What Is Free Trade?

In the simplest of terms, free trade is the total absence of government policies
restricting the import and export of goods and services. While economists have long
argued that trade among nations is the key to maintaining a healthy global economy, few
efforts to actually implement pure free-trade policies have ever succeeded. What exactly
is free trade, and why do economists and the general public view it so differently?

What Is a Free Trade Agreement (FTA)?

A free trade agreement is a pact between two or more nations to reduce barriers to
imports and exports among them. Under a free trade policy, goods and services can be
bought and sold across international borders with little or no government tariffs, quotas,
subsidies, or prohibitions to inhibit their exchange.
1. Increased Economic Growth: The U.S. International Trade Commission estimated
that NAFTA could increase U.S. economic growth by 0.5% a year.2
2. More Dynamic Business Climate: Often, businesses were protected before the
agreement. These local industries risked becoming stagnant and non-
competitive on the global market. With the protection removed, they have the
motivation to become true global competitors.
3. Lower Government Spending: Many governments subsidize local industry
segments. After the trade agreement removes subsidies, those funds can be put
to better use.3
4. Foreign Direct Investment: Investors will flock to the country. This adds capital to
expand local industries and boost domestic businesses. It also brings in U.S.
dollars to many formerly isolated countries.4
5. Expertise: Global companies have more expertise than domestic companies to
develop local resources. That's especially true in mining, oil drilling, and
manufacturing. Free trade agreements allow global firms access to these
business opportunities. When the multinationals partner with local firms to
develop the resources, they train them on the best practices. That gives local
firms access to these new methods.5
6. Technology Transfer: Local companies also receive access to the latest
technologies from their multinational partners. As local economies grow, so do
job opportunities. Multi-national companies provide job training to local
employees.6

Seven Disadvantages
The biggest criticism of free trade agreements is that they are responsible for job
outsourcing. There are seven total disadvantages:
1. Increased Job Outsourcing- Reducing tariffs on imports allows companies to
expand to other countries. Without tariffs, imports from countries with a low cost of
living cost less. It makes it difficult for U.S. companies in those same industries to
compete, so they may reduce their workforce. Many U.S. manufacturing industries did,
in fact, lay off workers as a result of NAFTA. One of the biggest criticisms of NAFTA is
that it sent jobs to Mexico.
2. Theft of Intellectual Property: Many developing countries don't have laws to
protect patents, inventions, and new processes. The laws they do have aren't
always strictly enforced. As a result, corporations often have their ideas stolen.
They must then compete with lower-priced domestic knock-offs.8
3. Crowd out Domestic Industries: Many emerging markets are traditional
economies that rely on farming for most employment. These small family farms
can't compete with subsidized agri-businesses in the developed countries. As a
result, they lose their farms and must look for work in the cities. This aggravates
unemployment, crime, and poverty.9
4. Poor Working Conditions: Multi-national companies may outsource jobs to
emerging market countries without adequate labor protections. As a result,
women and children are often subjected to grueling factory jobs in sub-standard
conditions.10
5. Degradation of Natural Resources: Emerging market countries often don’t have
many environmental protections. Free trade leads to depletion of timber,
minerals, and other natural resources. Deforestation and strip-mining reduce
their jungles and fields to wastelands.11
6. Destruction of Native Cultures: As development moves into isolated areas,
indigenous cultures can be destroyed. Local peoples are uprooted. Many suffer
disease and death when their resources are polluted.12
7. Reduced Tax Revenue: Many smaller countries struggle to replace revenue lost
from import tariffs and fees.13

Solutions
Trade protectionism is rarely the answer. High tariffs only protect domestic industries in
the short term. But, in the long term, global corporations will hire the cheapest workers
wherever they are in the world to make higher profits.
A better solution than protectionism is the inclusion of regulations within trade
agreements that protect against the disadvantages.
Environmental safeguards can prevent the destruction of natural resources and cultures.
Labor laws prevent poor working conditions. The World Trade Organization enforces
free trade agreement regulations.

