Krugman's Is Free Trade Passe? Essay

Krugman's Is Free Trade Passe? Essay

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Krugman writes that in the decade preceding his article “Is Free Trade Passé?” international trade theory underwent radical change from the traditions of constant returns and perfect competition to include new models emphasizing increasing returns and imperfect competition (1987, p. 131). Comparative advantage is no longer accepted as a means to explain in totality what actually happens in trade, and extraneous factors indicate that free trade may not be in the best interest of individual nations. Krugman answers the question posed in the article title by saying that free trade it is not passé, but it is better used as a guiding principle rather than a standard rule. This paper will review the theories that challenge the assumptions of constant returns and perfect competition, as well as discuss the implications for classical trade optimism and trade policy and practice.
Krugman defines comparative advantage as “the view that countries trade to take advantage of their differences” (1987, p. 132). Comparative advantage theories assume constant returns to scale and perfect competition. Krugman writes that trade exists when countries differ from one another in goods they have to offer, technology, or factor endowments. Although there are multiple models explaining the cause of trade, each differs as to what factors are included to explain why trade takes place. Economist Ohlin and authors Burenstam-Linder and Vernon began introducing counter-points to comparative advantage as early as the late 1950’s, saying that formal models of comparative advantage did not take into account all factors affecting international trade. International specialization and trade caused by increasing returns, as well as economies of scale and techn...


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... of their country, but allowing small groups to benefit while the majority are negatively impacted or not impacted at all.
While free trade has certainly changed with advances in technology and the ability to create external economies, the concept seems to be the most benign way for countries to trade with one another. Factoring in that imperfect competition and increasing returns challenge the concept of comparative advantage in modern international trade markets, the resulting introduction of government policies to regulate trade seems to result in increased tensions between countries as individual nations seek to gain advantages at the cost of others. While classical trade optimism may be somewhat naïve, the alternatives are risky and potentially harmful.



Reference
Krugman, P. (1987). Is Free Trade Passe? The Journal of Economic Perspectives, 1(2), 131-144.

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