Free trade also assumes that factors of production are internationally immobile. This has been proved wrong by the new world economy. As capital moves from developed nations to developing countries through outsourcing and other operations. These developed nations, through their multinational corporations, then take advantage of cheap labor force existing in developing countries. They reap the benefits of local markets and channel profits back home. This does no good to the developing nations, as these profits do not add to their GDP, rather, contribute to the GNP of developed nations. Therefore, the prediction of free trade that indicated the benefits of trade gains to nationals, never materialize. On the other hand, as the trade widens the disparity of incomes between the developing and the developed countries, labor or human capital also relocates itself. Therefore, skilled or knowledge workers in developing countries immigrate to developed countries. This brain drain causes huge losses in human capital of the developing countries, where, such labor force is crucially needed. Yet the developed countries benefit from such movements of skilled workers to their countries.
Multinational corporations emerge as the most powerful bodies of the world as the business borders blur and globalization affects trade. Today the profits of these multinational corporations actually exceed the GDPs of many countries. Therefore, these corporations have become a powerful political entity and can actually influence terms of trade in their favor. Free trade also assumes that customer preferences and consumer demand are independent and influence production of goods. The goods that are preferred by consumers internationally will be produced more as they would satisfy consumer needs and the consumers will get the best quality due to competitive forces. However, it can be seen that multinational corporations can easily change consumer behavior and preferences through aggressive marketing and advertisements. Today’s competition, is therefore not perfect competition but tilted towards the interests of multinational corporations of the developed nations.
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