The positive effects of free trade stem from the concept of comparative advantage and have been well studied and understood. Comparative advantage says that the country that sacrifices less to make a good A relative to good B should produce good A. When countries specialize in areas with a comparative advantage, the global economy can produce a greater quantity of goods, and countries can freely trade those goods among each other, benefiting from more efficient production. In turn, this results in lower prices of goods. However, negative externalities from free trade exist, as we don’t live in a perfect world, and most countries don’t engage in free trade. Additionally, absolute free trade can negatively affect global superpowers. Let’s explore some negative externalities of absolute free trade for the United States.

Perverse Incentives

• Degraded labor force skills: The United States operates within a capitalist system. In a capitalist system, businesses are incentivized to generate profits. However, profit maximization in a free trade environment with a very loose immigration policy perverts incentives and negatively impacts the domestic labor force. Offshoring to low-wage countries or hiring pre-trained immigrants is cheaper than funding long-term training programs and investing in the domestic labor force. For example, the H-1B visa program and other mechanisms allow firms to import skilled workers, reducing the urgency to train domestically. Meanwhile, government spending on education often prioritizes access (e.g., free college proposals) over outcomes (e.g., job-relevant skills). Public schools and colleges are funded based on enrollment or graduation rates, not labor market outcomes, creating little incentive to focus on practical skills. For example, only 15% of U.S. high schools offer robust career and technical education (CTE) programs. Employers report a skills gap, with 74% of manufacturers citing difficulty finding qualified workers in 2024, per the National Association of Manufacturers. The education system isn’t aligned with producing workers for high-demand sectors like advanced manufacturing, clean energy, or cybersecurity. There is a significant misalignment of the incentives of corporations, government, and its citizens: corporations avoid investing and training costs, policymakers lean on quick fixes, and the education system fails to adapt, leaving the U.S. labor force underprepared and degraded.
• Lower real wages: When the domestic labor force competes with cheaper, unregulated labor from abroad, its bargaining power will decline. Excessive immigration will put further downward pressure on wages.

Supply Chain Insecurity

Small countries with limited geographical resources cannot enjoy supply chain security. However, large nations like the US, China, and, to some extent, Russia could. Over-reliance on foreign production and labor increases exposure to global supply chain shocks, as seen during the 2020 pharmaceutical, semiconductor, and electronics shortages. Further, military conflicts can greatly expose a nation. From a national survival point of view, it’s probably not the best decision to rely on one of your adversaries for industrial inputs.

Limits Industrial Innovation

When the U.S. offshored much of its manufacturing to countries like South Korea and China, it shifted the opportunity for this experiential learning overseas. These nations took on the production processes and, through what famed economist/mathematician Kenneth J. Arrow called “Learning by Doing,” transformed into manufacturing powerhouses. By consistently engaging in manufacturing, their workers and firms improved techniques, reduced costs, and innovated independently, eventually moving up the global value chain. Meanwhile, the U.S., by stepping back from production, may have relinquished some of the productivity gains and technological advancements that come from staying directly involved in the manufacturing process.

Free trade, rooted in the principle of comparative advantage, allows countries to specialize in producing goods where they are most efficient, leading to increased global production, lower consumer prices, and greater variety. However, unrestricted free trade with no barriers can produce significant negative externalities, especially for a superpower like the United States operating in a world where many nations do not fully embrace free trade. These externalities include degraded labor force skills, lower real wages, supply chain insecurity, and limits on industrial innovation.