Allgemein,  Politik

Comparative Advantage and Externalities

The best argument for free trade is probably Ricardo’s comparative advantage. The argument is as follows, that even countries that are less efficient at producing any good compared to a more developed country would be able to specialise in a given prduct that has the lowest opportunity cost to them and trade that good in an advantageous way.

I personally feel that this argument should be disputed.

The main reason is the trading of externalities. Specialised countries are more prone to import externalities. Many markets have natural entrance-barriers. Structural and institutional deficits arising from specialisation hinder real „creative destruction“.

Argumentation for free trade follows a certain structure of argumentation: Comparative Advantage through specialisation enables less developed countries to participate in advantageous trade. Countries that are affected by free trade should improve flexibility of the work-force and infrastructure.

I would believe that a country with limited ressources would have a hard time increasing both specialisation and generalisation at the same time. A specialised country will therefore experience brain-drain. Stripped of the possibility to generalise to react to competition and with little room to improve the efficiency of its specialised industry it will be forced to either keep the living-standard down and decrease wages or to invite industries that other regions reject – for good reasons. Those bring externalities with them that the society will have to bear.

Is there a real difference to regions within a country? East-Germany for example experienced a significant brain-drain in the wake of reunification. However, countries like Germany or the US have the ressources to improve the infrastructure of their regions and support generalisation. Poorer countries with less ressources will have a harder time to do so.

Would free trade in terms of mobility and capital flows help better than free flow of goods? I don’t know yet – but I feel that it is not as easy as to say: „no trade barriers“.

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