The operation of supply and demand fuels economic growth (3.3.2). Free trade between countries offers businesses a larger market to sell to, which enables them to become more efficient and more competitive – giving a further impetus to growth. The European Union was partly created to gain these benefits (it was called the Common Market at one stage in its history), and free trade is now operating on an increasingly global basis. This has speeded up the overall growth of the world economy but has also altered the geography of wealth creation (3.4.2).
Free trade is of mutual advantage to both high-wage and low-wage economies. Many people find it difficult to believe this – but it is borne out by David Ricardo’s classical economic theory of Comparative Advantage (which Paul Krugman described as Ricardo’s Difficult Idea). The effect of free trade is that activities are performed in the most cost-effective place; goods are then cheaper, so consumers have more money to spend on other items – resulting in increased demand and business activity in both rich and poor countries.
People seem unaware that they personally benefit from cheaper goods; they suspect that global trade only makes rich people richer. As Larry Summers pointed out, Global trade should be remade from the bottom up, arguing that changing its image would “mean devoting as much political capital to the trillions that escape tax or evade regulation through cross-border capital flows as we now devote to trade agreements”. He suggested that more effort should now be devoted to curtailing financial abuses by the rich, so that the population would be more supportive of free trade and less inclined to vote for protectionist policies.