Both traditional and heterodox theories of trade tend to assume that either trade must be free, or that it must be protected. But, as argued in my new book Neither Free Trade Nor Protection: A Critical Political Economy of Trade Theory and Practice and previously on the Elgar Blog, we must break free from this binary and, by doing so, change the nature of how we think about – and do – trade.
Neither free trade nor protection
The two negatives of this title might seem designed to antagonise almost everybody. So I’ll begin with a couple of explanations to encourage you to stick with it.
Neither free trade nor protection have been the norm
Firstly, the title works as a simple observation. In fact, in real economic history, we have seldom seen either completely free trade or systematic protection. Mainstream economics, in particular, has a penchant for building models disconnected from the real world and expecting the world to shape up to their inventions. This won’t do. So recognizing that what we see is something other than straightforward openness or closure is a necessary starting point.
The case for openness or closure is weak
Secondly, I do argue against the choice between openness and closure. Free trade does not (or would not) bring the unalloyed benefits its supporters assert and the theories invoked in its defence can’t support the grandiose claims too often made for them. Conversely, trade is seldom to blame, or at least is seldom the principal villain of the piece, when it comes to questions of poverty or of inequality either between countries or within them.
The theories need to be taken seriously…
Having said this, trade theorists of various stripes have come up with some brilliantly elegant ideas. For the mainstream, the theory of comparative advantage remains a central support. There are other powerful ideas, for example anticipating what countries should trade and who within them gains and who loses. There is a range of more critical ideas, acknowledging market imperfections, which mean that trade might not balance, that poorer countries or those selling particular commodities might lose and that larger and richer countries might be able to strategize to turn trade to their advantage. Theories of unequal exchange claim a systematic exploitation of poorer countries.
…but investigated critically
These theories too often come wrapped in unnecessarily complex mathematics and I want to explain them in straightforward terms. I also want to look critically at what exactly it is they are claiming, what they are assuming and how plausible it all is.
The evidence is much more equivocal than either side would have us believe
Above all, the theories need to be tested. Conventional economic data can miss vital impact of trade, most obviously on the environment. However, the very fact that openness and closure are actually opposite, unrealized, ends of a spectrum means that there is plenty of evidence with which to test rival claims. Matters of degree, huge variations over time and between countries lend themselves to a bit of number crunching. Doing this, it quickly becomes clear that many of the big claims of advantage and disadvantage are overblown.
Trade, if anything, is slightly conducive to faster national growth. Maybe.
There is empirical support for some of the ideas. If anything increasing trade seems to be conducive to growth for both rich countries and for poorer ones. But the ‘if anything’ is important. At best weak, and weakly significant, associations claw their way out of the statistics. Other relations may be much more important.
Countries trade on the basis of factor endowments but don’t benefit from doing so
There is stronger evidence supporting some other influential ideas. For example, the ‘Heckscher-Ohlin theorem’, predicting that countries trade on the basis of their factor endowments – land-rich countries for example should sell primary products and import manufactured goods – seems to be confirmed. But this too needs to be quickly qualified: there is very little evidence that countries which to trade according to their factor endowments actually do any better in terms of their subsequent growth than those that trade in defiance of their endowments and the theory.
In praise of Adam Smith and trade deficits!
One result, which came as a surprise to me, is that countries which run trade deficits seem to do better than those with surpluses. This confounds both mainstream prejudices and more critical ones which stress the perils of indebtedness. Back in 1776, Adam Smith mocked his mercantilist opponents insisting that wealth consists not in money but in the goods it purchases. Of course, a trade ‘deficit’ simply means an incoming surplus of useful goods. I’m not staking too much on this result but maybe Smith was more right than most of his followers have realized.
Trade is a social practice needing a social theory
The final thing I’m trying to do with the book, but really its overarching theme, is to contextualize trade.
I begin with a chapter on trade’s long history to the 1970s. And I end with one on how changed trade relations since then contributed to the global crisis of 2007-09. This last makes clear that trade is not a general good or bad but that particular forms of trade, at particular times, can have very serious and seriously negative consequences. But here as throughout the book I am arguing that international trade doesn’t make much sense understood as a thing in itself, divorced from other social, political and economic processes.
And social theorists can learn by looking at trade
In turn, reflecting on questions of trade can tell us a something about wider social and economic questions. Who exactly trades; countries, corporations, individuals? Who decides what is traded and what counts as trade? What are the conditions in which trade brings benefits or losses? And for whom?
We need to move towards developing a better, more nuanced and more social understanding of trade.