Clarifications on the Case for Free Trade (or Pucker up boys and girls...)

Discussion in 'Politics, Religion, Social Issues' started by Frohickey, Apr 12, 2004.

  1. Frohickey macrumors 6502a

    Feb 27, 2003
    Clarifications on the Case for Free Trade

    Free trade has necessary conditions. Today these conditions are not met. This point has escaped*Joe Salerno and*George Reisman (both writing on,*as it has a vast number of other people.

    The case for free trade is based on David Ricardo’s principle of comparative advantage. Ricardo addressed the question how trade could take place between country A and country B (England and Portugal in his example) if country B was more efficient in the production of tradable goods (cloth and wine in his example) than A.

    In other words, if Portugal could produce both cloth and wine at lower cost than England, how could trade between the countries benefit each?

    Ricardo found the answer in relative or comparative advantage. He said that if Portugal specialized in wine, where its absolute advantage was greatest, and England specialized in cloth, where its disadvantage was least, total output would be higher than if both countries achieved self-sufficiency by producing both products. The higher productivity from specialization would result in mutual gains from trade.

    For comparative advantage to reign, two conditions are necessary:

    One is that capital and labor must be mobile within each country so that the capital and labor employed in England in the production of wine can flow into the production of cloth, where England’s trade advantage lies. In Portugal capital and labor must be able to flow from cloth to wine where Portugal’s advantage is greatest.

    The other necessary condition is that capital and labor (factors of production) cannot be internationally mobile. If the factors of production are internationally mobile, capital and labor would move from England to Portugal, where both commodities can be produced the cheapest. Both wine and cloth would be produced in Portugal. Portugal would gain and England would lose.


    Today we are a net importer of capital because we are increasingly dependent on imported manufactured goods as a result of outsourcing and off shore production. Goods, and increasingly services, that US multinationals produce abroad for the US domestic market are driving up the trade deficit. Foreigners use the dollars we pay them to acquire ownership of our assets.

    People also confuse themselves and others by comparing the large US investment stake in Europe with our small one in China. They overlook that our stake in Europe is a historical result of first world capital and technology being confined to the first world by world socialism. The global mobility of first world capital is new; thus, our stake in China is not as massive as our stake in Europe. Many commentators overlook that new developments are not contained in historical data. They also overlook that it takes large investments just to maintain the existing value of US investments in Europe. As it is extremely expensive to close a plant, adjustment to the new conditions cannot be instantaneous.

    As a director of a global manufacturing firm, I am very much aware that outsourcing of high value-added products and jobs has begun to affect European countries. The difference is that, unlike Americans, Europeans are not blind to the reality.

    Libertarians need to substitute their thinking caps for their knee-jerk reactions. A hidden agenda might be behind "globalism"--the international redistribution of first world income and wealth. It is a given that if factors of production are internationally mobile, domestic labor that is paid the value of its marginal product cannot compete with foreign labor in situations where excess supply prevents the foreign labor being paid the value of its contribution to output. If absolute advantage rules, capitalism itself will redistribute income and wealth from rich countries to poor ones.

    Libertarians might say all to the good. But this overlooks that they live in a sovereign country. The downward adjustment in wages and salaries necessary to bring the US into equilibrium with the global labor market requires reductions that cannot be achieved. For example, try to imagine what must happen to existing mortgages and debts if US workers are to compete with Chinese and Indian workers employed by first world capital and technology. So many people forget that the reason that highly paid US workers could compete against lowly paid Asian workers is that the US workers were much more productive due to the immobility of capital and technology. The international mobility of factors of production has stripped away the productivity advantage of first world labor. Try to imagine the political instability in store for the US as the ladders of upward mobility collapse. The reality toward which we head is not a libertarian paradise.

    Are libertarians going to allow their ideology to do their thinking? What good does it do for libertarians to go into denial and to call me, patronizingly, names?

    The proper way to answer the argument that Schumer and I have made is to make a case that free trade is mutually advantageous in the absence of comparative advantage. Alternatively, make a convincing case that comparative advantage does not require at least some factors of production to be immobile. Anyone who can devise a new theory that proves free trade to be mutually advantageous in circumstances where factors of production are as mobile, if not more mobile, than traded goods will win a Nobel Prize.

    :eek: :eek: :eek:

    We are in trouble, boys and girls. Free trade in the internet age is actually not free trade anymore, but the permanent migration of capital and labor.

    Anyone here want to figure out ways the 1st World can keep and hold on to 1st World assets? Worth a Nobel Prize...
  2. Thanatoast macrumors 65816


    Dec 3, 2002
    assuming i got the gist of this article, it raises a hair-raising thought. it most definitely is cheaper to manufacture goods and perform certain services out-of-country. why haven't free traders taken this into account? unless the free-traders who are the strongest advocates are the ones set to make the most profit from the system, eg) owners and executives :eek: :(
  3. Frohickey thread starter macrumors 6502a

    Feb 27, 2003
    I think that most free traders have not fully examined the current conditions, and have for the most part, relied on the analysis of other free traders that have staked a strong position.

    I think that this should get looked into.

Share This Page