Free trade: blessing or curse?

Two views on the ecological and economic impacts of globalisation

Prof. Dr. Claudius Gräbner-Radkowitsch

Department of Pluralist Economics, Europa-Universität Flensburg · ICAE, JKU Linz

21 October 2026

The ideology of “free trade” has now overplayed its hand; it has exposed itself as a farce. With democracy about to be sacrificed on the altar of free trade, it has become abundantly clear that free trade was never meant to be about freedom in the first place.”

Jason Hickel
Jason Hickel
Jagdish Bhagwati
Jagdish Bhagwati

[T]he various social causes that we all embrace, such as advancement of gender equality and reduction of poverty, are advanced, not set back, by globalization. By looking at virtually every social concern I could lay my hands on, […] globalization, by and large, advanced these social agendas instead of handicapping them.”

Starting activity

  • Sit together with 2-3 neighbours and discuss for about 5 minutes the following question: Is free trade something positive or negative?
    • Exchange ideas within your group
    • After 5 minutes, cast your vote in the Tweedback survey
    • As a group post the two main arguments on the chatwall

tweedback QR code for the Tweedback session

Learning goals

  1. Understand the classical justification of free trade and its historical origin
  2. Learn about challenges to the free trade narrative
  3. Think about the extent to which this is relevant for the (trade) policy of your country

Pro Free Trade

01

Mercantilism

  • 16th–18th centuries: absolutist states and hardly any international cooperation.
  • Basic idea: “The best for us, the worst for others.”
  • Mercantilism had its explicit theory of foreign trade
    • Trade as a zero-sum game: no increases in value, only redistribution
  • Trade as substitute for warlike actions:
    • Positive trade balance plus → more precious metal at home → wealth & military strength:
  • Policy implication: high tariffs on imports of luxury goods, export bans on grain, etc.
    • The environment played no role in this debate

Mercantilism: the role of the colonies

  • Sole purpose of colonies: serve interest of the colonizers

  • Implications for ‘trade policy’:

    Coloniser Colony Resources Final goods

  • This ‘division of labor’ fixed by law

Adam Smith: the theory of absolute advantage

  • In this time Adam Smith wrote his most famous works
  • Main reason for the “Wealth of Nations”: the division of labor
  • International dimension: theory of absolute advantage
  • Two countries with different strengths in producing products → better specialize and trade:

Adam Smith

Adam Smith
(1723-1790)

L Possible production Relative value
pretzels bento
Germany 100 20 10 1 pretzels = 0.5 bento
Japan 100 16 12 1 pretzels = 0.75 bento
No trade Trade Change
pretzels bento pretzels bento pretzels bento
Germany 10 5 20 0 +10 -5
Japan 8 6 0 12 -8 +6
World 18 11 20 12 +2 +1

Adam Smith: the theory of absolute advantage

  • In this time Adam Smith wrote his most famous works
  • Main reason for the “Wealth of Nations”: the division of labor
  • International dimension: theory of absolute advantage
  • Two countries with different strengths in producing products → better specialize and trade:

Adam Smith

Adam Smith
(1723-1790)

No trade Trade Change
pretzels bento pretzels bento pretzels bento
Germany 10 5 20 0 +10 -5
Japan 8 6 0 12 -8 +6
World 18 11 20 12 +2 +1

Germany could trade 8.1-9.9 units pretzels for
5.1-5.9 units of bento from Japan

Corridor in which both would win

David Ricardo: the theory of comparative advantage

  • Ricardo also one of the most famous economists of the classical age
  • Addressed Smith’s theory of absolute advantage
    • Trade beneficial, even if one country was always better
    • Key: comparative advantages → opportunity costs
  • Ricardo’s classical example:
    • Portugal with absolute advantage for both goods
    • Still, both countries would benefit from trade
    • Reason: Differences in opportunity costs
      → Comparative advantage

David Ricardo

David Ricardo
(1772-1823)

Requirements
wine cloth
Portugal 80 90
England 120 100

Comparative advantage: one example

  • Relation of input costs is \(80/120 = 0.67\) for wine and \(90/100 = 0.9\) for cloth
    • Portugal has a bigger advantage when it comes to wine
  • Opportunity costs for Portugal: \(90/80 = 1.125\)
    • For Portugal the production of 1 cloth comes with giving up on the production of 1.125 wine
  • Opportunity costs for England: \(100/120 = 0.833\) → cloth relatively cheaper in England
    • For England, the production of 1 cloth comes with giving up on the production of 0.833 wine
Requirements
wine cloth
Portugal 80 90
England 120 100

Comparative advantage: one example

  • England: people work 220 hours to produce 1 wine and 1 cloth
  • Portugal: people work 170 hours to produce the same
  • If both countries specialised according to their comparative advantage….
    • Portugal would produce \(170/80 = 2.125\) wine (and no cloth) → 0.125 more
    • England would produce \(220/100 = 2.2\) cloth (and no wine) → 0.2 more
    • If England traded 1 cloth for 1-1.125 wine, both countries would have more than before!
Requirements
wine cloth
Portugal 80 90
England 120 100

➡

This simple narrative continues to be at the core of many trade debates and analyses!

