Editing Free trade (section)

=== Economic models ===
{{Further|Supply and demand|International trade theory}}
Two simple ways to understand the proposed benefits of free trade are through [[David Ricardo]]'s theory of [[comparative advantage]] and by analyzing the impact of a tariff or import quota. An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade.<ref name = "landsburg"/><ref name="hartmann">[[Thom Hartmann]], ''Unequal Protection'', Second Edition, Chapter 20. p. 255</ref>

Most economists would recommend that even [[developing nations]] should set their tariff rates quite low, but the economist [[Ha-Joon Chang]], a proponent of industrial policy, believes higher levels may be justified in developing nations because the productivity gap between them and developed nations today is much higher than what developed nations faced when they were at a similar level of technological development. Underdeveloped nations today, Chang believes, are weak players in a much more competitive system.<ref name="autogenerated311">Pugel (2007), ''International Economics'', pp. 311–312.</ref><ref>{{citation|last1=Chang|first1=Ha-Joon|title=Kicking Away the Ladder: Good Policies and Good Institutions in Historical Perspective|url=http://siteresources.worldbank.org/INTDECINEQ/Resources/KAL-SummaryPaper.doc}}</ref> Counterarguments to Chang's point of view are that the developing countries are able to adopt technologies from abroad whereas developed nations had to create new technologies themselves and that developing countries can sell to export markets far richer than any that existed in the 19th century.

If the chief justification for a tariff is to [[Infant industry argument|stimulate infant industries]], it must be high enough to allow domestic manufactured goods to compete with imported goods in order to be successful. This theory, known as [[import substitution industrialization]], is largely considered ineffective for currently developing nations.<ref name="autogenerated311"/>

==== Tariffs ====
{{Further|Tariff}}
[[File:EffectOfTariff.svg|thumb|upright=1.5|The light red regions are the net loss to society caused by the existence of the tariff.{{citation needed|date=November 2024}}]]
The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market and hence in the domestic market is P<sub>world</sub>. The tariff increases the domestic price to P<sub>tariff</sub>. The higher price causes domestic production to increase from Q<sub>S1</sub> to Q<sub>S2</sub> and causes domestic consumption to decline from Q<sub>C1</sub> to Q<sub>C2</sub>.<ref name="stockman">Alan C. Stockman, ''Introduction to Economics'', Second Edition, Chapter 9.</ref><ref name="Mankiw">[[N. Gregory Mankiw]], ''Macroeconomics'', Fifth Edition, Chapter 7.</ref>

This has three effects on societal welfare. Consumers are made worse off because the consumer surplus (green region) becomes smaller. Producers are better off because the producer surplus (yellow region) is made larger. The government also has additional tax revenue (blue region). However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society.<ref name="stockman"/><ref name="Mankiw"/>

An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers (there is no tax revenue in this case because the country being analyzed is not collecting the tariff). Under similar analysis, export tariffs, import quotas and export quotas all yield nearly identical results.<ref name="landsburg"/>

Sometimes consumers are better off and producers worse off and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the gains from free trade are larger than the losses.<ref name="landsburg"/>

A 2021 study found that across 151 countries over the period 1963–2014, "tariff increases are associated with persistent, economically and statistically significant declines in domestic output and productivity, as well as higher unemployment and inequality, real exchange rate appreciation, and insignificant changes to the trade balance."<ref>{{Cite journal|last1=Furceri|first1=Davide|last2=Hannan|first2=Swarnali A|last3=Ostry|first3=Jonathan D|last4=Rose|first4=Andrew K|date=2021|title=The Macroeconomy After Tariffs|url=https://doi.org/10.1093/wber/lhab016|journal=The World Bank Economic Review|volume=36 |issue=2 |pages=361–381 |doi=10.1093/wber/lhab016|issn=0258-6770|hdl=10986/36630|hdl-access=free}}</ref>

==== Technology and innovation ====
Economic models indicate that free trade leads to greater technology adoption and innovation.<ref>{{Cite journal|last1=Perla|first1=Jesse|last2=Tonetti|first2=Christopher|last3=Waugh|first3=Michael E.|date=2021|title=Equilibrium Technology Diffusion, Trade, and Growth|url=https://www.aeaweb.org/articles?id=10.1257/aer.20151645|journal=American Economic Review|language=en|volume=111|issue=1|pages=73–128|doi=10.1257/aer.20151645|s2cid=234358882|issn=0002-8282}}</ref><ref>{{Cite journal|last1=Eaton|first1=Jonathan|last2=Kortum|first2=Samuel|date=2002|title=Technology, Geography, and Trade|jstor=3082019|journal=Econometrica|volume=70|issue=5|pages=1741–1779|doi=10.1111/1468-0262.00352|issn=0012-9682}}</ref>

==== Productivity and welfare ====
A 2023 study in ''Journal of Political Economy'' found that reductions in trade costs since 1980 caused increases in agricultural productivity, food consumption and welfare across the world. The welfare gains were particularly large in some developing countries.<ref>{{Cite journal |last1=Farrokhi |first1=Farid |last2=Pellegrina |first2=Heitor S. |date=2023 |title=Trade, Technology, and Agricultural Productivity |url=https://www.journals.uchicago.edu/doi/10.1086/724319 |journal=Journal of Political Economy |volume=131 |issue=9 |pages=2509–2555 |language=en |doi=10.1086/724319 |s2cid=235357218 |issn=0022-3808}}</ref>