the theory of comparative advantage and critically assess how far it is useful in understanding the realities of world trade.
I intend to answer this question by giving a brief explanation of the theory of comparative advantage and Waltz’s theory of international politics, then relate these to the world of international politics ,trade and the functioning of the world trade organization
The theory of comparative advantage is based on the simple assumption that countries should make best use of their endowments be they natural like mineral resources or man-made like skilled labour, innovation or advanced technology in manufacturing or services. It is possible for a country to produce all goods and services it needs as long it has the resources to do so, but sooner or later it will reach limits known as production possibility frontiers.
To increase the amount of goods and services once it reaches production possibilities frontiers, it will need to give up those things where the opportunity costs to make are too high and concentrate on those things which it is best at making better and cheaper. So if it is cheaper and better to make cheese in the UK than cars and it cheaper and better to make cars in China than making cheese, by trading with one another both countries will be able get more of cars and cheese at cheaper price, both countries can move beyond their production possibilities frontiers.
Waltz’s theory of international politics is based on the assumption that countries at local level are sovereign and subject to laws governing that country. At the international states are anarchic, self interest and power determines outcomes, despite international law there is no world government to enforce rules on states, other than states themselves.
The WTO was set up to regulate trade and investment among nations i.e. create a level playing field for all, since the rules are made by member states to which they are subject and since the WTO has no army to force countries to abide by its rulings and countries have to enforce its rules on other countries, rich countries Waltz theory suggests are able manipulate the rules to gain the most advantage in an anarchic situation, the distribution of power favouring the rich countries, although poor countries by organizing can be a counter balance to power depending on the circumstances.
To fully appreciate power relations we need look no further than the garment industry and agriculture. In both these trades poor countries have a comparative advantage in competing with rich countries and yet poor countries have never fully benefitted from these trades because of the poor terms of trades which richer countries have been able to impose on poor countries through the workings of the WTO and other means.
The USA and the EU heavily subsidize their farmers, this makes their agricultural produce artificially lower in price, on world markets this means poor countries farmers find it hard to compete limiting their export possibilities or having to accept much lower prices. Despite commitments to lower trade barriers poor countries do not have the power to make rich countries stop subsidizing their agriculture.
According to WTO countries can impose, fines, tariffs or restrict even stop goods from the offending country entering their markets if a country does not stick to the rules. So for example the USA company Tyco one the worlds biggest chicken processing company routinely dumps chicken parts(the rejected ‘brown meat’ from its market) onto the Haitian market, now Haiti can impose trade sanctions on the USA,doing so would not hurt the US much but more on Haiti as it is reliant on exports to the US.
This imbalance of power and disparity in wealth means that poor countries options are limited. There is no level playing field in world trade regulated by the WTO but more so the distribution of and use of power, The USA,Japan and EU have managed to rig the international trading system to gain as much advantage as possible.
The way this has been has not been by outright flouting of the rules but by clever manipulation of the rules and loop holes. Rich countries have qualified permanent experts at WTO meetings, while many poor countries lack expertise and permanent staff to represent their case, the result of this is that many meeting are held and decisions made without representations from poor countries. Only when these rulings come into force do poor countries realize they are disadvantaged, by then it is too late, at the time of writing WTO rulings run to over 26,000 pages and more are added everyday. There are 1700 meeting every year, of the permanent staff of the WTO only 94 out of 552 are from poor countries. The Doha round which collapse because the US threatened to walk out of talks unless tripp's was on the table, pressure from US business which hold many patents and intellectual property rights by companies like Monsanto was responsible for the US position.
The multi fibre agreement where poor countries have an advantage, the rich countries have agreed to lower tariffs over a long period while at the same it retains the right to limit imports by imposing quantity restrictions. By clever manipulations of the rules even when tariffs come down poor countries will not benefit because the rich countries will have reached their allotted quotas from poor countries, and since the initial tariff’s are so high lowering them will make little difference.
The theory of comparative advantage is not static. Countries like Taiwan, South Korea, Japan and now China, countries which have few natural endowments like oil or gas, have by being export led and investing in select industries through tariff protection and industrial trade policies have been able to create giant industrial giants like Samsung of South Korera,Sony of Japan and telecom giant of China Telecom, they have also moved their societies from agriculture to a industry based society and now towards a post industrial society, these countries did not develop by following wto rulings when they industrialized.
Many poor countries are still reliant on a few primary exports, the old colonial pattern of trade, despite the comparative advantage this means that price fluctuations can be very harmfull.Colombia a major coffee grower has seen the price of coffee drop affecting the lives of many farmers, unlike the rich countries who have welfare safety, Colombian farmers can suddenly be immersed in poverty with few alternative options.
