Free Trade & Economic Theory

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Free trade agreements are often promoted as development tools, vital to eliminating poverty and increasing the standard of living in developing countries. International finance institutions and many political leaders argue that trade liberalization is a key stepping stone to development, and that new jobs, more foreign investment, and increased access to foreign markets will bridge the gap between the developed and developing world. Unfortunately, however, the proven impact of past free trade agreements has been increased impoverishment and underdevelopment for the global south.

Southern countries are often disadvantaged even in the negotiating processes for trade policies. While ¾ of the World Trade Organization’s (WTO) members are developing countries, most of these are economically dependent on the US, European Union, or Japan in terms of aid, imports, exports, or security. Dissent in the WTO could threaten their security and economic well being. Additionally, developing countries have fewer human and technical resources and enter negotiations less prepared since they cannot maintain a team of negotiators and translators comparable to those of developed countries. Furthermore, trade rules are generally negotiated to apply uniformly to all countries, regardless of economic and political variations. Hence, the rules applied to the wealthy, post-industrial economies of Europe and the US are the same for poorer, agricultural nations that have significantly different needs.

The agricultural sector of southern countries is typically hard hit by free trade policies. Throughout the global south, a significant percentage of the population is involved in either subsistence or commercial agriculture. Without barriers against agricultural imports, foreign agribusiness imports are able to undercut local prices, putting farmers from southern countries out of business. In Mexico, under the North American Free Trade Agreement (NAFTA), this has resulted in massive increases in migration from rural areas to urban centers and to the US in search of employment. When employment is available for these immigrants, workers are subject to low wages and poor conditions. According to the Economic Policy Institute, underemployment has rapidly increase in Mexico since the implementation of NAFTA, while Mexican wages have dropped 27%, in part because of the destruction of domestic agriculture.

Agriculture, along with public health, is also affected by the imposition of US-style patent and copyright protections through the WTO’s agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and similar provisions in other free trade agreements. TRIPS mandates recognition of patent rights on a broad range of goods, including life forms such as plant and animal varieties traditionally cultivated by small farmers and indigenous groups. The patenting of seeds has required farmers to purchase new seeds every year, rather than practicing seed saving, thus significantly increasing the cost of production. Higher prices on patented and copyrighted medicines have had devastating effects on health systems in poor countries by prohibiting affordable access to vital medicines. These trade rules allow billions of dollars from developing countries to be transferred to developed countries in the form of royalties while ignoring the disastrous effects on public welfare.

Social services are another major victim of free trade policies. Since many developing countries rely on tariff revenue for 10-20 percent of government proceeds, free trade agreements eliminate a major source of government income by eliminating tariffs. This inevitably results in decreased social spending on education, health care, and other vital social services. Moreover, the push for deregulation, liberalization, and privatization from the Free Trade Area of the Americas (FTAA) and WTO’s General Agreement on Trade in Services (GATS) would lead to higher prices for water, electricity, health care, education, and other essential services, limiting the ability of the poor to access these essential services. Under GATS, developing countries are restricted from favoring domestic business over transnational corporations and from protecting natural resources such as fresh water or forests.

The majority of free trade agreements fail to include enforceable provisions to protect workers’ rights, human rights, and the environment. The lack of standards has led to a “race to the bottom,” where transnational corporations move from country to country in search of the cheapest labor and least imposing domestic regulations. This fluidity of investment creates instability and forces countries to compete for the lowest standards and the fewest protections in order to attract investors. Even if developing countries do impose strong labor and environmental standards, the investment provisions in NAFTA, and many trade agreements currently under negotiation, could allow corporations to challenge such laws as barriers to trade.

Free trade agreements have failed to deliver the positive development effects claimed by their advocates. Instead, free trade agreements have led to increased poverty and unemployment, and decreased food security and access to social services.

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