How power imbalances are overlooked in the debate over free trade

By Jun-Seo Kim
Illustration by Keo Morakod Ung

The concept of free trade is central to the global economic system. It is often hailed as a mechanism that drives economic growth, encourages competition, and promotes efficient allocation of resources by allowing goods, services, and capital to move freely across borders. 

However, the argument supporting free trade frequently overlooks an important factor that shapes its real-world effect: power imbalances. These imbalances can take many forms—economic, political, and institutional—and significantly affect how the benefits of free trade are distributed. In this post, we will explore how power imbalances are disregarded in the arguments for free trade, and why this neglect leads to unequal outcomes.

The theoretical case for free trade is grounded in classical economic theory, particularly the ideas put forward by economists such as Adam Smith and David Ricardo. According to the principle of comparative advantage, nations can benefit from trade by specialising in producing goods and services that they can produce most efficiently, thus maximizing global surplus. By eliminating barriers to trade, such as tariffs, free trade allows each country to focus on what it does best, leading to increased availability of goods and higher standards of living for all.

In this model, free trade is often considered a win-win situation. By opening up international markets, it is assumed that all countries will experience growth regardless of their level of development or size. This view tends to focus on the aggregate benefits of trade while overlooking the distribution of those benefits. This is where power imbalances play a critical role in shaping how different actors in the global economy experience the impacts of trade liberalization.

One way in which power imbalances manifest is through economic strength. Developed countries typically have greater economic resources, which they can leverage to influence trade negotiations. Wealthy nations often dominate the global trading system, as they possess the capital, infrastructure, and technologies to outcompete poorer nations. This economic power enables them to set the rules of trade to their advantage, often resulting in trade agreements that disproportionately benefit richer nations.

For instance, large multinational corporations headquartered in developed countries may dominate global supply chains, leaving less developed countries in a minor position. In such a system, poorer countries may be locked into producing raw materials or low-value-added goods, with little opportunity to climb the value chain. As a result, free trade does not necessarily lead to the intended outcome of economic convergence between rich and poor nations. Instead, it can perpetuate existing inequalities by reinforcing the economic dependence of developing countries.

In addition to economic power, political power also plays a crucial role in shaping the dynamics of free trade. Political power enables certain nations to influence international institutions such as the World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank. These institutions set rules for global trade and can impose conditions on countries seeking economic assistance. In many cases, the policies advocated by these institutions are shaped by the interests of powerful states, often disregarding the needs of developing nations.

For example, trade agreements such as the North American Free Trade Agreement (NAFTA) or the Trans-Pacific Partnership (TPP) are often negotiated in ways that reflect the priorities of dominant nations, particularly the US. While benefiting wealthy nations and large multinational corporations, the agreements may leave smaller countries with limited bargaining power. In such cases, the political influence of powerful countries ensures that the benefits of free trade are not distributed equally across all nations.

Alas, such disparities in power dynamics are often overlooked in the arguments for free trade. Advocates of free trade often focus on the aggregate economic benefits of trade while underestimating the distributional consequences. The assumption is that the benefits of trade will “trickle down” to all participants and that any inequalities that arise are simply part of the natural process of economic development. This view ignores the fact that the distribution of benefits is shaped by power and that not all countries or individuals have equal access to the opportunities that free trade presents.

Moreover, there is a tendency among the advocates to emphasize the importance of competition, often excluding other factors that can affect market outcomes. While free trade may lead to greater competition in theory, it is also true that powerful corporations and wealthy nations can use their influence to distort market outcomes in their favour. This dynamic can ultimately diminish competition, allowing the most powerful actors to dominate the majority of the gains.

In summary, although free trade promises global prosperity, the issue of power imbalance is frequently disregarded in the theoretical arguments for it. The unequal distribution of economic and political power can result in outcomes where the benefits of trade are concentrated in the hands of a few, while many others are left behind. By overlooking these power imbalances, advocates of free trade fail to account for real-world complexities of how the benefits of trade are distributed. A more nuanced approach to free trade would recognize the role that power plays in shaping trade outcomes and work to create a more equal system that benefits all participants. For instance, in their early stages of development, South Korea strategically used protectionist policies by shielding key industries from foreign competition, restricting imports, and providing subsidies. Once their industries became competitive on the global stage, they liberalized trade, allowing them to integrate into the global economy on stronger terms. This approach demonstrates that carefully managed trade policies, rather than blind adherence to free trade, can help developing nations build economic resilience and avoid being locked into low-value production.