- April 18, 2020
Free trade issue
FREE TRADE ISSUES 1
In the currentworld, there has been a growing concern about the increase in freetrade agreements. The concern has specifically been about the issueof ethics and how it relates to free trade. While these two issuesmay appear distinct, the concerns arising from free trade and ethicaldilemmas have some merit. It is important to note that tradeorganizations tend to take a one-sided view about the ethical dilemmameaning their approach is flawed and unsustainable in the long term.There is a need to strike a balance between free trade and ethicalissues in a bid to minimizing the trade barriers that exist (Irwin,2015). As much as there are clear guidelines and principles on how tobalance the two, these policies have failed in fulfilling theirmandate. The paper evaluates ethical issues arising from free trade.It seeks to show that free trade agreements do not always result in acommon good for all in a developing economy, but increase theinequality that exists between the poor and the rich.
Free trade oftenresults in exploitation of the poor while at the same time enrichingthe elites in economies around the world. In most cases, this form oftrade takes place between two countries whereby, one is moredeveloped than the other. In such an arrangement, business entitiesfrom the developed countries will try to maximize profits and theirshareholders’ returns. In achieving this, they will either seek toincrease the revenue output or cut on costs (Dragusanu, Giovannucci &Nunn, 2014). Cost cutting in most cases is the most viable option forthese economies, and this is realized through outsourcing (Dragusanu,Giovannucci & Nunn, 2014). Outsourcing disadvantages the lessdeveloped nation as it entails bringing in resources from theadvanced economy at relatively low prices.
Developing countriesin such agreements are usually struggling with low economic growth,and this leads to an overflow of labor which outweighs the demand.The result of this is a drastic drop in wage rates in these countriesin the absence of regulatory measures such as the national minimumwage (Sampson, 2014).
Since there is noprotectionism as a result of free trade, firms will automaticallyhave the benefit of low marginal costs for unskilled labor. In somecases, children become victims if the push to ensure the free flow ofcapital and goods. Research finding by ILO (2013) show that there aremore than 168 million children in the world who are being exploitedfor labor all in the name of free trade. This extends to not onlychildren but also other members of the society who are abused for thesake of availing free labor. This proves a great deal the extent towhich free trade and globalization have resulted in exploitation ofworkers (Sampson, 2014).
High levels ofinequality arise as a result of globalization which leads to freetrade. As Karl Marx stated, capitalism allows a minority ofindividuals in the economy to create an inequality to their benefit(Feenstra, 2015). The elites in such a setup, having the ability topurchase the factors of production, are often the most advantaged.These individuals from the developed economies will employ labor at acost below the revenue, and this results in an increase in personalgains. Free markets and globalization of free trade economies leadsto a concentration of wealth in the hands of few individuals whileexploiting workers, who in this case are the majority (Sampson,2014). Through the exploitation of the low class in these states,they are deprived of power and thus can do little to change theirstatus in societies where they live. On the other hand, the economicelites are the bigger beneficiaries as they realize increasedproductivity which in turn leads to an increase in global wealth.
Free trade oftenleads to the race to the bottom. This is a scenario where economiesengage in some bidding process where they attract foreign directinvestment into their countries (Sampson, 2014). This is achieved atthe expense of labor rights and other environmental standards.Engaging in such competitions often lead to a sort of suppression forfree association and the collective bargaining power. Countries wouldthen try to attract multinationals from the developed economies andtherefore trade off businesses with suppressed workforce. Suchmeasures help these economies to realize long-term economic growthand development for their countries while oppressing workers. In theshort term, the workers will have no bargaining power as a meansthrough which they can increase their bargaining power forchampioning for an improvement in their working standards (Feenstra,2015).
Free trade wouldhave devastating impacts on the economy of developing nations. Highrates of inequalities are likely to result mainly in emergingeconomies. This is likely to be the case, especially when puttinginto consideration the fact that the few elite individuals in thesecountries are likely to use the factors of production to their fulladvantage while exploiting the larger low labor working classpopulation in maximizing their returns.
In these developingnations, the population of the low labor workers is very high. Thisis a factor that plays a greater role in increasing inequality interms of income distribution and resources. The oversupply of theunskilled laborers ensures continued supply for the necessaryworkforce for exploitation by the elites. Once one lot of thelaborers gets enlightened on how they are being exploited, they areeither relieved of their duties or replaced by another lot. Suchsituations are a result of free trade between countries. Under suchcircumstances, it implies that it is difficult to bridge the gapbetween the elites in the economy and the poor laborers.
In as much as freetrade agreements are put in place for the sole purpose of promotingthe common good for the entire economy, this is not always the case.The outcome of these agreements, in most cases, is only beneficial tosome people in the economy while the rest of the populationespecially the poor people reap least of these benefits.
Research has shownthat free trade will only be beneficial to elites in the economy inthe short run. During this period, labor has little power andequilibrium wage rates are often very low. Under such a provision, ifunskilled workers try and unionize or demonstrate for the sake oftheir rights, firms which are owned by the elite can easily replacethem. The demand for labor at this time is low while there is anexcess in supply for labor. It would then imply that the economicelites have the upper hand in determining their revenue and this isoppressing unskilled laborers. The few rich in such a dispensationare majorly the principal beneficiaries of free trade at such a time.
However, the chancesare that the unskilled labor force is likely to reap more from freetrade in the long run. In case the condition resulting fromglobalization persists in these economies, direct investments takingplace consistently would make multinational firms immobile. The costthat these firms would incur in the process of moving rise and becomehigher than the cost saved by labor in other countries. Labor,therefore, gains some bargaining power and thus reaps the benefits offree trade being experienced in the country (Liu & Ornelas,2014).
Once the governmentstarts to levy higher tax rate for companies in these economies, theeconomic elites would start to feel the impact and their profitlevels often dwindle. The wage rate of unskilled labor then begin torise and the lower class in the economy then suddenly have abargaining power (Liu & Ornelas, 2014). It is at such a time thatthe lower class can then unionize or protest for better-workingconditions and better pay. At such a time, firms cannot make toreplace these workers if they abscond duty and therefore, they willhave no choice but to meet their demands for better pay.
From the abovediscussion, it is evident that free trade, especially for thedeveloping nations, does not always result in the common good for theentire economy. In terms of the benefits such as an increase in theflow of goods and job opportunities that come as a result of freetrade, these benefits are majorly felt by the elites in the economy.The people who own the main factors of production such as capital,land and machinery would benefit more from free trade agreements, andit usually is at the expense of unskilled laborers. The common goodcan only be realized in the long run after periods of investments.This noted, the benefits of free trade to the future of the humansociety cannot be underscored. Thus, it is important for policymakersand other stakeholders to develop strategies that will ensure thatthe misgiving of free trade in the form of increased inequality arecurtailed. This action, though will not have an immediate effect onthe negative impact of free trade, will be the first step towards asociety where the intended benefits of globalization are realized byall.
Dragusanu, R., Giovannucci, D., & Nunn, N. (2014). The economicsof fair trade. The Journal of Economic Perspectives, 28(3), 217-236.
Feenstra, R. C. (2015). Advanced international trade: theory andevidence. Princeton university press.
Irwin, D. A. (2015). Free trade under fire. PrincetonUniversity Press.
Liu, X., & Ornelas, E. (2014). Free Trade Agreements and theConsolidation of Democrac. American Economic Journal: Macroeconomics,6(2), 29-70.
Sampson, T. (2014). Selection into trade and wage inequality.American Economic Journal: Microeconomics, 6(3), 157-202.