What is free trade? In our Economics 101 courses, we learned about the benefits of free trade. Based on Ricardo's insight regarding comparative advantage, we would be better off if we focus on what we do best and exchange things. In terms of material wellbeing, we would then be better off than if we isolated ourselves and tried to do everything on our own. Under the principle of comparative advantage, the factors of production--land, labour and capital--should be allocated in accordance with market forces, so that they are used most efficiently. This efficient allocation of resources would produce the greatest overall benefit.
In Economics 101, we learned some basic concepts; however, we should not get stuck there. We should refine our thinking about economics by appreciating the limitations and qualifications to be taken into account when these ideas are applied in the real world.
1 While economic theory says that all factors of production should be allowed to move freely according to market forces, in reality we generally do not allow labour to move freely. There is high labour mobility in the European Union and the economic union we call the United States, but globally such mobility is highly constrained by immigration laws, visa requirements, travel costs and discrimination.
2 Free trade theory assumes that we enter the marketplace with similar levels of economic power. It implies that after finding our separate niches, we still have comparable levels of power, and the differences among us have to do with accidents of nature and differences in taste. It does not acknowledge that free trade necessarily leads to a steadily widening gap between the rich and the poor. The process steadily increases the power of the rich over the poor.
3 Free trade theory assumes the seller is in direct contact with the buyer, negotiating terms of trade at arms length. It does not anticipate the middlemen, whose only comparative advantage is that they can facilitate or block the connection between buyer and seller. This comes at a price, often with the seller getting only a small share of the amount paid by the ultimate consumer. Innovative "fair trade" programmes for products can be viewed as attempts to restore connectedness between sellers and buyers.
4 Free trade theory is based on the idea that there are many independent actors with different initial endowments and preferences, interacting freely in the marketplace. It does not anticipate that many...