2
The Case for Free Trade:
Old Theories, New Evidence

For more than two centuries, economists have pointed out the benefits of free trade and the costs of trade restrictions. As Adam Smith argued more than two centuries ago, “All commerce that is carried on betwixt any two countries must necessarily be advantageous to both,” and therefore “all duties, customs, and excise [on imports] should be abolished, and free commerce and liberty of exchange should be allowed with all nations.”1 The economic case for free trade, however, is not based on outdated theories in musty old books. The classic insights into the nature of economic exchange between countries have been refined and updated over the years to retain their relevance to today's circumstances. More important, over the past decade economists have gathered extensive empirical evidence that contributes appreciably to our understanding of the advantages of free trade. This chapter reviews the classic theories and examines the new evidence, noting as well the qualifications to the case for free trade.


Specialization and Trade

The traditional case for free trade is based on the gains from specialization and exchange. These gains are easily understood at the level of the individual. Most people do not produce for themselves even a fraction of the goods they consume. Rather, we earn an income by specializing in certain activities and then using our earnings to purchase various goods and services—food, clothing, housing, health care—produced by others.

1 Smith 1978, 511, 514.

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Free Trade under Fire
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