The Free Trade Argument and Development Strategy

Abstract

The argument that free trade enhances the output bundle of countries is based on the assumption of full utilization of factors of production and, in turn, on the idea that supply creates its own demand (Say’s Law). However given that involuntary unemployment prevails, the free trade argument for development strategy becomes invalid. Not only is it impossible, due to constrained demand, for all trading partners to benefit from trade, but autonomous sources of expenditure are also constrained, such that if expenditure does not increase after trade, trade-surplus countries will be imposing “beggar-thy-neighbour” policies on the trade-deficit countries. Historically, external stimuli for capitalist expansion relied on the colonial market. It is argued in this article that trade between countries should promote actual cooperation by ensuring that their economies are not demand-constrained. This, in turn, requires that the hegemony of globalized finance be eliminated and capital controls instituted. Growth must be essentially home-market-oriented, and trade should be not free but a matter of discretion.