The Core and Premise of Free Trade Theory

The Wealth of Nations

Theory and practice have demonstrated that the realization of the benefits of free trade is uneven among different types of countries. Moreover, Smith's theory of free trade and Ricardo's theory of free trade are built in the model of ideal economic analysis, which is the premise of the theory of free trade. This model mainly consists of three basic assumptions, one is the "simplification" of the assumption, that is, the assumption that the currency is "neutral" to participate in the trade of only two countries, commodities only two kinds of commodities, the production of commodities only two types of factors, without taking into account the cost of transporting commodities; two is the "static" assumption. The second is the assumption of "staticization", i.e., the assumption that the total amount of factors of production, the level of production technology, the pattern of distribution of national income, and the consumption preferences of the population of a country are established and unchanged, and that the factors of production cannot move freely between countries; the third is the assumption of "perfectionization", i.e., the assumption that all countries participating in trade have a market economy. Third, the "perfecting" assumption, that is, the assumption that the countries involved in the trade are practicing the market economy system, the market is completely free competition, and the price has sufficient elasticity. However, it is worth noting that, in addition to the above premises and free participation in international trade in accordance with the international division of labor pattern described in the free trade theory, the realization of the benefits of free trade described in the free trade theory has its own implicit and intrinsic other premises. The main ones are:

1. The international division of labor can be carried out unconditionally according to the absolute or comparative advantage of each country.

It can be said that the division of labor is a prerequisite for the two countries to trade and obtain trade benefits, and only by realizing the division of labor can the trade benefits of free trade theory be realized. In the real economy, under the conditions of free competition in the market as discussed in the free trade theory, the division of labor can be realized when each of the two countries has an absolute advantage in the products that can enter the market of the other country. In the production of all products are at a disadvantage in the country, its comparative advantage but not absolute advantage of the product, to enter the other country's market under the conditions of free competition in the market is very difficult. After all, the occupation of the market of strong products by inferior products is not in line with the law of cost and price competition. On the contrary, the country that is superior in the production of all products can fully occupy the market of the inferior country. But the theory of free trade implicitly presupposes that the division of labor can proceed unconditionally under free competition.

2. Industrial adjustment of countries due to division of labor need not be costly.

If, according to the free trade theory, the two countries according to their absolute or comparative advantage in the division of labor and specialization of production, then, the original investment in the absolute disadvantage and comparative disadvantage of the industry's constant and variable capital must be moved to the new choice of industry, some of the assets with the specialization of the assets, such as production equipment will be eliminated. Whether transferred or eliminated, the cost of industrial restructuring on a national scale is enormous. This cost in the trade interests of the two countries in the proportion of how much, and because of the existence of the cost of industrial restructuring and even the international division of labor can be successfully reached, free trade theory in the elaboration of its theoretical basis and trade premise - division of labor, did not take into account. In contrast, the modern trade theory of dynamic competition, it is argued that adjustment is neither instantaneous nor costless.

3. The market capacity of each country is equal and the trade balance is perfectly balanced.

In the theory of free trade on the participation of trade in only two countries, goods only two kinds of commodities, commodities production factors only two types of assumptions, that is, "2-2-2" analytical model, but also implicitly - a The premise is that each country's exports are equal to the other's imports, and the trade balance is in perfect equilibrium. That is, the market capacity of the two countries is the same, and domestic supply and demand are in constant equilibrium. However, the development of division of labor and specialization depends on the size of the market. Foreign trade also depends on the demand and supply capacity of the markets of the home country and the other country. Different supply and demand conditions lead to different trade outcomes, and free trade cannot be accomplished with absolute and comparative advantages. In the real economy, countries have more or less trade surplus or trade deficit, there is almost no perfect balance of trade balance of payment situation also proves this point.

4. Constant returns to scale.

Swedish economists Heckscher and Ohlin developed the doctrine of comparative advantage. They created the factor endowment theory that the factor endowment of each country is different, the factor endowment situation affects the price of factors, which in turn affects the cost of production of products, a country can only specialize in the production and export of its abundance of factor-intensive products, imports of scarce factor-intensive products, in order to obtain the benefits of trade and to increase the welfare of society as a whole. Factor endowment theory is a comparative interest theory based on differences in resource endowments. As the most influential free trade theory after the absolute cost theory and comparative cost theory, its research model and assumptions and comparative interest theory are basically - the same, but compared to the comparative interest theory of labor productivity or technology level differences between countries established assumptions, factor endowment theory assumes that there is no difference in the labor productivity or technology level of the countries, so its another important assumption is scale Reward invariance, that is, the production function of the manufacturer does not change with the expansion of its scale, and therefore the expansion of the scale affects the price of goods, and thus the basis of trade.