Developed economies can reduce their agribusiness subsidies, keeping emerging

market farmers in business. They can help local farmers develop sustainable practices.
They can then market them as such to consumers who value that.
Countries can insist that foreign companies build local factories as part of the
agreement. They can require these companies to share technology and train local
workers.
The Bottom Line
Free trade agreements give countries access to more markets in the global economy. But
they have advantages and disadvantages.
On the plus side, FTAs can force local industries to improve competitively and rely less on
government subsidies. These can open new markets, increase GDP, and invite new
investments. They also allow companies to discover new technologies and better ways of
doing things.
On the downside, free trade agreements open a country to degradation of natural
resources, destruction of traditional livelihoods, and local employment issues.
Countries entering FTAs must protect their people and resources against the negative
effects. But trade protectionism is rarely the most effective solution.

ASEAN Trade in Goods Agreement

The 2010 ASEAN Trade in Goods Agreement (ATIGA) consolidated all Common Effective
Preferential Tariff/ASEAN Free Trade Area (CEPT/AFTA) commitments related to trade in
goods. It seeks to establish a single market and production base with a free flow of
goods in the ASEAN region, a major component of the ASEAN Economic Community
(AEC). ATIGA covers tariff liberalization, trade facilitation initiatives, simplification of
rules of origin, and establishment of an ASEAN Trade Repository. Visit
http://investasean.asean.org/ for updates on ASEAN trade.

Philippines – Japan Economic Partnership Agreement

The Philippines and Japan entered into a free trade agreement in 2008. PJEPA is the
Philippines’ only bilateral free trade agreement, covering, among others, trade in goods,
trade in services, investments, movement of natural persons, intellectual property,
customs procedures, improvement of the business environment, and government
procurement.
Philippines – European Free Trade Association Free Trade Agreement
The Philippines and EFTA members – Iceland, Liechtenstein, Norway, and Switzerland –
signed a free trade agreement in 2016 which is expected to enter into force in 2018.
The Philippines-EFTA covers trade in goods, trade in services, investment, competition,
intellectual property, government procurement, and trade and sustainable development.

Other Free Trade Agreements

The Philippines has free trade agreements with China, India, Japan, South Korea, and
Australia and New Zealand under ASEAN.

But for a lot of critics, it’s not just the size of the pie that matters, but who gets what.
They argue that even if free trade actually creates more wealth overall, most of that
wealth goes to the richest and most powerful, at the expense of everyone else. In richer
countries people worry that free trade will make it easier for their jobs to be moved
overseas. In poorer countries people worry that free trade will give international
corporations too much control over their economies (and politics).
There’s also an argument that free trade makes it harder for countries to develop from
poor to rich. If every country specializes in what they’re ‘best’ at making, poorer
countries can get stuck specializing in lower wage industries like mining, fishing or
farming. Instead they argue that some degree of protectionism is needed to build up
more advanced industries.
In all of this it's good to keep in mind that details matter. Some trade deals actually
have provisions to help the people likely to be hurt by more trade. Other have provisions
intended to force countries to protect the environment or improve working conditions.
Other deals don’t do this at all.
Also, not all trade has the same economic consequences. For instance, trade between
countries with similar economies—like the countries within Western Europe— is very
different from trade between the EU and China. That’s part of the reason people can be
for free trade in some cases and against it in others.

BRIA 21 3 c Outsourcing Jobs to Other Countries: Is Globalization a Threat to American

Workers?
After the Civil War, New England’s textile factories began to relocate to the South, where
non-union workers were willing to accept much lower wages. One hundred years later,
U.S. textile manufacturers relocated once again, this time to countries like Mexico and
Indonesia.
Poor foreign countries have large numbers of job-hungry workers who will work for
wages far below the U.S. minimum wage. The globalization of textile manufacturing
continues today with China out-competing even these poor, low-wage countries. In this
period, hundreds of thousands of textile manufacturing jobs have disappeared in the
United States.
The relocation of textile manufacturing from the United States to foreign countries with
cheaper labor is an example of outsourcing. American companies import goods for sale
in the United States that they once produced here. Sometimes American firms own the
foreign factories outright. Or, foreign companies may own them and contract work for
American importers.
American companies began to take greater advantage of international outsourcing in the
1970s. Many kinds of factory work began to shift overseas—clothing, steel, toys,
television sets, and computer hardware and chips.
Outsourcing accelerated in the 1990s when the United States negotiated free-trade
agreements like NAFTA (North American Free Trade Agreement). Such agreements
reduced or eliminated tariffs (taxes on goods imported into a country). Without tariffs,
cheap foreign-made imports can often undercut the prices charged by American
manufacturers with their higher paid workers.
Today, only 22 percent of all private enterprise output in the United States is in the
manufacturing sector. The United States has changed into primarily a service economy.
Its economic output is the strongest in the world. Its gross domestic product (GDP) is
almost equal to that of the next three highest nations’ GDP combined.

