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The phenomenon of “free trade” appeared with the repeal of the Corn Laws in 1846.
Three decades
later, protectionist tariffs emerged and grew till the Great Depression. However, thanks to the
negotiations of the General Agreement on Tariffs and Trade (GATT) and the American leadership’s
support, the world witnessed the re-emergence of trade liberalisation. But, during mid-1970s trade
protectionism resurfaced due to global stagflation and the New Protectionism that the US came up
with in order to keep out Japanese and other imports. However, the completion of the Uruguay
Round of trade negotiations (1993) brought with it some developments to trade liberalisation by
replacing the GATT by the World Trade Organisation.
Free trade constituted a major topic of debate among economists. Advocates of Trade Protectionism
consider that Free Trade is a form of imperialism which would benefit the powerful countries and
would create a dependence of the less developed countries on the developed ones. They also claim
that the State is the one responsible for economic development and not free markets; states should
guide and shape the overall structure of the society through trade protectionism, industrial policy as
well as other forms of government intervention.
On the other hand, classical economists such as Adam Smith argued that by removing trade barriers,
we’ll have national specialisation and better utilisation of the world’s scarce resources. Free Trade
encourages international spread of technology around the globe. This would provide developing
countries with the opportunity to catch up in productivity whereas Trade Protectionism would
diminish the incentive to innovate and climb the technological ladder.
Certain misconceptions about trade have led policy makers to prefer protectionism over free trade.
First, many in the US considered unfair trade practices by trade partners like Japan as responsible for
the trade/payments deficit that the US witnessed during much of the 80s and 90s. Nevertheless, the
behavior of trade partners does not affect the balance of trade/payments and the deficit country
went through was rather because of the law rate of American savings. Second, imports from low-
wage countries were claimed to be at the origin of wage inequality in the US and unemployment in
Western Europe. The US was perceived as unable to compete with East Asian countries which
enjoyed abundant labor and paid far less wages. Moreover, globalization and free movement of
workers were seen as a major cause for American workers losing their jobs. In reality, income
inequality between 1973 and the 1990s was due to shifting to modern technologies within the
American economy. This led to the decrease in the demand of unskilled workers (whose jobs were
replaced by automated processes) and the increase in the demand of skilled ones. Furthermore, the
high rates of unemployment in Western Europe which reached 10% to 12% in the 1990s were mainly
because of domestic problems. Inflexible labor markets, generous welfare programs, and restrictive
macroeconomic policies contributed to worsening the situation of unemployment in the region.
While both misunderstandings advocated protectionism, opting for a closed economy is still the
worst choice.
Since the 1930s the Heckscher-Ohlin theory (HOT) was accepted as the modal for explaining
international trade. Based on factor endowments and comparative advantage, the theory suggests
that each country will produce and export the products in which it has a cost advantage. The HOT
also implies that a rise in the relative price of a good will lead to a rise in the real return to that factor
which is used most intensively in the production of the good. In other words, the distributive effect
of the theory will eventually favor either capital or labor in trading countries. Besides, the H-O modal
is based both on Mundell equivalency and Factor-Price Equalization Theory. Although it is still largely
adopted by economists, the actual patterns of trade differ from what the theory predicts. As a
consequence, revisionists of the HOT attempted to modify it include factors like human capital,
learning by doing, technological innovation, and economies of scale.
A number of concepts represented a challenge to the HOT. First, the introduction of the concept of
human capital was an attempt to resolve the “Leontief Paradox” which was a major blow to the H-O
Theory. According to the H-O Theory’s predictions, the US, which is a rich-capital country and has a
comparative advantage in capital intensive goods, has been exporting labour-intensive goods, such
as agricultural commodities, which is anomalous.
Second, since the rebuilding of Western Europe and the GATT negotiations, the world witnessed the
rise of intra-industry trade where countries export and import goods in the same economic sectors.
This went against what the H-O theory’s inter-industry trade which entails importing and exporting
goods in different economic sectors.
Third, the post-WWII period was marked by the growing integration of international trade and
foreign direct invest by multinational corporations. Economists came to realise that MNCs have
contributed greatly to the development of internationalisation of services and industrial production
and that the trade patterns resulting from movement toward internationalisation do not conform to
H-O theory based on comparative advantage.
Lastly, according to Michael Porter’s findings, the intense competition between firms that occur
domestically in specific sectors will make those firms ready to compete internationally. He also
discovered that the deliberate corporate decisions and government policy choices contribute to the
development or thwarting of firms to create competitive advantage. The drive for technological
superiority has increased the receptivity of governments to the new trade theory.
Known also as the strategic trade theory (STT), this new trade theory is based on the oligopolistic
competition concept. It advocates that government can and should intervene actively to help
oligopolistic firms. This can lead to a powerful market which could result in a better control of tariffs
for national benefit. The theory also assumes that the nation can play a major role and can intervene
effectively in trade matters to gain disproportionately. Unlike the HOT, the STT contends that certain
economic sectors are more vital than others for the economy and that the government should take
protectionist measures to protect them whenever required. The strategic trade theory thus
concludes that free trade is not the optimum policy a government can take.

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The phenomenon of “free trade” appeared with the repeal of the Corn Laws in 1846.

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