OVER the decades, there have been much debate about the advantages and disadvantages of free trade.
Most people are confused about the pros and cons of free trade, particularly in relation to wealth creation, unemployment and economic welfare.
The diverse views on free trade can be broadly categorised into three main categories:
> The pro-free trade view – advocates argue that free trade brings greater access, economies of scale and returns to exporting industries.
Conversely, free trade compels import-competing goods’ price to drop, reducing returns to a domestically uncompetitive sector.
Thus, the imposition of tariffs on imported goods raises consumer prices, limits competition and innovation, and reduces product quality and choices.
Moreover, tariffs raise costs for downstream industries (eg, manufacturers using steel and aluminium) and risk retaliation by trading partners.
> The anti-free trade view – Critics often disapprove of free trade on the grounds that it creates job losses, wage stagnation and unfair competition.
Free trade negatively affects economic factors of production such as labour, capital and land in the import-competing sector.
Affected segments such as labour and capital cannot move immediately or costlessly between industries, which reduces demand for these inputs.
Moreover, unfair competition such as dumping, low labour and environment standards, and state subsidy cause the domestic market to experience a shrinking market share, which forces the import-competing industries to lobby for protectionist policies.
> The middle ground view – this perspective argues that strategic industries (such as defence, energy, advanced technology, infant industry and food) should be protected to reduce dependency on foreign imports for strategic reasons.
Thus, governments should impose tariffs to protect critical domestic industries and negotiate for fairer competing grounds with foreign trading partners.
Merits and demerits
To evaluate the benefits of free trade, I think we should turn to experts of free trade and see what economists think about the merits and demerits of free multilateral trade.
Overall, most economists believe that free trade benefits all trading nations in the longer run despite short-term disruptions due to job losses and rent in the import-competing sector.
However, the export sector will benefit from free trade through expanding employment and capital returns.
Trade increases overall economic efficiency and output, creating a larger economic “cake”.
Additionally, the winners could compensate the losers through taxes and transfers, and all parties will still be better off than limiting trade.
Conversely, protectionism can lead to inefficiencies, lack of innovation, higher prices for consumers, and retaliation from trading partners.
I think one of the most hot topics today is how much unemployment can be attributed to free trade?
To answer this, Prof Paul Krugman, a US economist, has provided statistical evidence to prove that free trade is largely uncorrelated to domestic high unemployment rate.
In fact, from the 2001 to 2010 period, only an insignificant fraction of about 2% of involuntary displacements attributed to import competition or plants moved overseas.
Although after 2012, both imports and unemployment dropped substantially, the dip in imports was caused by decreasing oil prices.
Non-oil imports as a share of US gross domestic product remained stable in this period.
The same is true of manufacturing employment.
In fact, manufacturing jobs are on a declining path, down steadily from the peak of 39% during World War 2 to just 8% in 2024.
The change in US employment composition is due to structural change in the economy over the years, not due to trade.
The agriculture sector experienced a similar declining pattern as well from the peak of 40% of total US employment in early 1990s to just 3% in 2024, while the service sector has gained significantly from about 25% in 1900 to 71% in 2024.
In short, free trade has not directly contributed to significant job loss in America over the years and in other countries as well, but rather it is likely caused by macroeconomic factors like recessions, imprudent monetary policies, swelling government debt, demand shocks and structural change in the economy, particularly the introduction of artificial intelligence (AI) and automation.
Corporate profits vs people’s welfare
The rapid advancement of AI and automation technology has been seen as an increasing factor that contributes to greater unemployment despite of promises of generating more employment elsewhere.
The main drive of today’s quest for advanced technology and AI is for efficiency and profits.
Unfortunately, unregulated and unrestrained increasing competition in AI and advanced technology, due to ever insatiable wants for ever greater corporate profits, can threaten the economic welfare of people as well.
More people are being replaced by AI technology in big corporations bringing promises of greater income to shareholders and top management, but little for lower management and general staff workers.
Studies show that AI will likely replace some jobs, especially those involving repetitive or routine tasks like data entry, customer service, and administrative work, and recently even entry level and higher skill white-collar professions in the United States.
The trend can worsen if such practices are filtered through the small and medium enterprises collectively employing the majority of workers in any nation.
AI and automation is good for a country but not at the expense of its people.
Workers welfare should not be sacrificed for the unrelentless pursuit of greater efficiency and unequal wealth sharing within private enterprises.
Increasing unemployment and unequal distribution of income caused by rapid employment of AI and advanced technology (AI and robots need just replacement and maintenance) will produce macro problems when fewer workers are hired and there is a widening income gap between the rich and the poor (including deteriorating status of the middle income group).
Governments will face lower tax revenue (given that 60% to 80% of government revenue are derived from workers and the corporates and wealthy pay little), debt crisis, lower public healthcare, education, infrastructure, and security spending will follow suit.
A shrinking employed workforce also means much less spending on consumer goods which is likely to severely affect firms providing goods and services along the supply chain network.
AI is entering an unchartered frontier, however government policies has not caught up with the rapid evolution in AI power and advanced technology.
There is a need to regulate and ensure sufficient workers are employed and rich individual and corporations pay higher tax to resolve the problems highlighted above.
In summary, free trade brings benefits for all trading partners and all should adopt fair trade.
Finally, business enterprises and nations should acknowledge that AI and advanced technology should improve the overall welfare of mankind.
It must serve not just for the few privileged top management and the extremely rich but to everyone for the good of economic welfare, stability of society and a sustainable natural environment.
Wong Hoong Sang is an economist and researcher at UCSI University. The views expressed here are the writer’s own.
