Question

Upon the basis of Krugman’s discussion in his “Is Free Trade Passe?” why should free trade should be “the rule of thumb” even in strategic trade policy cases - large country cases and foreign monopoly cases?

Answer 1

Adam Smith wrote in his 1776 book The Wealth of Nations that free trade was beneficial to trading partners. Smith noted that when the countries in a free trade agreement made products and provided that product for the other country at a cheaper rate than the receiving country could produce it, both countries benefited. We, as consumers, often apply that concept to our daily lives. We purchase goods or services that we cannot cost-effectively produce ourselves, benefiting both parties.

David Ricardo expanded on Smith's ideas, arguing that countries should do what they do better and cheaper than other countries. This is called comparative advantage. Ricardo further noted that concentrating on core competencies gave nations a comparative advantage.

Free trade also helps countries generate foreign currency that they can use to purchase the things that they need. Japan, for instance, exports cars and computers to China and the United States, generating foreign currency. Japan takes the revenue it earned from exporting and uses it to import needed products, such as food or mineral fuels.

Free trade opens foreign markets and lowers barriers for corporations that otherwise might not be able to compete against local competitors. As previously mentioned, without free trade agreements, foreign corporations must pay tariffs that increase their cost and decrease competitiveness.