What Is the Ricardian (Comparative Advantage) Case for Free Trade?

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David Ricardo’s book, ‘On the Principles of Political Economy and Taxation’, was published in 1817, here he put forward the theory of comparative advantage, formally introducing it for the first time. This work explained to economists at the time that there was no possible outcome of trade that is worse than not partaking, regardless if foreign economies are more efficient at producing goods than the domestic. The idea is still very much applicable to this day but there is a certain resistance due to the likes of Brexit and Donald Trump, some aspects have aged better than others as the mobility of capital and labor is much higher now than back in the 19th century, ultimately impacting a country’s ability to have a long-lasting comparative advantage in the production of a particular good. Comparative advantage states that all countries will benefit from opening up to free trade, no matter the extent of each individual country’s absolute advantage producing goods and services. The reasons behind it being possible for everyone to benefit is due to operating in a free market, whereby the exchange rate will automatically adjust to ensure that all countries will become equally competitive. Ricardo originally gave the example of England producing cloth and Portugal producing wine. In the case of England, it has no absolute advantage in production of either good but has a relatively lower opportunity cost in the production of cloth and Portugal in the production of wine. Initially England will have a trade deficit with Portugal but then the Pound Sterling will depreciate relative to the Portuguese Real. Inevitably, Portugal will lose some of its advantages through the equilibrating mechanism, trade will balance in the long run. Take for example Japan and its net exports in 1869 in relation to price changes from 1851 – 53 to 1869. It was at this time that Japan opened up to international trade for the first time, the first major real-world example since Ricardo introduced the idea. After the opening of the Japanese economy, the relative prices of major exports such as silk rose as Japan decided to export what was in surplus for them but was valuable abroad, and goods such as sugar prices fell to compete with the colonies of tropical agriculture located in the Caribbean. This real-world evidence perfectly supported Ricardo’s case for free trade as it enabled Japan to develop a comparative advantage in industries such as silk and silkworm eggs, potentially allowing the whole nation to benefit. One such benefit of this could be an increase in jobs and employment rate increasing therefor a greater proportion of the population would be earning and income which could lead to higher economic growth through greater levels of consumption and investment.

However, this may not be entirety the truth as it is unlikely that every individual in Japan benefited from the country opening up to foreign trade. Workers in industry’s that experienced a reduction in price of their commodities are likely to have become unemployed as part of cost cutting measures in hope of firms increasing price competitiveness of their goods. As a result, these works could have become structurally unemployed potentially forcing them to work for less in other industries where they do not have the experience to provide the same utility to their employers. Moreover, the workers that keep their jobs may be forced to work for less, which could lead to greater exploitation of labor which would inevitably lead to lowering of living standards of the lowest income earners in the country.

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Today, the world looks very different to which it did some 200 years ago when Ricardo first introduced comparative advantage. With the likes of various trading blocs such as the European Union, the Trans-Pacific Partnership and the World Trade Organization. However, the same fundamental theory still applies. The extent to which trading blocs liberates trade with the removal of tariffs and quotas vary from bloc to bloc, depending of if it’s a trade union, customs union or a monetary union.

Ricardo's argument for free trade is still very relevant to this day. For example, you can take the new Trans-Pacific Partnership bloc and try to explain how its members feel after joining it. This block includes 12 countries, including Canada, Chile, Australia and Japan. For example, the Chilean economy. Joining the block could lead to a net welfare gain equal to an area of B + D, this could be due to the removal of tariffs on the importation of Chilean copper based in other member nations. This would make Chilean exports more price competitive due to the removal of the tax making the goods cheaper, so foreign country may divert their interest away from importing copper from members outside the trade union. This would be highly beneficial to the Chilean economy as it leads to a potential for jobs creation and investment in the Chilean workforce which could aid sustainable long-term growth, making it just as applicable today as to when it was first devised.

On the other hand, one aspect of Ricardo’s comparative advantage that hasn’t stood the test of time well is due to the invention of the Internet in 1983. This created a ‘death of distance’ enabling the efficiency and speed of technology transfer to increase to a level beyond imaginable at the time of Ricardo first introduced the idea of the comparative advantage. The Internet has over 3.9 billion accounting for over half of the global population, the internet has opened doors providing entrepreneurs and governments accesses to sources of data that would not be obtainable without otherwise, thus removing forms of imperfect information that may have previously existed. For example, when Great Britain industrial revolution was in full swing in the 1830’s it is likely that they would have had a much larger comparative advantage in the production of manufactured goods than other countries which were not experiencing the same industrialization. In the present day the Internet limits the extent to which a country can obtain and maintain a comparative advantage in the production of goods ands and services this is because there is a considerably greater amount of people with access to the same information. Due to greater access to information, it eliminates asymmetric information across borders.

In conclusion, I strongly believe that David Ricardo’s theory of the comparative advantage is just as applicable today as it has been in the past. Moreover, it is apparent that the theory is true for all time and doesn’t heavily depend on history or geography for its validity. Technology does have the potential for a large impact on the theory, but it is no case influential enough to prohibit the full extent to which a country may have a comparative advantage.

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What Is the Ricardian (Comparative Advantage) Case for Free Trade? (2022, December 15). Edubirdie. Retrieved May 30, 2024, from https://edubirdie.com/examples/what-is-the-ricardian-comparative-advantage-case-for-free-trade/
“What Is the Ricardian (Comparative Advantage) Case for Free Trade?” Edubirdie, 15 Dec. 2022, edubirdie.com/examples/what-is-the-ricardian-comparative-advantage-case-for-free-trade/
What Is the Ricardian (Comparative Advantage) Case for Free Trade? [online]. Available at: <https://edubirdie.com/examples/what-is-the-ricardian-comparative-advantage-case-for-free-trade/> [Accessed 30 May 2024].
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