Other advantages of free(er) trade

  • Numerous other arguments for free(r) trade, especially in economics:
    • Exploitation of economies of scale and corresponding efficiency gains
    • Increasing the variety of products that consumers can buy.
    • Larger markets increase the incentive for innovation
    • Integration into global markets leads to learning effects
    • Export markets offer growth potential to poorer countries with weak domestic demand
    • Access to capital and technology might allow industrial upgrading in developing countries
  • Indisputable: trade liberalization produces winners and losers
    • But: overall gains large enough to compensate for losers (?)

Example case: South Korea

GDP per capita 1820-2022 for South Korea, Western Europe, the World and Sub-Saharan Africa

  • Archetype for export-driven development

  • Machinery was 1.3% in 1962, and is 53% of goods exports in 2024

    South Korea's goods exports by product group, 1962-2024, in US dollars

    South Korea's goods exports by product group, 1962-2024, as shares

  • In 2022, GDP per capita is more than 26 times as high as 1960

  • But note cautionary remarks later

Trade and the environment

  • Potential synergies:
    • Access to green technologies (solar panels, wind turbines)
    • Export revenues fund conservation
    • Market incentives for sustainable practices
  • Key conditions:
    • Ability to capture value (not just raw material extraction)
    • Technology transfer and learning actually happens (no excessive IPR)
    • Supportive institutions and policies

Example: China and the solar panel boom

Solar PV module prices against cumulative installed capacity, 1975-2024, both on log scales

Solar PV module production by country in 2024: China 629 of 728 GW

  • The success of solar power is due to the success of China in producing cheaper and cheaper PV panels

Break and discussion

  • Sit together with 2-3 neighbours and discuss for about 5 minutes the following question:
    • Which were the main arguments in favour of free trade?
    • Which of the arguments did you find convincing? Which ones not?
    • Are there factors that you find important, but that were not taken into account in the previous arguments in favour of free trade?
  • Post your results on the chatwall!

tweedback QR code for the Tweedback session

Contra Free Trade

02

A nuanced view on trade

  • What you export matters
    • For development
    • For the environment
  • Problem: trade is often unequal
    • In terms of Value added
    • In terms of Environmental burdens
    • In terms of Terms of Trade
  • Example: The Prebisch-Singer Hypothesis
  • Revisiting the South Korea and Chinese examples

The Terms-of-Trade problem

  • Ratio of export prices to import prices
    • Small ToT: export more to import the same amount
  • Prebisch-Singer Hypothesis:

    • Primary commodity prices decline relative to manufactured goods

      Real price of primary commodities relative to manufactures, 1900 to 2025, with a falling linear trend

    • Countries exporting raw materials face deteriorating terms

    • To import the same amount → must export more over time

  • Systematic disadvantage for commodity exporters

Technologically unequal exchange

Economic complexity

  • Idea of economic complexity: measure collective knowledge by looking at the things people produce

    Countries Capabilities Products c₁ c₂ c₃ a₁ a₂ a₃ p₁ p₂ p₃ Countries Products c₁ c₂ c₃ p₁ p₂ p₃

  • Stylised fact: countries produce everything they can

    • More capabilities → more diversified production → more wealth
    • Consistent with idea of comparative advantage?

Country-by-product matrix of revealed comparative advantage: diversified countries export almost everything, less diversified countries only the most ubiquitous products

Technologically unequal exchange

Capability accumulation and the product space

  • But how to accumulate new capabilities?
    • Especially: capabilities to do good things (i.e. things that make your country rich and keep it clean)
  • People learn only things that are similar to what they know → relatedness
  • The more capabilities you have, the more attractive capabilities you can perform
  • The more capabilities you have, the easier it is to recombine them

➡

Strong path dependence in the context of capability accumulation!

Technologically unequal exchange

Capability accumulation and the product space

  • Attractive way to study the implications of this path dependency: the product space
  • A network based on trade data that quantifies relatedness of activities related to the production of goods and services
    • Each node is a product (a.k.a. activity); each link captures relatedness of products (a.k.a. activities)
Apples Cherries Berries Grapes Transistors Printed circuits Integrated circuits Solar cells Electric motors Generators Wind turbines Diesel engines Crude oil Natural gas Petroleum coke Refined petroleum Steel tubes Close: similar capabilities Far: dissimilar capabilities A fossil-fuel exporter Renewables: only step by step

Stylised illustration, not data. For the real product space see the next slide.

Technologically unequal exchange

The product space

The product space: about 850 products as nodes, coloured by cluster, linked when they tend to be exported together

Technologically unequal exchange

The product space

  • Looking at the position of a country in the product space can be highly informative:

The product space for three country groups, without telling which panel is which

Latin American countries (28) African countries (43) Industrialised countries (39)

Outlook: Ecological unequal exchange and externalization

  • General idea:

    Global South Global North Low-value (intermediate) goods, associated with high environmental costs High-value (final) goods, associated with low environmental costs but high value creation

  • For the computation of emissions embodied in trade and the implications, you need input output tables → see separate session

Summary

  • Free trade has long been argued to be a source of development
  • Thanks to comparative advantage said to be to the benefit of all countries involved
  • Especially after the 1980s growing criticisms of free trade
    • One source: ever broader free trade agreements covering much more than trade
  • Two potential drawbacks of full free trade:
    • Technological lock-in/vicious specialization → This session
    • Ecological externalisation → conflicts and accounting: Session 6
  • Most debates about trade are intricate → corner solutions unlikely to be best
    • See ambivalent role of environmental protection

References

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