Retrospectives: Challenges to Free Trade

The recent theoretical literature on strategic trade policy suggests that government intervention in international trade has the potential to be welfare improving. Government promotion of exports from imperfectly competitive industries, for example, may enable domestic firms to capture economic rents from foreign firms, thereby increasing national welfare. In addition, active responses to foreign protection, by a policy of reciprocity, may be required to prevent a loss of domestic welfare. Although these findings may bring into question the traditional economic case for free trade, many economists doubt that these theories provide sound guidance for trade policy. Economists in the nineteenth century also argued about whether theoretical justifications for tariffs compromised the case for free trade. This paper discusses two older debates somewhat related to the current focus on strategic industries and reciprocity, and concludes with an observation about how developments in economic theory affect economists' view of policy.