Negative Impacts of Free Trade Agreement

Topics: International trade, Free trade, Export Pages: 3 (1037 words) Published: April 25, 2011
Forming a free trade agreement between countries is believed to have brought some negative impacts towards both countries’ in employment and growth. One of the objections to Country A signing a free trade agreement with Country B is that free trade may give a negative impact on jobs. Most free trade agreements give false promises, claiming that it creates jobs and raise incomes. However, the problem with this claim is that it misrepresents the real effects of trade on the economy. Trade, in fact, creates and also destroys jobs. Increases in exports of a country have a propensity to create jobs in this country but increases in imports tend to reduce jobs because the imports displace goods that otherwise would have been made in that particular country by domestic workers, which corresponds to the Heckscher-Ohlin Theory, whereby the theory predicts that a country exports the products that use its relatively abundant factors intensively and imports the products using its relatively scarce factors intensively. Indirectly, factors in abundant supply are exported and factors in scanty supply are imported. For instance, Country B has a comparative advantage in some set of products, and production of these products will thrive in that country. The signing of free trade agreement between Country A and B will result in reductions of jobs producing the products that are imported from Country A, but these workers can shift to the expanding export-oriented industries. While there may be some transition costs borne by the workers who must shift from one industry to another, Country B still gets the gains from trade, not Country A. Hence, a free trade agreement is not a fair trade. Another objection to signing a free trade agreement is that it brings trade deficit which, in turn, contributes to growing income inequality and to the declining relative wages of the countries under free trade agreement. The growth in trade and trade deficits may put downward pressure on the wages of...
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