The second possibility, where the issue is not the imposition of a new tax but rather the return to free trade from the evils of protection, centers around the need of preventing a sudden painful shock to a domestic industry. This will be largely a question of size: only when a "great multitude of hands" would all at once be deprived of their ordinary employment and livelihood by the removal of high duties and prohibitions in some special regard to their welfare in order. Indeed, Smith feels, it becomes a matter of equity in this case that the return to exposure to competition from foreigners be undertaken "...slowly, gradually, and after a very long warning".

Bounties on exports, that is, government payments to exporters of goods who could not otherwise effectively compete with their foreign rivals, were, as we might expect, another device of the "mercantile system" scorned by Smith. They can only warp the natural allocation of resources. Since a country cannot force the buying of its exports on other countries, the next best expedient may be found in one country paying another for the buying of exports. But doing so, through bounties, will force a country's trade in less advantageous channels than that in which it would go if left alone. Domestic consumers will be the losers: under conditions of full employment they would pay a higher price for a smaller portion of the total supply, and in addition they would have to foot the bill for government payments to exporters.

Such are the highlights of the attack on the absurdities of mercantilist restrictions, which had flowered too long to suit Smith's disposition.

The Comparative Advantage Theory

Smith did not expand these ideas at much length; but David Ricardo, the second great classical economist, developed them into the "principle of comparative advantage", a principle still to be found, much as Ricardo spelled it out, in every textbook on international trade.

The principle of comparative advantage is based on what kind of product the country can produce best, in comparing not with other countries, but with the producing of other kinds of goods. In this case the country doesn't necessarily need an absolute advantage to specialize in producing and exporting it.

The major purpose of the theory of comparative advantage is to illustrate the gains from the international trade. Each country can gain by specializing in those occupations in which it is relatively efficient; it should export part of that production and take in exchange those goods in whose production it is, for whatever reason, at a comparative disadvantage. The theory of comparative advantage thus provides a strong argument for free trade - and indeed - for a laissez-faire attitude with respect to trade.

The supporting argument is simple; specialization and free exchange among nations yield higher real income for the participants.

The act that a country will enjoy higher real income as a consequence of the opening up of trade barriers does not mean, of course, that every family or individual within a country must share in that benifit. Producer groups affected by import competition obviously will suffer to at least some degree. Comparative-advantage theorists concede that free trade would affect the relative income position of such groups, and perhaps even their absolute income level. But they insist that the special interests of these groups clashes with the total national interest, and the most that they are usually willing to concede is the possible need for a temporary protection against import competition, in order that the persons affected may have sufficient time to move to another occupation.

David Ricardo

In his theoretical researches D.Ricardo did not base apon extensive empirical researches but mainly engaged in abstract reasoning. In working out his international trade theory, he also founded his conclusions apon a set of postulates which he considered as first approximations of the real world. The conclusions he drew, being valid within the framework of his assumptions only, had of course to be modified before they could be applied to actual circumstances.

The same is also true for Jean-Stuart Mill, whose studies in international trade theory completed the framework built by Ricardo. In spite of many attacks and emandations, the main structure of the Ricardo-Mill theory of international trade remained basically unimpared untill well into the 20th century.

He left however, much unfinished business for his successors, since his statements did not explain how the actual ratios of international exchange determine international prices.

Ricardo has been attacked on many grounds: his statement of the doctrine in terms of labor costs only; his assumption of constant cost of production; and, of course, his artificial assumptions of perfect factor mobility within a nation as against complete factor immobility internationally. Many feel that these demerits are minor and are overshadowed by the fact that his new approach opened up entirely new vistas for further research, for example, a restatement of the principle in terms of opportunity costs.

John Stuart Mill

Ricardo's contribution left unanswered the question of how the actual ratios at which goods exchange are determined. It was Jean Stuart Mill who explained the determination of the terms of trade and did so with great skill. He found that they are dependent on reciprocal demand and that the equilibrum exchange ratio is the ratio that equalizes the values of exports and imports for each country in a two-country two-commodity situation. With the "Equation of International Demand" as a tool, he proceeded to envisage more complicated situations and explain what modifications in assumptions their analysis necessitated. His work helped greatly in clarifying the intricate problems connected with the theory of international values and strengthened the foundations on which others could build.

Among the other representatives of classical school we can pick up such economists as Nassau William, Senior, John Elliot Cairness, the Irish one Charles Francis Bastable, whose apport in developing theory of international trade was, perhaps, the boldest, as they tried to modify the Ricardo-Mill theory in more realistic way.

This change of attitudes led to the signing of a number of agreements embodying the new ideas, among them the Anglo-French Treaty of 1786, which ended what had been an economic war between the two countries.

After Adam Smith, the basic tenets of mercantilism were no longer considered defensible. This did not, however, mean that nations abandoned all mercantilist policies. Restrictive economic policies were now justified by the claim that, up to a certain point, the government should keep foreign merchandise off the domestic market in order to shelter national production from outside competition. To this end, customs levies were introduced in increasing number, replacing outright bans on imports, which became less and less frequent.

In the middle of the 19th century, customs walls effectively sheltered many national economies from outside competition. The French tariff of 1860, for example, charged extremely high prices on British products: 60 percent on politique economique ig iron; 40 to 50 percent on machinery; and 600 to 800 percent on woolen blankets. Transport costs between the two countries provided further protection.

A triumph for liberal ideas was the Anglo-French trade agreement of 1860, which provided that French protective duties were to be reduced to a maximum of 25 percent within five years, with free entry of all French products except wine into Britain. This agreement was followed by other European trade pacts.

Resurgence of Protectionism