The Journal of Economic Perspectives · 1987 · 681 citations · 15 references
Social SciencesEconomicsInternational EconomicsInternational TradePolitical EconomyComparative AdvantageCross-border TradeGlobal TradePerfect CompetitionTrade LiberalizationTrade PolicyCompetition ModelsInternational Trade Economics
Recent advances in international trade theory, including increasing‑returns and imperfect‑competition models, have challenged the traditional comparative‑advantage framework and raised doubts about the explanatory power of free trade. The paper argues that free trade is no longer an unquestioned principle but remains a useful, though not universally optimal, policy guideline. These newer models suggest that comparative advantage may not fully explain trade, that selective government interventions can be justified, and that free trade should be viewed as a reasonable rule of thumb rather than an absolute optimum.
If there were an Economist's Creed, it would surely contain the affirmations “I understand the Principle of Comparative Advantage” and “I advocate Free Trade.” Yet the case for free trade is currently more in doubt than at any time since the 1817 publication of Ricardo's Principles of Political Economy, and this is due to changes that have recently taken place in the theory of international trade. While new developments in international trade theory may not yet be familiar to the profession at large, they have been substantial and radical. In the last ten years the traditional constant returns, perfect competition models of international trade have been supplemented and to some extent supplanted by a new breed of models that emphasizes increasing returns and imperfect competition. These new models call into doubt the extent to which actual trade can be explained by comparative advantage; they also open the possibility that government intervention in trade via import restrictions, export subsidies, and so on may under some circumstances be in the national interest after all. To preview this paper's conclusion: free trade is not passé, but it is an idea that has irretrievably lost its innocence. Its status has shifted from optimum to reasonable rule of thumb. There is still a case for free trade as a good policy, and as a useful target in the practical world of politics, but it can never again be asserted as the policy that economic theory tells us is always right.
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