International Trade Theory and Policy
by Steven M. Suranovic

Trade 120-1

Evaluating the Controversy Between Free Trade and Protectionism


For hundreds of years, at least since Adam Smith's publication of The Wealth of Nations, the majority of economists have been strong supporters of free trade among nations. Paul Krugman once wrote that if there were an Economist's Creed it would surely contain the affirmation, "I advocate free trade".(1)

The original arguments for free trade began to supplant mercantilist views in the early to mid-18th century. Many of these original ideas were based on simple exchange or production models that suggested that free trade would be in everyone's best interests and surely in the national interest. During the 19th and 20th centuries, however, a series of objections were raised suggesting that free trade was not in everyone's interest and perhaps was not even in the national interest. The most prominent of these arguments include the infant industry argument, the terms of trade argument, arguments concerning income redistribution, and more recently, strategic trade policy arguments. Although each of these arguments might be thought of as weakening the case for free trade, instead, each argument brought forth a series of counter-arguments which have acted to reassert the position of free trade as a favored policy despite the objections. The most important of these counter-arguments include the potential for retaliation, the theory of the 2nd-Best, the likelihood of incomplete or imperfect information and the presence of lobbying in a democratic system.

What remains today is a modern, sophisticated argument in support of free trade among nations. It is an argument that recognizes that there are numerous exceptions to the notion that free trade is in everyone's best interests. The modern case for free trade does not argue, however, that these exceptions are invalid or illogical. Rather it argues that each exception which might support government intervention in the form of trade policy brings with it additional implementation problems that are likely to make the policy impractical.

Before presenting the modern argument, however, it is worth deflecting some of the criticisms that are sometimes leveled against the economic theory of free trade. For example, the modern argument for free trade is not based on a simplistic view that everyone benefits from free trade. Indeed trade theory, and experience in the real world, teaches us that free trade, or trade liberalization is likely to generate losers as well as winners.

The modern argument for free trade is not based on unrealistic assumptions which lead to unrealistic conclusions. Although it is true that many assumptions contained within any given trade model do not accurately reflect many realistic features of the world, the modern argument for free trade is not based on the results from any one model. Instead the argument is based on a collection of results from numerous trade models which are interpreted in reference to realistic situations. If one considers the collection of all trade models jointly, it is much more difficult to contend that they miss realistic features of the world. Trade theory (as a collection of models) does consider imperfectly competitive markets, dynamic effects of trade, externalities in production and consumption, imperfect information, joint production and many other realistic features. Although many of these features are absent in any one model, they are not absent from the joint collection of models and it is this "extended model" which establishes the argument for free trade.(2)

1. See Krugman (1987), "Is Free Trade Passe?", Journal of Economic Perspectives, 1 (2) pp. 131-144. Go Back

2. Ideally we would create a supermodel of the world economy which simultaneously incorporates all realistic features of the world and avoids what are often called "simplifying assumptions". Unfortunately this is not a realistic possibility. As anyone who has studied models of the economy knows, even models that are very simple in structure can be extremely difficult to comprehend, much less solve. As a result we are forced to "interpret" the results of simple models as we apply them to the complex real world. Go Back

International Trade Theory and Policy - Chapter 120-1: Last Updated on 10/3/97