The current paradigm of classical neo-liberal economics proposes free trade and allows state intervention only to “liberalize markets and lower distortions” (Wade 1990, 23).  Consequently, most trade models oppose protectionism by nature. The simplest and probably most influential trade model is Ricardo’s comparative advantage.  “[C]ountries will export goods that their labor produces relatively efficiently and import goods that their labor produces relatively inefficiently” (Krugman Obstfeld 2003, 34).  Another important trade theory is Samuelson and Jones’ specific factors model that adds information concerning income distribution.  “[F]actors specific to export sectors in each country gain from trade, while factors specific to import-competing sectors lose. Mobile factors that can work in either sector may either gain or lose” (2003, 60).  Additionally, the Heckscher-Ohlin model clarifies resources and trade: countries will export goods which are intensive in the factors with which they are supplied abundantly. The Krugman-Obstfeld standard trade model explains that:

“The price of exports relative to imports, a country’s terms of trade, is determined by the intersection of the world’s relative supply and demand curves. Other things equal, a rise in a country’s terms of trade increases its welfare. Conversely, a decline in a country’s terms of trade will leave the country worse off” (Krugman, Obstfeld, 2003, 113).

Another pro-trade argument is economies of scale, meaning that the more that is produced, the lower the unit price. This can create imperfect competition domestically but will lead to monopolistic competition internationally and consumers will be able to purchase a higher variety of goods at lower prices. External economies are economies of scale at the level of the industry instead of the company (2003, 155).

Yet another free trade proposition is called the counter-tariffs argument, which maintains that tariffs raise the domestic price by less than the tariff rate. Domestic producers of the good gain higher revenues because the tariff raises the domestic price. Consumers lose because they must pay more, while the government gains revenue from the tariff. Adding all those gains together, in comparison to free trade, there is an efficiency or deadweight loss (2003, 206).

For an excellent summary of trade models, see Krugman, P.R.;  Obstfeld, M.  2003.  International Economics: Theory and Policy: Sixth Edition. Boston, San Francisco, New York:  Addison Wesley.

Wade, R.  1990.  Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization.  Princeton: Princeton University Press. 23(13)