by I. Wellington

Created on: August 18, 2009

To begin it must be understood that "Free Trade" is a much mis-used expression, appropriated by politicians from all sides of politics for and against various pieces of trade legislation. So there exists two versions of "Free Trade": the theoretical one derived from economic thought and the theory of comparative advantage and the popularised version, the version that is understood by the average member of the public.

First to theory, it is easy to demonstrate with economic theory that Free Trade leaves both sides of the trade better off even if one party is better at producing all goods traded. That both sides benefit from trade is shown by the theory of comparative advantage which recognises that due to opportunity costs (the X units of good B foregone to produce Y units of good A) specialisation will result in both parties being better off. A simple example is: I can produce five pizzas or five burgers in one hour, you can produce fifteen pizzas or ten burgers in one hour. Obviously you are better at making both pizzas and burgers than I am. However each burger only costs me 1 pizza whereas each burger costs you 1.5 pizzas in foregone production. If you specialise in pizza and I specialise in burgers then we have fifteen pizzas and five burgers. Now I give you five burgers for six pizzas (remembering I am indifferent between pizza and burger), I now have six pizzas, one more than I could have produced by myself. You have 9 Pizzas and 5 burgers which is also combination you could not have produced by yourself. So we have both gained from trade, trade has increased the economic pie despite the fact that you are better than me at making both goods. It is easy to see how this simple problem can be scaled up to encompass countries and how theoretically free trade leads to gains to both parties to the trade. This is why free trade is a desired global goal.

The problem is that the popular version of Free Trade is not the version described by the theoretical model above. Most Free Trade agreements merely create free-er trade, not actually Free Trade and protectionism still abounds, ever more so due to the current crisis. This leaves the global trade system twisted and distorted, overall it is enduring protectionism that creates the worst problems in the global trade system. Entrenched protectionism means that moving towards Free Trade is a structural change to the economy and too often the costs emerge before the benefits, and too often politicians respond to the pressure from affected industries to maintain protectionism because the costs of protectionism are politically free: no one ever sees the metaphorical extra pizza that protectionism takes from the economy so no one ever complains.

Theoretically Free Trade is a sound goal for the world economy. However it is unlikely to ever truly be achieved.

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