How the U.S. Economy is a Victim of Comparative Advantage

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“Why don’t pro football players mow their own lawns?

Ian Fletcher puts this provocative question forth in an article for the Coalition for a Prosperous America (CPA), for which he serves as senior economist, as the centerpiece for his argument on why comparative advantage, in practice, doesn’t really work. In the first part of his argument, he lays out the difference between absolute and comparative advantage; obviously, in answering the above question, the football player has more power and ability to mow his lawn faster than a run-of-the-mill, suburban landscaping contractor but he’s got better things to do with his time.

It seems the US has had “better things to do with its time for several decades now and arguably, this has not improved our long-term growth prospects. Following our coverage of what the World Trade Organization thinks international trade will look like in 2011, Fletcher’s arguments against free trade (or, rephrased, why it is fundamentally flawed in the world we live in today) seem rather poignant; if only to draw attention to inherent problems, so that we can begin seriously considering potential solutions. “This is why we must analyze trade in terms of not absolute but comparative advantage, Fletcher writes. “If we don’t, we will never obtain a theory that accurately describes what does happen in international trade, which is a prerequisite for our arguing about what should happen”or how to make it happen.

In the second part of his argument, Fletcher lists a number of “dubious assumptions about comparative advantage working properly, poking holes in the “free trade is best argument enough holes, as he says, “to sink a container ship. He lists seven

  • “Trade is sustainable
  • “There are no externalities
  • “Productive resources move easily between industries
  • “Trade does not raise income inequality
  • “Capital is not internationally mobile
  • “Short-term efficiency causes long-term growth
  • “Trade does not induce adverse productivity growth abroad

— and although he gives a treatment for each, two stand out: trade is sustainable (it really isn’t) and “short-term efficiency causes long-term growth (comparative advantage is not built to even consider the long term). As far as the first point, let’s look no further than the trade deficit. Potential solutions to balance out the US trade deficit, which didn’t drop in February as much as analysts predicted/hoped, must stem from reducing consumption which seems paradoxical, as consuming imports is what this country has been, for better or worse, built on. (In fact, Bloomberg reported that a government report showed the cost of imported goods rose in March to a two-year high.) The percent change in the deficit that the mainstream media monitors, whether increases or decreases, all stem from Ëœsmall-potatoes’ changes (an increase in oil demand here, a decrease in the value of the dollar there, etc.), rather than systemic implementation of sustainable policy.

This is inevitably where government comes in. In a theoretical world, nations can simply trade as people would, with their own mores and assumptions and prerogatives. But inevitably, there are losers. In playing the free trade game with other nations some with governments that are involved in subsidizing elements related to trade there will surely be inequalities. But for the US to play with cheaters, it will need more than the WTO to play the referee. In addition to the pro-active government policies (across the board 33-percent tariffs on all imports, anyone?), we’ve got to look at our own consumption, break addictions not just to Ëœforeign oil’ but also to all sorts of cheaply made goods, and brace ourselves for the point in time when foreign societies will attain higher-earning, more specialized workforces much like ours.

At that point, what will the US be able to offer? Even in manufacturing, are there goods made domestically that other countries can’t make themselves or can’t buy from someone else more cheaply? How can US citizens envision a sustainable future from selling our goods, instead of buying others’? Of course, to stop short of advocating pure protectionism, there is a global trade landscape that is already in place that cannot easily be broken. But adding independent WTO-style mediation as a stopgap for unfair trade practices sometimes seem a nominal, not a real, fix.

As Fletcher mentions in yet another article, we can’t keep treating real trade problems such as the deficit as though they’re abstract. We’ve done that before with the financial securities markets, and we all saw how nebulous abstractions got the global economy into some real, real trouble.

Feel free to leave any comments/additional suggestions on how both business and government can better work together to improve the trade landscape.

–Taras Berezowsky

Comments (2)

  1. steven palla says:

    How do you compete with slave labor? It’s obviously impossible, so unless we want to join the race to the bottom, we need trade barriers to goods produced by slave labor conditions. It’s no secret that millions of Chinese laborers are not paid at all and are certainly overworked.

    It should be illegal to import goods produced under these conditions into the united states….then we could start manufacturing in the USA again

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