Free Trade is an Idealist Theory

Free trade is a persistent theory or ideal. It is persistent because it is attractive to those who long for a world without meanness, where all parties benefit from human interaction.
Indeed, opening national borders to all imports, as advocated by free trade believers, would benefit all nations, provided that trade is balanced – imports and exports equal. This little requirement, however, is violated by deliberate actions by some nations and is achieved by circumstance by others. In every case, unequal trade results in winners and losers from international trade.

Japan became an economic powerhouse, with the second largest economy in the world, primarily because of the ingenuity, intelligence and work habits of their population. It is also clear that the Japanese economy was organized and directed with a clear purpose - to create capacity to export manufacturing goods to the rest of the world. To that end, in the period after WW II., their government diverted scarce capital resources to the steel industry, combined with tariffs on foreign steel, so that the Japanese manufacturers of goods fabricated from steel would have a comparative advantage over manufacturers in other countries.

The Japanese economy became a spectacular success, in part because they first subsidized heavy industry and they refused to open their borders to all imports. Japan became a winner from international trade because their governmental policies and other characteristics unique to their culture enabled them to produce products which they could sell on the international market AND their unwillingness to purchase products made in other countries helped generate trade surpluses which they then used to upgrade their manufacturing capabilities. Success breeds success.

Free trade theory is also pernicious as well as persistent. It diverts attention away from the real consequences of international trade. International trade is one of the ways nations compete with each other. A realistic government policy, for every nation, is to arrange their trade so that their nation becomes more successful in producing goods and services that other nations want to buy.

This does not require “beggar thy neighbor” policies. Equal trade will insure that all countries benefit from trade. A realistic foreign trade policy would recognize that equal trade does not come automatically, but must be created, just as the current world trading system, with low tariffs, did not arrive automatically, but was created by governments.

It will be up to the U.S. and Great Britain, the countries that created the current trading system by advocating and supporting mutually agreed reductions in tariffs, to recognize that the benefits of mutually agreed reductions in tariffs that are achievable have already been achieved and that the world now needs to move toward equal trade. This will require placing free trade theory on the shelf – to be treated as an idealistic theory that could not be implemented because of the large gains from trade generated by trade surpluses.