No wonder the discussion of trade is in such a tangle. The terminology around the subject is almost designed to cause confusion. The dictionary is a good starting point. According to the Collins English Dictionary, free trade is “international trade that is free of government interference as import, quotas, protective tariffs, etc”.
Although definitions vary, Collins includes many of the key elements. Free trade is not just about an absence of tariffs but eschewing all forms of protection. These can include non-tariff barriers (such as using environmental standards as a pretext for defending national markets), subsidies for domestic industries and currency manipulation. It means minimal state involvement and the smallest possible number of rules.
The benefit of free trade, as outlined by David Ricardo over two centuries ago, is that it enables production to be organised on the largest possible scale. It opens the way for a global division of labour in which different places can specialise in different products and components.
Imagine producing cars or mobile phones solely for use within one relatively small country, such as Belgium or Switzerland. The products would probably not be that sophisticated or else they might be prohibitively expensive. Doing all the research and investment within one country, then producing on a relatively small scale, is inefficient. Even in a large market, such as the US or China, it is generally sub-optimal. Production on a global scale is, in principle, the most efficient way to produce complex items.
Contrast this with what is called ‘multilateral trade’ or the ‘rules-based order’. This is about having a system of international trading rules overseen by an international organisation. This is precisely the set-up that has existed since 1947, first with the existence of the General Agreement on Trade and Tarrifs and since 1995 its successor, the World Trade Organization (WTO).
“The benefit of free trade, as outlined by David Ricardo over two centuries ago, is that it enables production to be organised on the largest possible scale”
The advantage of this system is that it provides a means to contain trade conflicts. If one country or trading bloc has a dispute with another it can initiate a formal complaint under the WTO rules. The system cannot eliminate tensions but it can allow them to be resolved amicably.
The purpose here is not to weigh up which system is better. It is, rather, to make the point that the two systems are incompatible. Multilateral trade co-exists with a high degree of protectionism in all of the world’s main trading blocs.
Those who claim to support both are guilty of double standards. In effect, they are saying that their trading bloc should be free to export as it wishes but its competitors to be subject to protection.