Outsourcing of Knowledge-Based Services

In the 1990s, the Internet began to revolutionize the workplace. One consequence is
what some have called the “death of distance.” With high-speed telecommunications,
workers can complete many jobs on a computer anywhere, even overseas.
Outsourcing of computer or knowledge-based services got a big boost during the
explosive expansion of World Wide Web “dot-com” companies in the late 1990s. Imports
of outsourced private sector services grew almost 80 percent.
The first type of knowledge-based services to be outsourced was the management of
computer networks (information technology, or IT). Next, businesses began to outsource
their “call centers,” places customers call to get help with a company’s products or
services.
American businesses discovered that low-wage foreign workers could do much “back
office” work overseas. Such jobs as data entry, billing, accounting, and processing
insurance claims, loan applications, and tax returns shifted out of the country to places
like India.
Today, outsourcing of knowledge-based services is expanding to high tech and
professional jobs. For example, overseas workers connected over the Internet with
companies in the United States are now doing software programming, paralegal work,
financial investment research, X-ray and CAT-scan analysis, and drug testing.
The main reason U.S. businesses give for outsourcing is to remain competitive by cutting
costs, especially wages. For example, American software programmers in 2004 averaged
about $70,000 per year while those in India earned about $8,000.
Nearby Canada is number one in handling American outsourced knowledge-based work.
But India has attracted services such as data processing and computer programming. In
addition to its low labor costs, India has an advantage over other countries in its time
zone difference with the United States. Workers in India can complete jobs while
Americans sleep, enabling U.S. businesses to operate 24 hours a day. India’s biggest
outsourcing advantage, however, is that each year it produces up to 3 million college
graduates, most of whom speak English.
There is much uncertainty about the impact of outsourcing on American knowledge-
based jobs because of the lack of data collected in this area. The only U.S. government
study so far reported that there were 13,000 layoffs in 2003 due to foreign outsourcing,
but most of those were in manufacturing. Global Insight, a private firm, estimated that
about 104,000 IT jobs were lost to outsourcing from 2000 to 2003. These numbers make
up a small fraction of the 140 million workers in the U.S. economy.
Some researchers estimate that from 3.3 to 14 million knowledge-based jobs will be at
risk between 2000 and 2015 because of outsourcing. In 2004, the U.S. Government
Accountability Office cautiously concluded that outsourcing “is a small but growing trend
in the U.S. economy.”