Poor countries have found it very difficult to trade out of poverty, infact the opposite is happening with the globalizing of poverty through trade, this is the conclusion of Michael chessudovsky (the globalization of poverty.2003).he explains how it works, a country that exports raw peanuts is subject to low tariffs, if however if that country decides to export peanut butter it is subject to 1000% tariff!.
He also explains how the IMF and World Bank through loan conditions are imposing a harsh trade regime which is making things worse, by opening up their economies especially agriculture the affect has been devastating on poor countries farmers. Mexican farmers have lost out badly as US agri subsidized corn has destroyed the local market; in Senegal EU subsidised tomato concentrate has destroyed the local market.
As Waltz suggests at the international states are anarchic ,they may co-operate if it is in their interest, but underlying the WTO ruling hides the interests of the powerful to manipulate events and circumstances, now the rich countries do not always get their way, by operating as a block China,India,Russia and Brazil known as the brics are co-operating together so that their interests can be represented, and doing trade deals to lock out the US and the EU,this constant shifting of alliances and power known as state craft is according Waltz is the normal working of anarchic states at the international.
With terms of trade so poor the reader may ask why they participate, for poor countries to be locked out of the world trading system means they will have no access to world markets, it is better to gain something than nothing. The 1986 Uruguay round where poor countries signed up to open up their markets, have gained very little. African countries export over 28% of gdp but are still poor due to low prices for primary goods and have not been able to get out of the poverty trap, despite their comparative advantage in natural mineral resources, because they lack the skills and expertise to mine these, and the investment needed in expert machinery.
As a consequence they have to rely on rich countries to make the investment to mine the resources, as conditions of the investments most of the money ends up in the hands of the mining company leaving little for local development that which is left after the elites have looted their share and hidden it abroad
The theory of comparative is now discredited by the examples outlined above, the problem lies in the real world where economic and political power comes into play as in the WTO meetings of the Uruguay and Doha rounds where the US and EU have dominated.
According to Ha joon jang (kicking away the ladder.2000 ed),if comparative advantage was applied as its originator intended, Japan would still be growing rice, America wheat, South Korea fish and vegetables. According to him there is no reason that things cannot be made and sold anywhere.
He gives the example of Toyota which is the second largest car company, started of making small machine parts and later moved into the auto industry under the guidance of investments and industrial polices of the then Japanese government to industrialize the country through acquisition of technology and protection of its home markets.
According to Ha Joon Jang nearly all rich countries have practiced the infant industry protection schemes to develop their industries behind high tariffs on foreign goods and services, this is not what the WTO now suggesting to poor countries.
By opening up their economies poor countries have not had liberal free trade but globalization, where giant multi-nationals have been able to expand incorporating more of the worlds land, resources and people into their domain of operations.
China is the classic example its comparative advantage was cheap labour, which it has used to attract muli-nationals.It has been careful to use foreign direct investment to develop key industries like the auto industry and telecoms. It now has world class mobile phone Company called Huwuai which is now launching products into western markets
The theory of comparative advantage does not necessarily lead to gains in trade but also depends on terms of trade, poor countries reliant on a few primary goods are especially vulnerable to price fluctuations and have not been able to trade out of poverty
The WTO a western creation favours the powerful like the US and EU who are able design and enforce ruling which often are not in the interest of the poor countries. Liberal free trade as enforced by the WTO has not made many poor countries prosperous; if we take China and India out of the equation evidence suggest many poor countries have got poorer, especially African countries
Most trade is still done between rich countries around 75% of gdp,with only 15% of the world’s population, rich countries continue to dominate trade and WTO rulings, despite poor countries having comparative advantage in certain trades, they have been locked out of these key markets or terms of trades so poor they have benefitted very little
Rich countries developed under high tariffs and import restrictions when their industries developed, only when their industries were able to take on the best in world markets did they become free trade converts. This is not what is being sold to poor countries, in debt, reliant on few primary goods, despite comparative advantage have seen few benefits
In our concept of the Good Society trade is a good thing if it is free and fair.Countries need to trade themselves out of poverty,but uneven trade agreements puts poor countries at a considarable dis-advantage.The modern trading system has ensured that the old colonial pattern of trade continues, where poor countries continue to supply cheap primary commodities to the rich countries.The result of these policies is to keep countries poor.
Because of the above situation the response of less powerful countries has been to organize together and demand better terms and conditions of trade.This is one of the reasons the Doha round trade agreement collapsed.The rich countries still have a colonial and Imperial mindset which they need to change,other wise in future they will suffer.You cannot keep the majority of the worlds people down and make them do what you want them to do.Military intervention as the West is finding out in the Middle East is counter productive.
In our Concept of the Good Society free and fair trade should be beneficial to both sides,otherwise poorer countries are going to organize and de-link themselves from the West, and the West will be the big loser.
Kind Regards Tiger Moto