Free Trade and Its Alternatives

Free trade as the widely preferred policy regime has enjoyed a very long and largely successful run. In recent years, however, political support for it has cooled substantially, especially in the arena of multilateral trade negotiations. Its wide acceptance was in part nurtured by memories of the devastating protectionism of the interwar years. Interestingly, the strongest and most unequivocal intellectual support for it comes from a model whose assumptions are more than a little at odds with modern reality. The case for free trade becomes more ambiguous under circumstances involving product differentiation and intra-industry trade, economies of scale, imperfect competition, and externalities.Nevertheless, while introduction of greater realism weakens the universality of the case for free trade; it does not add up to an argument for protectionism. When markets are free, it can readily be shown that trade should also be free. In the years since World War II, trade barriers have been reduced significantly, while many markets have become less free, with greater concentration of economic power and rising volumes of transactions that do not take place in markets at all. This is particularly true in the financial services industries. Hence, the alternatives to free trade are not just simply a return to protection, but strengthening competition in markets that are encumbered by public and private distortions.