The Debate Over Outsourcing

One of the most prominent opponents of foreign outsourcing is Lou Dobbs, anchor of a
business news program on CNN. He has written a book titled Exporting America: Why
Corporate Greed Is Shipping American Jobs Overseas. He argues that multinational
corporations are outsourcing American jobs for their own benefit and to the detriment
of American workers. He says that we are weakening the American middle class by
“firing” our consumers and taxpayers from these good-paying occupations.
Dobbs argues that outsourcing unfairly forces American workers to compete with low-
wage workers in poor countries. For example, the average hourly manufacturing wage in
the United States is around $16; in China it is less than $1. Inevitably, he argues,
outsourcing will force wages to go down in the United States.
Dobbs believes outsourcing will destroy our economy. He says: “India can provide our
software; China can provide our toys; Sri Lanka can make our clothes; Japan can make
our cars. But at some point we have to ask, what will we export? At what will
Americans work? And for what kind of wages?”
Dobbs thinks that free-trade agreements, like NAFTA, have failed us. He points out that
we import billions of dollars more in foreign-made goods than we export. While we still
export more services than we import, he thinks outsourcing will change this.
Dobbs argues that the United States should engage in fair trade, not free trade. He cites
as an example the agreement that the Reagan administration hammered out with Japan
in the 1980s. It put a quota on imports of Japanese cars, but let Japan get around the
quota by building manufacturing plants in the United States. Dobbs says: “Reagan’s
policy forced overseas corporations to make investments in the United States, from
building factories to hiring American workers, if they wanted greater access to our
market.”
It troubles Dobbs that even government has resorted to outsourcing. Forty state
governments outsource jobs to foreign countries. He cites the example of the Indiana
Department of Workforce Development. It is in charge of helping unemployed people in
Indiana find work. It awarded a $15 million contract to a firm in India to update its
computers. Fortunately, says Dobbs, the governor canceled the contract when people
protested. The contract subsequently went to a U.S. company for $23 million.
The American people seem to agree with Dobbs about outsourcing. An Associated Press-
Ipsos poll in May 2004 showed that 69 percent of Americans believed that outsourcing
hurts the economy. Only 17 percent believed that it helps the economy.
Most economists, however, disagree with Dobbs on outsourcing. President George W.
Bush’s top economic adviser, Greg Mankiw, said that “outsourcing is probably a plus for
the economy in the long run.” Paul Krugman, a Princeton University economics professor
and a harsh critic of the Bush administration’s economic policies, echoed this opinion.
He said that “outsourcing is less a threat than is widely perceived.” He thinks that it has
become an issue because of the weak economy. He advises going “very slowly on the
issue and push hard on a domestic economic recovery program and then take a look
around to see where we are after that.”
Most economists view outsourcing as a form of trade. And they consider trade highly
beneficial. Timothy Taylor, managing editor of the Journal of Economic Perspectives,
said: “The circumstantial evidence that international trade provides economic benefits is
overwhelming. Eras of expanding global trade, like recent decades, have generally been
times of economic growth. Periods of contracting trade have often involved recession or
worse. When a country’s economy expands, its level of international trade typically
increases.”
Economists make several points about outsourcing. First, it makes up a small part of the
economy. Service imports make up about .4 percent of GDP. Only a third of these
services comes from poor countries. The rest comes from other industrial nations.
Second, outsourcing is a two-way street. The United States outsources services, and
other countries outsource services to the United States. In fact, the world outsources to
the United States about $20 billion more each year in service jobs than the United States
outsources. These include high-paying jobs such as professional and business services,
education and health services, and information and financial services. The United States
outsources mainly low-paying jobs.
Third, outsourcing lowers prices. This helps the American consumer. It also makes U.S.
businesses more competitive in the globalized economy, enabling them to stay in
business and hold on to higher-paying jobs in the United States. Furthermore, lower
prices free up money for investing in innovative products and services. For example,
outsourcing the manufacture of computer hardware led to an explosion of computer
use, which drove the innovative development of software and the World Wide Web. The
result was the creation of many new high-paying jobs.
Fourth, outsourcing accounts for few job losses. The overwhelming majority of jobs lost
are not due to outsourcing. But many economists note that the modern American
economy has much “job churning,” people moving from job to job. This can be
extremely stressful to workers. Many economists call on government to help. Timothy
Taylor advises: “The United States could stand to rethink its policies regarding workers
who are forced or pressured to move between jobs. Unemployment insurance is one
useful mechanism for softening the transition. But there is a range of additional
assistance that might be offered to those between jobs, including health insurance,
‘wage insurance,’ and retraining.”
Although most economists believe outsourcing will help the U.S. economy in the long
run, some economists disagree. The Economic Policy Institute, a Washington think tank
on economic issues, sees some dangers in outsourcing. Its “Issue Guide on Offshoring”
acknowledges that the United States currently has a trade surplus in services. But it
notes that the surplus is shrinking. In 1997, the surplus was 1.3 percent of GDP. In 2003,
it had dropped to .6 percent. If the trend continues, it says, the United States will be
losing more service jobs than it gains.
It also points out that India is graduating far more engineers each year than the United
States. (In 2003, 250,000 Indians earned degrees in engineering versus 70,000
Americans.) With a highly trained workforce, India may challenge the U.S.’s lead in
technical innovation and attract more and more skilled jobs away from the United
States.
Writing in a research report for the Fisher Center for Real Estate & Urban Economics
(University of California), economists Ashok Deo Bardhan and Cynthia Kroll lay out some
possible outcomes from outsourcing. Among the scenarios are these three:
1. Worst-case scenario. The United States fails to continue leading in technical
innovation. More high-wage jobs go overseas. Growth in high-wage jobs at home slows.
Unemployment grows. Lower wages result.
2. Protectionist scenario. The United States passes laws that prevent certain types of
jobs from being outsourced overseas. If the laws are successful, jobs would be
protected. The economy overall is less efficient.
3. Best-case scenario. The United States keeps its lead in technical innovation. The
innovations lead to new high-paying jobs. The United States continues to outsource low-
paying service jobs.

