TRADE IS

BENEFICIAL
FOR ALL
COMPARATIVE ADVANTAGE
82 COMPARATIVE ADVANTAGE

IN CONTEXT Even if Country A

FOCUS can do everything better
Global economy than Country B, it will profit
Making a product entails most by focusing on the
KEY THINKER costs. One of these costs things it does best. It is
is time. too costly to sacrifice time
David Ricardo (1772–1823)
on something it does
BEFORE less well.
433 BCE The Athenians impose
trade sanctions on the
Megarians in one of the first
recorded trade wars.
1549 John Hales, an English
This allows Country B,
politician, expresses the Both countries benefit which is good (but not
widely held view that free from a comparative the world’s best) at making
trade is bad for the country. advantage, which makes the the products Country A
most efficient use of their does not make, a chance
AFTER time and resources. to make them without
1965 US economist Mancur undue competition.
Olson shows that governments
respond more to the appeal of
a concentrated group than one
that is more dispersed.
1967 Swedish economists
Bertil Ohlin and Eli Heckscher
develop Ricardo’s trade theory Overall, more goods are
to examine how a comparative produced, giving consumers Trade is
a wider range of products beneficial for all.
advantage might change at lower prices.
over time.

T
he ideas of the renowned Elizabethan times. Ricardo thought to growing crops. However, as the
18th-century British that in the long run such protectionist war temporarily came to an end in
economist David Ricardo policies were more likely to restrict 1802, the price threatened to fall
were clearly shaped by the world he the ability of the country to increase back so the landowners—who also
inhabited and by his personal life. its wealth. controlled Parliament—passed
He lived in London, England, at a Corn Laws to restrict the importation
time when mercantilism (pp.34–35) Early trade protection of foreign wheat and place a “floor,”
was the dominant economic view. Ricardo was particularly concerned a bottom price, on grain. When the
This held that international trade by the introduction of a British tax wars ended in 1813, the Corn Laws
should be heavily restricted. As a known as the Corn Laws. During were used to raise the floor price
result governments introduced the Napoleonic Wars (1803–15) it again. The laws protected farmers
policies that aimed to increase was not possible to import wheat but also pushed the price of bread
exports and decrease imports in from Europe so the price of wheat beyond what poorer people could
an attempt to enrich the nation in Britain had risen. As a result pay at a time when newly returned
through an inflow of gold. In many landowners increased the soldiers and sailors were unable
England the policy dated back to proportion of their lands dedicated to find work.
 THE AGE OF REASON 83
See also: Protectionism and trade 34–35 ■ Market integration 226–31 ■ Dependency theory 242–43 ■

Exchange rates and currencies 250–55 ■ Asian Tiger economies 282–87 ■ Trade and geography 312

countries would benefit from

50% 20% specializing and trading when one
party had an absolute advantage in
both goods. Would it be worth
trading if one country could produce
both more wine and more wool per
worker than the other country?
Another way of looking at this is
to consider whether a person who is
better at making both hats and
shoes than someone else should split
his time between the two jobs or
Worker B is not choose one job and then trade with
If Worker A is better than Worker the less-skilled worker, who makes
20 percent better A at anything, but the other product (see diagram, left).
at making hats he is better at
but 50 percent making hats than Suppose that the superior worker
better at making shoes. If he makes is 20 percent better at making hats,
shoes, he should hats, he will have but 50 percent better at making
focus on shoes. a competitive shoes—it will be in the interest of
That is the most advantage and can both of them if he works exclusively
profitable way trade with Worker at making shoes (the product he
to use his time. A for shoes.
really excels in), and the inferior man
works in making hats (the product
Ricardo vigorously opposed the of resources than a competitor is he is least bad at making).
Corn Laws, despite being a wealthy said to have an “absolute advantage.” The logic behind this argument
landowner himself. He claimed that Smith said that both Britain and has to do with the relative costs of
the laws would make Britain poorer, Portugal would profit most by making a product in terms of the
and developed a theory that has specializing in what they did best amount of production time taken or
become the mainstay for all those and trading the surplus. Ricardo’s lost. Because the superior worker is
wishing to justify free trade contribution was to extend Smith’s so good at making shoes, the cost of
between countries. argument to examine whether his making hats is high—he would ❯❯

Comparative advantage
Adam Smith (p.61) had pointed out
that the climate differences between
Portugal and Britain meant they
would benefit from trade. A worker
in Portugal could produce more wine
than a worker in Britain, who in turn
could produce more wool than a
worker in Portugal. Any person or
state able to produce more per unit

In 1819, a crowd of 80,000 gathered

in Manchester, England, to protest
against the Corn Laws, which kept the
price of wheat high by limiting imports.
The protest was brutally suppressed.
84 COMPARATIVE ADVANTAGE
The increased importation of tires
from China (left) led the US to impose
trade restrictions in 2009. This, in turn,
led to a full-blown trade battle and a
deterioration in diplomatic relations.

