When two countries have free trade with each other does it really benefit both or does it just make the...?

Question

richer one poorer and the poorer one richer?

Answer 1

Generally it makes both better off, but there exists the possibilities of externalities that would generate offsetting losses if one country is very large and one is very small. For example, if the large country purchased polluting goods from the small country to reduce its own pollution. Not only is money being exchanged, but also pollution. In such a case, it would be possible that the small country ended up losing, but if that was the case, it would cease trading.

Answer 2

I believe that the theory of comparative advantage is convincing that both countries benefit from trade with two important caveats.

First, though a nation will benefit overall from trade, not all citizens may benefit. With trade, each country will change the mix of products and services that it produces, and thus labor and capital must shift from one industry to another. Workers and investors in the declining industry may suffer.

Second, there is the possibility that restricting trade might benefit a country in the long even though it hurts the country in the short run. One example is the infant industry argument. This says that by restricting trade and protecting new industries from foreign competition, they might be able to grow and eventually compete with foreign firms. S. Korea is one case of where this seems to have worked.