Free trade has been a core policy of those who believe in limited government and free markets. Based upon the theories of “absolute advantage” and “comparative advantage” propounded by Adam Smith and David Ricardo, respectively, free trade advocates have accurately pointed out the theoretical benefits to society when a country eliminates restrictions on trade.
However, reality doesn’t always correspond to economic theory. Multiple exogenous factors can force countries to adjust or limit free trade ideals when formulating international trade policies.
“Trade realism” in trade policy focuses not on abstract theories but economic reality. What is the correct policy, for instance, when other countries engage in international political or economic behavior that distorts a market to the point where free trade policy is no longer feasible?
For example, China’s trade policies—e.g., forced technology transfers, intellectual property theft, etc.—demonstrates the challenges of maintaining a free trade policy. Free trade works when both countries in a trading relationship embrace such a policy. If one country does not, then the real world benefits of free trade are less apparent.
Ricardo’s famous model where Britain specializes in the production of cloth while Portugal specializes in the production of wine results in more total cloth and wine being produced. But it only works if both countries follow that model.
While a country’s specialization in production of items in which it has an absolute advantage is always sensible (e.g., Saudi production of oil), the reality is that few countries embrace free trade policies. A pure free trade policy without regard to a trading partner’s policies is akin to a defense policy of unilateral nuclear disarmament. The underlying logic of such a policy only holds true if all sides adopt it.
Further, trade policy is often a product of competing societal and state interests that vary from one industry or economic sector to another. While arguably a free trade policy should always be the default policy for any industry or economic sector, real world considerations do not always make it practical.
Additionally, the father of free trade theory himself, Adam Smith, recognized that national security considerations provide a legitimate argument against a free trade policy in certain instances. The recent U.S. imposition of export restrictions of advanced technology to China, especially in semiconductor chips and equipment, are an example of Smith’s argument.
Free trade policy is desirable as a starting point and a goal that should be pursued. A hard dose of reality, however, is necessary when navigating the contours of the international political and economic landscape. Trade realism requires a country adopt a trade policy that takes into considerations the realities of that landscape.