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  • Print publication year: 2015
  • Online publication date: May 2018

8 - Trade, tariffs and growth

Summary

The comparative advantage argument for free trade and its consequences

David Ricardo (1772–1823) put forward the idea that countries trade in order to gain from their comparative advantages. In his model, countries differed only in the productivity of their labour for producing different goods, and the country that was relatively efficient at producing something should export this good. So, for example, England should export cloth to Portugal and import wine. An important implication of this theory is that countries should trade even if they do not have an absolute advantage in the production of goods: it is not whether a country is better at producing something than another that decides whether or not it should export it, but whether it is relatively better in comparison with other goods. The argument relates to the concept of opportunity costs and is the same idea as that we met in Chapters 2 and 4 as one of the bases of pre-industrial growth. When population or the ‘extent of the market’ expands, specialization is possible. Trade allows the ‘extent of the market’ to cross international borders and for countries to specialize.

The concept of comparative advantage is often considered to be one of the most difficult to grasp in economics, and yet its understanding is crucial. In short, producing a good diverts labour from producing other goods, which are thus lost (the opportunity cost). Of course, in the absence of trade it is necessary to produce all goods, and this is unavoidable. However, with trade it is best for a country to focus on the goods it produces relatively well, because by so doing it can produce most. This extra output can then be traded for the goods it is relatively poor at producing and hence enhance the level of consumer welfare. This is the classic idea of ‘gains from trade’. A numerical example is given in the appendix.

P. R., Krugman, M., Obstfeld and M., Melitz, International Economics: Theory and Policy (Pearson Education, Inc., 2014) gives an excellent textbook introduction to trade theory.
The following are economic histories of trade and trade policy: J., Foreman-Peck, A History of the World Economy: International Economic Relations Since 1850 (Harvester Wheatsheaf, 1995) and A. G., Kenwood and A. L., Lougheed, The Growth of the International Eeconomy, 1820–2000 (London: Routledge, 1999).
R., Findlay and K., O'Rourke, Power and Plenty: Trade, War, and the World Economy in the Second Millennium (Princeton University Press, 2007) covers a much longer period of time, and provides a truly global perspective to the history of trade. The following also provide histories of the time before the nineteenth century:
K. H., O'Rourke and J. G., Williamson. ‘After Columbus: Explaining the global trade boom 1500–1800’, Journal of Economic History 62 (2002), 417–56;
K. G., Persson, Grain Markets in Europe 1500–1900, Integration and Deregulation. (Cambridge University Press, 1999).
For a more modern perspective, see: E., Helpman ‘The structure of foreign trade’, The Journal of Economic Perspectives 13(2) (1999), 121–44.
J., Nye and D., Irwin have long been intellectual adversaries as regards the history of trade liberalization in the nineteenth century:
D., Irwin, Against the Tide (Princeton University Press, 1988).
J. V. C., Nye, War, Wine, and Taxes: The Political Economy of Anglo-French Trade, 1689–1900 (Princeton University Press, 2007).
P. R., Sharp, ‘1846 and all that: The rise and fall of British wheat protection in the nineteenth century’, Agricultural History Review 58(1) (2010), 76–94 attempts to shed some light on the working of one part of the liberalization story: the movement to free trade in grain in Britain.
There are numerous studies on the relationship between trade policy and growth. See:
D., Acemoglu, S., Johnson, and J. A., Robinson, ‘The rise of Europe: Atlantic trade, institutional change and economic growth’. American Economic Review 95 (2005), 546–79.
P., Bairoch, ‘Free trade and European economic development in the nineteenth century’. European Economic Review 3(3) (1972), 211–45.
M. A., Clemens and J. G., Williamson, ‘Why did the tariff-growth correlation change after 1950?’, Journal of Economic Growth 9 (2004), 5–46.
A., Estevadeordal and A. M., Taylor, ‘Is the Washington Consensus dead? Growth, openness, and the great liberalization, 1970s–2000s’, Review of Economics and Statistics 95(5) (2013), 1669–90.
I. B., Kravis ‘Trade as a handmaiden of growth: Similarities between the nineteenth and twentieth centuries’, The Economic Journal 80(320) (1970), 850–72.
S., Lehmann and K. H., O'Rourke, ‘The structure of protection and growth in the late nineteenth century’, Review of Economics and Statistics 93(2) (2011), 606–16.
K. H., O'Rourke, ‘Tariffs and growth in the late nineteenth century’, Economic Journal 110 (2000), 456–483.
F., Rodriguez and D., Rodrik, ‘Trade policy and economic growth: A skeptic's guide to the cross-national evidence’, in NBER Macroeconomics Annual 2000, Volume 29 (Cambridge, Mass.: MIT Press, 2000), pp. 261–338.
J. D., Sachs and A., Warner, ‘Economic reform and the process of global integration’, Brookings Papers on Economic Activity 1 (1995), 1–118.