The Eli Economics Institute is not quite as down on economists as Michael Tobis, but the bunny has always advocated trusting everyone, but cutting the cards. As with much else the issue is almost always the assumptions, not the details. Thus it was interesting to read "Trade Liberalization and Economic Development by Jomo Sundaram and Rudiger von Arnim which appeared last month in Science.
In the eco biz, the chalk line is that free trade benefits all nations on balance. Sundaram and v. Arnim point out that this depends on several assumptions. Originally
The case for free trade rests on Ricardo's theory of comparative advantage. . . . However, his argument assumed a world of flexible exchange rates responsive to changes in the market for goods, continuous full employment, and costless factor mobility, meaning that no barriers exist to seeking and finding employment anywhere in the world. Especially in developing countries with chronic underemployment and volatile, cyclical capital flows, the last two assumptions are generally not satisfied.Idealized free trade assumes that acountries exports are concentrated in areas where it is most productive and imports in areas that are least productive. The authors point out that this is a non-runner, given that most trade occurs between countries that are quite similar (US/Canada, the EU, etc.).
Within the present context, further trade liberalization will benefit a few richer countries and stick it to the poor, especially the rural poor, unless they are specically compensated. Liberalization of trade rules for agriculture will be an even worse bargin for the under-developed countries.
Large-scale policy models have focused on configurations that emphasize gains from trade--despite a large and growing chorus of prominent economists [including Nobelists Paul Samuelson and Joseph Stiglitz] arguing that across-the-board liberalization can be harmful.
The fundamental difference between economies of the developed and developing world is another crucial dimension of trade theory. Suppose that countries specialize in sectors for which the production factors are relatively abundant, as is recommended by traditional models. Exports of developing countries tend to be concentrated in primary products, which offer little added value. However, over time the prices of primary products will tend to decrease relative to manufactured goods. The role manufacturing plays for development has been recognized. Gains from trade then do not derive from Ricardian specialization but from expansion of dynamic sectors. From this perspective, the potential gains from trade liberalization are large, but they will materialize only if complemented by policies promoting development of industry.