiring cheap labor
and low tax rates (van Kooten, 2014). These type of benefits can be achieved through the
formulation of a free trade regime. A reduced rate of taxation and a substantial increase in
investment helped in lowering the inflation rate. As a result, the affordability and the welfare
of the consumers increased.
Furthermore, consumers are offered different varieties of goods. This increases their
bargaining power and enhances their total welfare. For instance, mobile phones have become
a necessity for individuals. A different brand of cell phones and smartphones are available,
which offers unique specifications and sleek designs. These include Samsung, Apple iPhone,