BUSINESS

Free Trade Theories and Protectionism

Free Trade Theories and Protectionism

Introduction

Recall that this model of liberalism with comparative advantages and competitive advantages come from the assumptions made by Adam Smith (1776) and David Ricardo (1817) mainly, which are defined and explained for the first time as a country can obtain benefits through their participation in domestic and foreign markets. Smith claimed the benefit of competitive advantage for countries and regions. Smith's approach was, that trade could be seen as a positive sum game, in which all participating countries can gain, by specializing in production and where the most competitive companies would be most efficient. Smith believed in the operation of natural law or of the invisible hand, it was imagined as a means to control behavior "civilized" of economic agents, and in turn favor the individual capitalism and free trade. Smith said that some men are more knowledgeable than others and their needs and desires, if every man seeks his own advantage, this could in the long run contribute more to the common good. This invisible hand, Smith showed that all forms of government intervention, such as export subsidies, import restrictions, and regulation of wages and prices, were an obstacle to the natural growth of the economy (Lloyd, 1989, pp. 301).

Natural Law rather than restrict the government, could serve to prevent abuses of the freedom of it. The competition was a key element in society that Smith intended. Competition ensured that every nation and person could do the best they could do. From Smith's point of view the fundamental factor of the Natural Law came from the Division of Labor. He explained with the example of the output pins, where a man untrained and not familiar with the machinery for the manufacture of pins, a pin could make in one day alone, and would almost ensure that he could not provide more than twenty pins per day. While in a company where the production is divided into sectors, a man could get the fire wire, flatten and cut another, another do the heads, and one that united both sides. Depending on the machinery and the skill of these people, Smith estimated production in this company with 10 employees reached the 48000 pins, or 4800 pins per person in one day (Irwin, 2011, pp. 59).

Smith extended the idea of ??division of labor to the International Division of Labor. Now more companies to consider, is considered the national economies and economies specializing in productions such as producers of pins.

Comparative advantages of David Ricardo

But there was a problem with the theory of competitive advantage for Smith, what would happen if a country had a competitive advantage in different goods?, According to Smith than the country that result may not get benefits of international trade. In contrast David Ricardo said the country should specialize in the product that had the greatest competitive advantage, while the lower countries should specialize in the less competitive disadvantage. This rule is known as the theory of comparative ...