Trade Theories, a Historical Approach Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country. The economic arguments surrounding the benefits and costs of free trade in goods and services are not abstract academic ones. International trade theory has shaped the economic policy of many nations for the past 50 years. The textbook reviews six main trade theories: Adam Smith's theory of absolute advantage; David Ricardo's theory of comparative advantage; the Heckscher-Ohlin theory and the product life-cycle theory, which extend various aspects of Ricardo's theory; the new trade theory explaining the benefits from trade without national differences in resource endowments or technology; and Michael Porter's theory of national competitive advantage that draws attention to an international success in a particular industry. All these theories identify the specific benefits of international trade, help to explain the patterns of international trade, and government trade policies.