Trade vs. Free Trade

If you're interested in the question of whether free trade is good for a country, but don't have an economics background, check out this article by Robert Driskill and this response by Greg Mankiw. The essence of the argument: free trade raises a country's GDP, but tends to hurt some individuals in the country whose jobs are lost. If you care about the people who get hurt by trade, then the right thing to do is to "compensate" them by taxing the people who were helped by trade. Whether such compensation is possible is another question entirely.

In any case, I think one problem with this debate is that economists rarely make a distinction between trade and free trade - the former being an economic activity, the latter being a kind of policy. If there were only two countries in the world, these would be the same thing; opening ourselves to trade would mean more trade, closing ourselves off would mean less trade.

But there are more than two countries in the world. The entry of a new country into the global trade system can, in fact, be unambiguously bad for some of the nations in that system. To see this, suppose there's two countries, France and England. France makes cheese, and England makes children's books, and then they trade one for the other. But then a third country - let's call it Wisconsin - appears, which also makes cheese. France, which is also a cheese-maker, is in trouble, since its advantage is no longer unique.

But in this situation, would France benefit if it stopped trading with England? No. Wisconsin's appearance is bad for France because of "trade diversion" - Wisconsin takes some of France's business - but if France restricts trade it just makes itself even worse off. In this example, trade is bad for France, but free trade is the best of all possible policies.

In my opinion, economists should talk more about trade diversion and other multi-country effects of trade. It would help them make the argument that, even if globalized trade is bad for us, protectionism would only make it worse.