Does Free Trade Give the Economic Shakes

Globalization is the word that best comes to mind when describing the exponential growth of political, economic and cultural integration among humans across national borders.  From the multinational operations of corporations to the worldwide popularity of Indian and American cinema, globalization is internationalizing human activity and forging nations into a global village.

For policymakers worldwide, this process has not been ignored.  Much of globalization has its roots in the decisions made by policymakers who sought to walk away from the nationalism that marred the twentieth century.  To achieve greater globalization, policymakers proposed economic integration and free trade as a way to encourage the establishment of mutually beneficial relationships among nations. They argued, together with a plurality of mainstream economists, that a nation could actually earn more wealth by specializing in the production and export of certain goods and services.  While some industrial sectors would be left underdeveloped, it was much more preferable to import such goods and services from trading partners, who could produce them at a lower cost.  With such mutually beneficial relationships between nations, policymakers concurred that the prosperity from free trade could prove to be a powerful incentive for taming the belligerent tendencies of nation-states.

With the end of the Cold War and the consequent spread of free markets throughout the world, the argument put forth by proponents of free trade was put to the test.  As both developed and developing nations increasingly embraced free trade as a critical component of their economic development plans, the prediction of greater prosperity arising from economic integration seemed to have come to fruition.   One example of this can be seen in the prosperous aftermath of the 1994 signing of the North American Free Trade Agreement (NAFTA) between Canada, the United States and Mexico.  Since NAFTA’s ratification, intraregional trade has grown from 290 billion USD in 1993 to over 1.1 trillion USD in 2012.  Furthermore, for the United States and Canada, export-oriented jobs have earned 15% to 20% more in income.

The more pacifist benefits of free trade have also become evident.  In the 20th century, European national rivalries fueled global wars and genocide. With the aftermath of the Second World War, and especially since the fall of Communism, Europe’s transition into one of the world’s largest free trading zones has spilled over into greater political integration among its nations. The relative political stability of Europe has caused the continent to become a desired destination for refugees.

Based on examples like NAFTA and Europe, it seems free trade proponents have won out over their critics. The distribution, however, of free trade’s benefits is still unequal.  Though certain industries within a national economy may earn greater returns from the lowering of trade barriers, industries that must compete with cheaper imports could essentially be priced out of the market.  This has been seen in the United States where cheaper manufacturing imports from Asia and Latin America has pushed the nation’s famed manufacturing base into decline. Detroit, once of the industrial centers of America and responsible for much of its economic manufacturing power in the 20th century, is now bankrupt, as well-paying manufacturing jobs have left the city for cheaper locales.

Free trade proponents would still argue that the loss of certain industries to cheaper imports is a necessary cost for the greater gains promised by free trade.  They argue that for every Detroit lost in the face of global competition, there is always a Silicon Valley or Wall Street that thrives from the opening of new global markets.  The reliance on relatively fewer industries to provide jobs and wealth for an economy seems quite disconcerting. Such concern arises from a possibility  that a nation’s economy would be more vulnerable to downturns  caused by shocks specific to exporting industries.  Without other industries to counteract the negative effects of exporting industries, a nation’s economy could be more prone to volatility.  An example of this can be seen here in Canada, where a combination of lower global commodity prices and the country’s reliance on the export of natural resources has resulted in an economic recession.  Though lower input costs  should be a boon for Canadian manufacturers, decades long competition from cheaper foreign imports has seriously eroded the Canadian manufacturing base.

The issues raised are purely theoretical, and more investigations are still required to show that there is a clear empirical link between free trade and economic volatility.  Nonetheless, this possibility could prove disastrous for those who are of the belief that greater trading links ensures global peace.  As history shows, economic volatility naturally fosters political instability as economic uncertainty causes citizens to distrust long-standing institutions.  Such distrust feeds to the allurement of more radical solutions like communism or fascism, which promises totalitarian control as an answer to uncertainty.  With global policymakers betting on a world order constructed around the promise of free trade, it is more than necessary that questions be raised about the possibility of free trade actually feeding the instability that it was meant to eliminate.

Anojan Nicholas

About Anojan Nicholas

Anojan Nicholas is a finance graduate from the Schulich School of Business at York University. He is currently working as a Tax Operations Analyst at a major bank. He was previously employed at the same bank as a business analyst. His interests include geopolitics and international economics. In the future he hopes to pursue a career that encompasses international economics and finance, political risk and global corporate strategy. You can follow him on Twitter @anojnich