Is Free Trade Passé?

“Free trade is not passé, but is an idea that has irretrievably lost its innocence” (Krugman, 1987, p.132). In his article, Is Free Trade Passé, Paul Krugman writes that the classical trade theory has been replaced with a new trade theory. The classical trade theory is based on constant returns to scale and perfect competition, is driven by comparative advantage, and endorses free trade. This classical theory emphasized the idea that trade was brought about by differences in tastes, technology, or factor endowments between countries (Krugman, 1987). However, the new theory of international trade is driven by increasing returns to scale, also known as economies of scale, and leads to imperfect competition (Carbaugh, 2011). Furthermore, this new trade theory fosters the idea that the government could work in the interest of its nation to improve market outcomes, the antithesis of free trade. Krugman’s article presents two arguments that challenge the assumptions of classical trade optimism and support the case for government intervention. However, the implementation of government intervention in international trade may create excessive obstacles and in the end, free trade may be more practical.

Economists generally believe that international trade can improve the standard of living of the trading countries (Wheelan, 2010). However, economists were not completely convinced that the classical trade theory fully represented reasons for trade. The classical trade theory is based on comparative advantage which is the ability to produce a good or service at a lower opportunity cost than others. The nation with the lower opportunity cost in one product will specialize in the production of that one product and trade for the...

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...ade policy is that a free trade policy should be more of a rule of thumb than an optimal policy (Krugman, 1987). Assuming that the obstacles to implementing government intervention could not be overcome, a free trade policy would be the second best solution as it helps countries benefit from providing and receiving a variety of goods liberally.

Works Cited

Bade, R., & Parkin, M. (2004). Foundations of Microeconomics (2nd ed., p. 208). Boston, MA: Pearson Addison Wesley.

Carbaugh, R. J. (2011). International Economics (13th ed.). Mason, OH: South-Western Cengage Learning.

Krugman, P.R. (1987). Is free trade passe? Economic Perspectives 1(2), 131-144.

Krugman, P.R. (1992). International Trade Modelling (p. 4). New York, NY: Chapman & Hall.

Wheelan, C. (2010). Naked Economics: Undressing the Dismal Science. New York, NY: W.W. Norton & Company, Inc.