The relationship between international free trade and employment has long been controversial. 

Some economists argue free trade affects efficiency but has no effect on total employment in the medium and long term, whilst others argue that there are increased job opportunities due to a rise in exports. 

There are several reasons why a country would want to participate in foreign trade. Most obviously, one may be able to buy goods it is not capable of producing domestically. Cost differences account for a large part of international trade; most countries would be able to make any good (excluding certain goods like commodities, as there is an unequal distribution of resources) but it would just come at a much larger production cost or with potential timing delays.

On the one hand, free trade agreements may lead to outsourcing and unemployment. This can be demonstrated through the North American Free Trade Agreement (NAFTA), established between the US, Canada and Mexico in 1994, which eliminated most taxes on imports and exports between those countries. This made it cheaper to import food and goods from Mexico than it was to grow or make them in the United States, leading to a large decrease in the price of goods and a net benefit for consumers. However, the trade agreement also led to outsourcing those same farming and manufacturing jobs to Mexico. It is estimated that 1.1 million jobs have been lost to NAFTA over the past two decades. A free trade agreement is intended to make it easier for foreign countries to compete with local production, making everything less expensive according to free-market principles (if there are many suppliers of a good, producers are incentivised to sell it at a competitive level, thus driving down the price). However, the workers who actually have to compete with cheaper foreign labour or resources are forced to find new work. This can also create a widening social inequity as it is often the lower-paid workforce who have this pressure while everyone benefits from the lower cost of goods.

With free trade, there is no protection of local industries as they are threatened by foreign competition. Some firms can’t compete with imports from overseas as they are inefficient with resources and aren’t producing at the lowest cost; consequently, they may be forced to close down, resulting in a loss of jobs. However, if governments feel it is necessary, subsidies (when governments pay part of the cost of producing or consuming a product so it costs less to either party) can be paid to firms, keeping them open, which can prevent unemployment but may do little to help national competitiveness and productivity. For instance, the US subsidises the Agricultural industry to the tune of $20 billion a year. Food is a necessary requirement and a country dependent on foreign powers could find itself vulnerable.

On the other hand, there are situations where free trade will not cause an increase in unemployment. If one country was less efficient at producing every good, this would be due to the fact that they require more factors of production to produce every good compared to elsewhere. If this is the case, could and should that country engage in trade? 

It could and it should. It can do so by specialising in the product it is least inefficient at producing. Before it begins to engage in international trade, prices of goods and services within the country are related to costs of production within it. Therefore, the pattern of relative prices – the price of one good compared to other goods – will highlight these different costs. So if there is no international trade, relative prices will vary in different countries due to varying productive efficiencies. What happens next?

If international trade was to now open up, consumers will see that relative prices differ in different countries, and will buy the good or service as cheaply as possible. There will be two-way trade, even if they have different production costs (exchange rates of countries will adjust for these production costs). For example, imagine two countries: Brazil, before engaging in trade, has production costs such that the ratio of tea to coffee is 5:1; whereas in India, the ratio of the same two goods is 1:3. When trade opens up, consumers in Brazil will wish to buy the tea abroad as it is relatively cheaper and consumers in India will want to buy the coffee from Brazil. Therefore, both countries will take advantage of relative price differences produced by different production costs. Usually, countries specialise in the goods at which they are relatively most productively efficient.

It is shown that through free trade, consumers benefit either through a wider selection of goods or a lower cost of such goods. These benefits stem from a changing pattern of production. Within each economy, demand will switch away from one good towards another. This will cause workers to move; it does not cause them to be completely out of work. Although they are not wanted in a certain job, they are now wanted and needed in another – the force which reduces demand for them in one area increases the demand in another. This relationship between the reduction and increase in demand is inseparable – as demand rises in one sector, it falls in another. Trade could cause a movement of workers, but not necessarily unemployment.

Unless workers can move immediately, neither having to look for new work nor requiring retraining, there will be a temporary rise in unemployment. Furthermore, if the workers are unable to obtain the necessary qualifications for the new job – either because of difficulties acquiring the qualification (may take a long period of time to complete the qualification needed) or because of a lack of skill – then they will become unemployed (an example of immobility of labour). Except for this particular case, free trade won’t cause permanent unemployment. At most, it will cause a temporary rise in it.

It is this immobility of labour that will cause a rise in unemployment. Both geographical immobility and occupational immobility can be reduced. The government can reduce occupational immobility by investing in training schemes to improve unemployed people’s human capital, making them more employable. This is most notable currently in digital and technology skills retraining. For geographical immobility, reforms in the housing market can reduce the price and increase the supply of rented properties as well as increase the supply of affordable properties. This can make it easier for the unemployed to move near new job opportunities. A reduction in the immobility of labour – often through government policies/spending –  will lead to a decrease in the length of time in unemployment. It can also be argued that should a post-Covid phenomenon of working remotely be maintained, geographic mobility will be less relevant- although this is only true for some forms of employment.

In summary, free trade will not cause unemployment but a change in the patterns of demand within economies. This will lead to a change in patterns of employment, and there may be transitional unemployment, while workers are switching jobs. Those who argue free trade will cause long term unemployment are implying that the pattern of demand for products will not change; this is not usually the case. The length of unemployment will depend upon the mobility of workers, which is dependent upon government policies and spending.