Free trade simply refers to a form of trade that exists between nations, in the absence of barriers. Trade barriers can either be tariff barriers like taxes and subsidies or non tariff barriers like quotas and embargoes. With free trade, the government allows market forces of demand and supply to operate and do not interfere with them. In the recent past, most countries have opened their economies for trade with the rest of the world. This move has been triggered by the pressure to transform the world into a global village. However, it is important to note that no nation in the world has embraced perfect free trade with all nations of the world. However, free trade has mainly occurred between groups of countries, which form a trading block, in a process called economic integration. In most advanced stages of economic integration, members of a trade block completely remove trade barriers among themselves, while they maintain barriers towards the rest of the world. It is true that free trade has both beneficial and detrimental effects to an economy as well as to the world at large. However, the scope of this paper is to analyze how free trade hurts nations.
Fundamental to our discussion, it is important to understand why government intervention in trade is essential; the government regulates the importation of harmful products, illegal products, and protects domestic infant industries. With this understanding, we can now embark on our discussion, with the assumption that the government does not intervene in trade. This would result to the following effects:
Collapse of Infant Industries
The absence of government intervention places infant industries under a risk of collapse (Einchengreen 9). Infant industries are industries that are not well established to withstand foreign competition. In some cases, infant industries form the major sectors of the economy. There has been a history of collapse of many infant industries, especially in developing countries, due to competition from foreign firms. Such foreign firms are usually well established and are able to force local industries out of the market through predatory dumping. Predatory dumping is an economic terminology, which means that a firm supplies its product in the market, at a price below the cost of production of that product, with the intention of forcing a target firm out of the market. This implies that a predating firm is willing to absorb losses at least in the short run. Such a move makes foreign products more attractive to the domestic consumers than the products of a domestic firm. This implies that the domestic firm will face reduced demand for its products and will finally be unable to meet the operation costs. This provides such a firm with only one alternative; closing down.
It is important to note that infant industries employ many people. Closure of firms in this industry, therefore, means that many people will lose their jobs. From the lowest level of analysis, this will, in turn, lead to lower standards of living among citizens. It is, therefore, important for government to come in, to reduce this detrimental impact of free trade to the economy. Government can prevent the collapse of infant industries by provision of subsidies. This entails provision of subsidies to local producers, with the aim of helping them lower their cost of production. This enables local producers to charge a favorable price for their products, making them competitive. The government may also impose taxes, quotas or total bans on imports.
Supply of Harmful Products
One way, through which government intervenes in trade, is by regulating the quality of products. In this regard, government establishes quality monitoring units, which ensure that the products being sold in the market meet the set standards. Such standards include quality and quantity. Quality means that products being sold should be safe for human consumption. In the absence of government regulations, unscrupulous traders will get an opportunity to supply even harmful products, with a profit motive. In fact, empirical data suggests that where free trade exists, the volume of harmful products is usually high. In most developing countries, for instance, traders have been importing food products with aflatoxin. This has resulted to many deaths due to food poisoning. With government intervention, however, units such as food and poisoning board ensure that all imports are safe for consumption. Quality can also be analyzed from the dimension of dumping. With dumping, an economy is characterized by large amounts of cheap but poor quality goods. This deceives consumers to use such low quality goods, simply because they are lowly priced. Besides quality, traders have been known to sell products that do not meet the stipulated quantities, where there is no government intervention. This is because in absence of intervention, there are no quantities monitoring units. This implies that consumers pay more for less. In economic terms, this is consumer exploitation and is a form of welfare loss.
Loss of Tariff Revenue
Government needs money to fund its activities, for provision of public goods and services. For many economies, taxation forms a major component of government revenue. Tax revenue includes a wide range of taxes, even those imposed on imports; import duty. With free trade, the government is expected to exempt all imports from taxation. This simply means that the amount that the government will realize in collecting as tax revenue will reduce considerably. This is analogous to saying that the government’s ability to provide public goods will reduce, thereby, lowering the standards of living of a country. However, proponents of free trade argue that by allowing free trade, government will earn much more through trade creation, than it would have earned through taxation. Trade creation is an economic term usually used in free trade discussions. It is a phenomenon, where a country’s expensive production is replaced by a more efficient foreign production. Through complex analysis, it has been proved that trade creation raises people’s welfare, as they get access to cheaper imports, and hence, are able to consume more. However, trade creation will only occur under the assumption that there is no unfair competition. If this assumption is relaxed, then, trade creation will not occur. On the contrary, opponents of free trade argue that it can actually lead to trade diversion. This occurs, when more efficient local production is replaced with less efficient foreign production. Trade diversion is facilitated by unfair competition and has the effect of lowering people’s welfare.
Besides focusing on economic analysis of free trade, it is important to conduct a detailed social analysis. With economic integration, economies permit free movement of people and goods. Empirical studies show that most checking points at the boarders of any are majorly established for revenue collection purposes. This means that with free trade, many of such points would not exist. In any case, it is very expensive to maintain them. Unrestricted movement of people and goods from one country to another breeds the problem of insecurity, and supply of illegal products (Kenneth 32). For instance, it facilitates easy supply of weapons such as guns as well as movement of terrorists from one country to another. This, in turn, causes destruction to the world.
Moreover, the nature of some products is that they cannot be left under the control of the market forces of demand and supply. Such products include sensitive products like fire arms and rounds of ammunitions. Leaving such commodities to be supplied by private individuals would be a great compromise to the world’s security.
Free trade may entail the removal of legal barriers. One way, through which government participates in the market, is through provision of a legal framework (Greenburg 57). Such a framework is important in ensuring that trade transactions are honored. To better understand this phenomenon, it is important to note that many international transactions occur on credit basis. It would be very difficult to conduct international credit transactions merely on basis of gentle man’s agreements. In this regard, a legal framework is important in ensuring that each party to a trade agreement honors his or her obligations. In absence of such a framework, some traders will take advantage of others. This means that in absence of government, trade will be characterized by risk of loss. By modeling the element of risk in this framework, there will be less volume of trade in the world.
From the above analysis, it is true that in the absence of government, free trade hurts the world. This justifies the participation of government in trade, to correct these problems. Putting it differently, it is illogical to embrace complete free trade. Government needs to participate in trade to correct market failures e.g. in provision of public goods. The nature of such goods is that they are not profitable as to be supplied by private people. Demand for such goods can only be met through public provision. Furthermore, government should participate in trade to ensure quality provision and to prevent local firms from unhealthy foreign competition. Finally, government needs to participate in trade to control supply of harmful or illegal products.