Theory
In 1776, "the economist Adam Smith exploded the mercantilist idea in his influential book, The Wealth of Nations. A country's wealth, he argued, lies not in the amount of silver in its vaults, but in the labour and enterprise of its people.
Free trade benefits both sides: why build costly hothouses to grow grapes in Scotland, when you can buy wine cheaply from France? And his ideas led to the great Nineteenth-Century
free trade era and the wide prosperity that came with it."
(
Adam Smith Institute, visited on 2009-07-19)
The Reality
Theory and practice are two different things. Even when international trade of goods and services is without any tariff or other trade barrier, or when labour and capital move freely between countries, there are trade-distorting policies (such as taxes, subsidies, regulations or laws) that give domestic firms, households or factors of production an advantage over foreign ones. That's why it can be said that
free trade has in fact never existed. States have preferred to slow down their liberalization, but under pressure from GATT and the WTO, they continue to liberalize their policies.
"In January 1994, Canada, the United States and Mexico launched the North American Free Trade Agreement (NAFTA) and formed the world's largest free trade area. The Agreement has brought economic growth and rising standards of living for people in all three countries. In addition, NAFTA has established a strong foundation for future growth and has set a valuable example of the benefits of trade liberalization."
(Foreign Affairs and International Trade Canada,
Canada and the North American Free Trade Agreement , visited on 2009-07-13)
Debate
The principal argument in favour of
free trade is that of increased economic well-being. Economists argue that this well-being comes from the gains obtained by the opening of borders, which, they argue, outweigh the costs. Free traders also use the development of economies of scale in production, and the diffusion of innovation as arguments in favour of free trade, the idea being that the opposite alternative, that is, the reduction of international competition, encourages the protection of local industries through customs barriers, causing a surplus of businesses in the domestic market and preventing the development of a scale economy.
However, some economists argue that, in some cases, active governmental trading policies can contribute to national economic well-being rather than diminishing it. These theories suggest that only the small countries whose prices are imposed by the world market will benefit from increased economic well-being through free trade, whereas rich countries can simply determine global market prices regardless.
The second argument in favour of protectionism concerns domestic market failures. The sectors involved are generally subject to labour market restrictions (particularly for unskilled labour) and, to a lesser extent, to financial restrictions, and are therefore in need of protection.
Indeed, it is not uncommon for so-called "free trade agreements" to impose trade restrictions, because of domestic political pressure by corporate, environmental or labour interest groups seeking special protections of their perceived interests.