The Foundations of Free Trade Theory and their Implications for the Current World Recession

Traditional theory, both classical and neo-classical, asserts that free trade in goods between different regions is always to the advantage of each trading country, and is therefore the best arrangement from the point of view of the welfare of the trading world as a whole, as well as of each part of the world taken separately.1 The purpose of this paper is to show that these propositions are only true under specific abstract assumptions which do not correspond to reality. I want to show that conditions can exist (and indeed are likely to exist) in which unrestricted trade may lead to a loss of welfare to particular regions or countries and even to the world as a whole — the world will be worse off under free trade than it could be under some system of regulated trade.