What Should We Do About Outsourcing?

Dobbs believes the United States should negotiate “fair trade” agreements. Some critics
of free-trade agreements want to renegotiate them to create a “more level playing field”
with international standards for working conditions. Other opponents of outsourcing call
for protecting American jobs by tariffs on imports. Protectionists also want to eliminate
tax breaks for companies that outsource work. Many call for laws to protect the privacy
and security of personal information sent abroad as well as an outright ban on the
outsourcing of government work.
Critics of the protectionist approach point out that imposing import tariffs will only
cause other countries to do the same, which will harm our export industries. Moreover,
putting restrictions on outsourcing knowledge-based services will weaken the
competitiveness of U.S. companies and be almost impossible to enforce.
Others propose that the federal government should provide tax credits to encourage
research and innovation by U.S. businesses, making them more competitive in the global
economy. Some call for the federal government to increase its budget on science and
technology research, which has been cut in recent years.
American workers who lose their jobs because of outsourcing may need retraining and
extended unemployment benefits. Furthermore, American taxpayers will undoubtedly
have to make major investments in public education at all levels. In the new globalized
job market, American workers will have to prepare to compete not only with each other
but also with those in India, China, and everywhere else in the world.
concerns the impact of trade liberalization on the environment and, hence, on climate
change. “Increased trade liberalization, increased trade, increased production, increased
energy use and climate change,” while treated as separate issues until the early nineties,
have become the focus of scholars researching trade and the environment (Stoessel,
2001). In particular, the debate originated in the early 1990s,following negotiations over
the North American Free Trade Agreement (NAFTA) and the Uruguay round of the
General Agreement on Tariffs and Trade (GATT), both of which emerged during a time of
rising environmental awareness. Environmentalists argued that the creation of NAFTA
would result in an environmental disaster for Mexico and pointed to the Maquiladora
zone, where trade with the United States caused a concentration of industry that had
detrimental effects on the local environment.

Moreover, trade is related to numerous environmental problems. TheHandbook on

Trade and Environment emphasizes that trade acts as facilitator of the “international
movement of goods that, from an environmental perspective, would best never be
traded. With hazardous wastes and toxic materials, the environmental risks increase the
further the goods are transported, since spillage is always possible. Equally, such ‘goods’
may end up being dumped in countries without the technical or administrative capacity
to properly dispose of them, or even assess whether they should be accepted. Trade also
makes possible the over-exploitation of species to the point of extinction—there is rarely
enough domestic demand to create such pressure.“ Examples include the threats to
species such as elephants, due to trade in ivory, the deterioration of air quality in parts
of China attributed to export-led growth, and unsustainable harvest rates in tropical
rainforests due to trade in timber (Copeland and Taylor, 2003).

A major concern is that the increasing competition between companies induced by

further trade liberalizations causes a ”race to the bottom” in environmental standards,
because countries might weaken their environmental policy in order to shelter their
industry from international competition or to attract foreign firms due to low costs of
environmental protection as a similar incentive as low labor costs.