that it comes from countries’ relative

abundance of capital and labor.
Capital-rich countries will have a
comparative advantage in capital-
intensive products such as machines.
Labor-rich countries will have a
comparative advantage in labor-
intensive products such as farming
goods. The result is that countries
tend to export goods that use their
abundant factor of production;
capital-abundant nations such as
have to forfeit a lot of valuable shoe advantage, more goods are produced the US are most likely, therefore,
production. Although in absolute in total, and trade delivers more and to export manufactured goods.
terms the inferior worker is worse cheaper goods to both nations. Heckscher and Ohlin’s analysis led
at making shoes and hats than the Comparative advantage resolves to another prediction. Not only
superior worker, his relative cost a paradox highlighted by Adam would trade tend to reduce the
when making hats is lower than for Smith—that countries that are differences in prices of goods in
the superior worker. This is because inferior at producing goods (they different countries, it would also
he forfeits less shoe production per are said to have an “absolute reduce wage differences: the
hat than the superior worker would. disadvantage” in them) can specialization in labor-intensive
The inferior worker is therefore said nonetheless export them profitably. sectors by labor-abundant
to have a “comparative advantage” economies would tend to push up
in hats, while the superior worker has 20th-century advantage wage rates, while an effect in the
a comparative advantage in shoes. What determines comparative other direction would be seen in
When countries specialize in goods advantage? Swedish economists Eli the capital-abundant country. So
for which they have a comparative Heckscher and Bertil Ohlin argued despite the overall increase in the

David Ricardo Considered one of the world’s economists of his day, including
greatest economic theorists, David Thomas Malthus (p.69) and John
Ricardo was born in 1772. His Stuart Mill (p.95). He retired
parents moved to England from from the stock exchange in 1819,
Holland, and at the age of 14 and became a member of
Ricardo began working for his Parliament. He died suddenly of
father, a stockbroker. Aged 21, an ear infection in 1823, leaving
Ricardo eloped with a Quaker, an estate worth more than $120
Priscilla Wilkinson. Religious million in real terms today.
differences between the families
resulted in both sides abandoning Key works
the couple, so Ricardo started his
own stockbroking firm. He made a 1810 The High Price of Bullion
fortune betting on a French defeat 1814 Essay on the Influence of
at Waterloo (1815) by buying a Low Price of Corn
English government bonds. 1817 On the Principles of
Ricardo mixed with notable Political Economy and Taxation
 THE AGE OF REASON 85
damaged US export industries. Other economists have questioned
The jobs of some US tire workers whether trade always helps
may have been saved, but in the developing countries. The US
wider economy many more jobs economist Joseph Stiglitz (p.338)
were lost. argues that developing countries
The diminution of money often suffer from market failures and
in one country, and its Protectionism today institutional weaknesses that might
increase in another, do The US economist Mancur Olson make a too rapid liberalization of
not operate on the price has helped to explain why politicians trade costly for them.
of one commodity only, continue to impose policies that are There are also contradictions
but on the prices of all. likely to damage the overall economy, between theory and practice. When
David Ricardo even though the costs are widely the government of India removed
known. He points out that those tariffs on imports of cheap palm oil
against the tariffs—a small number from Indonesia, for instance, it had
of large domestic producers and the positive effect of raising the
their workers—suffer a visible living standards of hundreds of
impact from cheap imports. millions of Indians, in line with
However, the potentially larger Ricardo’s theory, but it destroyed
short run, ultimately there may number of consumers who have to the livelihoods of 1,000,000 farmers
be losers as well as winners, and pay higher prices because of tariffs who grew peanuts for oil, which was
consequently opposition to the and those workers in affiliated now passed over for palm oil. In a
opening up of trade. industries who might lose their jobs perfect Ricardian world the peanut
The cries for protectionism through connected impacts are farmers would simply transfer into
are as loud today as they were in dispersed around the economy. the production of other goods, but
Ricardo’s time. In 2009, China in practice they can’t because their
accused the US of “rampant Contemporary trade investment in capital is immobile—
protectionism” for imposing heavy Today, most economists support a machine that processes peanuts
taxes on imported Chinese car the basic Ricardian position on has no other use.
tires. The decision to increase trade and, in particular, believe that Ricardo’s critics argue that in
tariffs came after pressure from US it helped today’s industrialized the long run these kinds of impacts
workers, who had seen tire imports countries. US economists David might hamper the industrialization
grow from 14 to 46 million from Dollar and Aart Kraay have argued and diversification of poorer
2004–08, reducing US tire output, that over the last few decades trade countries. Moreover, although rich
causing factory closures, and has helped developing countries to industrialized countries became
creating unemployment. However, grow and reduce poverty. They successful traders, they did not
the US had previously accused claim that the countries that cut practice free trade when they
China of unfairly subsidizing its their tariffs have grown faster and were first developing. How
own tire industry, so tensions have seen less poverty. countries build up comparative
mounted. China’s response was advantage over the long run may
to threaten retaliatory increases in be more complex than Ricardo’s
import taxes on US cars and poultry. model suggests. Some argue that
Tariffs produce effects that ripple Europe and then later the Asian
through economies. Any protection Tigers (pp.282–87) built it up
gained for US tire producers from through trade protection
the tariffs on tires, for example, was in which skills were developed
counteracted by other negative before trade opened up. ■
impacts. Higher tire prices increased
Goods made in Asia are transported
the costs of US cars, making them to Western countries in vast container
less competitive and reducing the ships. It is estimated that 75 percent of
numbers bought by US consumers. goods in a typical US shopping cart are
The retaliation by China also exported to the US from Asia.