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The Narrow and Broad Arguments for Free Trade Author(S): Paul R American Economic Association The Narrow and Broad Arguments for Free Trade Author(s): Paul R. Krugman Source: The American Economic Review, Vol. 83, No. 2, Papers and Proceedings of the Hundred and Fifth Annual Meeting of the American Economic Association (May, 1993), pp. 362-366 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2117691 Accessed: 02/12/2010 04:57 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aea. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review. http://www.jstor.org FREE TRADE:A LOSS OF (THEORETICAL)NERVE?t The Narrowand Broad Arguments for Free Trade By PAUL R. KRUGMAN* Economistshave a notorious, only partly vantagethat Ricardohad exploded170 years deserved reputation for disagreeing about earlier. (On the strength of that perfor- everything. One thing that almost all mance he was then invited to publish an economists have almost always agreed article in the Harvard Business Review). about, however, is the desirabilityof free Lester Thurow's (1992) latest book is a trade. best-seller because it seems to agree with Why are economists free-traders? It is the popularview of internationaltrade as a hard not to suspect that our professional struggle over market shares, even if some commitmentto free trade is a sociological appreciationof general equilibriumis hid- phenomenonas well as an intellectualcon- den in the footnotes. And despite her con- viction, that is, that there is more to it than siderable qualifications,does anyone think our altruisticdesire to persuade society to that Laura Tyson would have attractedthe avoid deadweightlosses. After all, if social attention that has now made her the presi- welfare were all that were at stake, we dent's chief economic adviser if she had should as a professionbe equallycommitted criticized conventional wisdom on health to, say, the use of the price mechanismto care or social securityinstead of trade pol- limit pollution and congestion. However, icy? supportfor free trade is a badge of profes- Let me be clear from the outset that sional integrity in a way that support for economists are basicallyright and the gen- other, equallyworthy causes is not. By em- eral public basically wrong about interna- phasizingthe virtues of free trade, we also tional trade. Those who criticize the pro- emphasize our intellectual superiorityover fessional conventionalwisdom rarely do so the unenlightenedwho do not understand because they have a serious alternative. comparativeadvantage. In other words, the Usually what their objections amount to is idea of free trade takes on special meaning simply a failure to understandthe idea of preciselybecause it is someplacewhere the opportunitycost. And it is certainlydisturb- ideas of economists clash particularly ing when rewardsare lavishedon economists stronglywith popularperceptions. or self-described political economists who On the other hand, the contrastbetween seem to pander to popular misconceptions. what economists know and everyone else Yet there is still the question of what believes about trade creates special incen- really is known about trade policy. Is the tives for economists to turn apostate. In case for a free-trade policy really as over- 1986John Culbertsonwas given primespace whelming as the professional consensus in The New York Times, not once but three might suggest? The answer, I will argue, is times, to propoundexactly the same confu- no: there is a case for free trade, but it is a sion between comparativeand absolute ad- more subtle and above all a more political case than we are used to making. I. What We Know about International Trade tDiscussants: Drusilla K. Brown, Tufts University; Dani Rodrik, Columbia University; J. David Richard- son, Syracuse University. Since the late 1970's there has been a of the of in- *Department of Economics, Massachusetts Institute fundamentalrethinking theory of Technology, 50 Memorial Drive, Cambridge, MA ternational trade. This rethinkinghas not 02139. thrownout the grandtradition of trade the- 362 VOL. 83 NO. 2 FREE TRADE:A LOSS OF (THEORETICAL) NERVE? 363 ory,but it has modifiedthat traditionenough tive to details of market structurethat gov- to create a new climate of doubt aboutwhat ernments are unlikely to get right, while we actually know about trade and trade efforts to quantify the gains from rent- policy. What is the currentstate of play? snatchingsuggest small payoffs.(For surveys The first thing that seems pretty clear is of this literature,see ElhananHelpman and that internationalspecialization and trade Krugman[1989] and Krugmanand Alasdair cannot be explainedsimply by an appeal to Smith [1993]).Free trade is not the optimal comparative advantage, that is, speaking policy, these studies suggest, but clever in- loosely, by countriestrading in order to take terventionist policies will do only a little advantageof their differences.While com- better. parative advantage due to differences in These results apply, however, only to ef- resources and exogenous differences in forts to capture excess returnsin oligopolis- technology is clearly important, so is spe- tic industries. What about external econo- cializationdriven by economies of scale and mies? International economists have long externaleconomies. The importanceof non- known that external economies could pro- comparative-advantagesources of special- vide an argumentagainst free trade. Since ization is not, or at any rate should not be, we have little empirical evidence on the news: the importanceof increasingreturns actual importance of external economies, has repeatedly been emphasized by acute however, it is difficultto know how impor- observers of trade, including Bertil Ohlin tant this argumentsreally is. My personal himself. What has happened since the late guess, based in part on looking at semi- 1970's, however,is that the role of increas- plausible numericalexamples, is that exter- ing returns has been codified in nice mod- nal economies will turn out to be a more els; since economists prefer to emphasize importantargument against free trade than those aspects of the world they think they excess returns,but that we will still be talk- understand,this codification has made in- ing about relativelysmall stakes. I propose creasing-returnsstories about trade and the following question: suppose that the specializationmuch more compellingto our United States were to carry out a clever, ears than they used to be. completely antisocial attempt to corner the Once one has abandoned the assump- world market in high-externalityindustries, tions of constant returns and perfect com- and that the rest of the world were to petition, one has also abandoned the remain entirely passive as it did so. How Arrow-Debreuworld in which marketsnec- much would this raise real income in the essarily produce a Pareto optimum;so the United States? I would guess less than 1 "new trade theory" that legitimized imper- percent. fect competition in positive discussion of If this guess is right, then the widespread trade also opened the door to possible argu- popular view that the economic future of ments for governmentintervention. Also, in the United States rests on its success in a the mid-1980'sthere was a flurryof excite- "head-to-head" international competition ment over the idea, first enunciated by over who gets the good industries is basi- James Branderand BarbaraSpencer (1985), cally if not totally wrong. However, to say that governmentscould successfullyengage that trade is not a zero-sumgame is not the in "strategic"trade policies that would help same as saying that free trade is the best domestic firms snatch excess returns away policy. I have just arguedthat the new trade from foreign rivals. theory,while it refutes the position that free After severalyears of theoreticaland em- trade is optimal, does not suggest that any piricalinvestigation, however, it has become alternativewill achieve great results. Still, clearthat the strategictrade argument,while why should free trade be the null hypothe- ingenious,is probablyof minor real impor- sis? There are, I think, two arguments tance. Theoreticalwork, has shown that the for free trade that survive the revolution appropriatestrategic policy is highly sensi- in international trade theory: a narrow 364 AEA PAPERS AND PROCEEDINGS MAY1993 economic argumentand a more compelling tic distortion,rather than to exploit market argumentthat
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