This is “Introduction”, section 11.1 from the book Policy and Theory of International Economics (v. 1.0).
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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.”See Paul Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives 1, no. 2 (1987): 131–44.
The original arguments for free trade began to supplant mercantilist views in the early to mid-eighteenth 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 nineteenth and twentieth 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 included 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 counterarguments that have acted to reassert the position of free trade as a favored policy despite these objections. The most important of these counterarguments include the potential for retaliation, the theory of the second 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 contend, however, that these exceptions are invalid or illogical. Rather, it argues that each exception supporting government intervention in the form of a 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 that 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” that establishes the argument for free trade.Ideally, we would create a supermodel of the world economy that 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.
Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”