Success: Is Free Trade Good or Bad?

Free trade is something of a sacred cow in the economics profession.

Moving towards it, rather slowly, has also been one of the dominant features of the post-World War Two global economy.
Now there are new challenges to that development.
The UK is leaving the European Union and the single market - though in her speech this week, British Prime Minister Theresa May promised to push for the "freest possible trade" with European countries and to sign new deals with others around the world.
Most obviously Donald Trump has raised the possibility of quitting various trade agreements, notably Nafta, the North American Free Trade Agreement with Mexico and Canada. Even the World Trade Organization (WTO) has proposed new barriers to imports.
In Europe, trade negotiations with the United States and Canada have run into difficulty, reflecting public concerns about the impact on jobs, the environment and consumer protection.
The WTO's Doha Round of global trade liberalisation talks has run aground.
The case for trade without government imposed barriers has a long history in economics.

Comparative advantage

Adam Smith, the 18th Century Scottish economist who many see as the founding father of the subject, was in favour of it. But it was a later British writer, David Ricardo in the 19th Century, who set out the idea known as comparative advantage that underpins much of the argument for freer trade.
It is not about countries being able to produce more cheaply or efficiently than others. You can have a comparative advantage in making something even if you are less efficient than your trade partner.
When a country shifts resources to produce more of one good there is what economists call an "opportunity cost" in terms of how much less of something else you can make. You have a comparative advantage in making a product if the cost in that sense is less than it is in another country.
If two countries trade on this basis, concentrating on goods where they have a comparative advantage they can both end up better off.
Another reason that economists tend to look askance at trade restrictions comes from an analysis of the impact if governments do put up barriers - in particular tariffs or taxes - on imports.
There are gains of course. The firms and workers who are protected can sell more of their goods in the home market. But consumers lose out by paying a higher price - and consumers in this case can mean businesses, if they buy the protected goods as components or raw materials.

Avoiding protectionism

The textbook analysis says that those losses add up to more than the total gains. So you get the textbook conclusion that it's best to avoid protection.
And this conclusion is regardless of what other countries do. The 19th Century French economist Frederic Bastiat set it out it like this:
"It makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbours because other countries have rocky coasts."
The implication is that unilateral trade liberalisation makes perfect sense.
A more recent theory of what drives international trade looks at what are called economies of scale - where the more a firm produces of some good, the lower cost of each unit.
The associated specialisation can make it beneficial for economies that are otherwise very similar to trade with one another. This area is known as new trade theory and the Nobel Prize winner Paul Krugman was an important figure in developing it.