Free Trade Doesn’t Work, Why the Theory of Comparative Advantage is Wrong
By Ian Fletcher
In his book Free Trade Doesn’t Work: What Should Replace It and Why, Ian Fletcher examines the emerging debate over the wisdom of ‘free trade’ as a sound policy for the American nation. In this article, he looks at the failings of the theory of comparative advantage, and the consequent implications for the reform of existing trade policies.
David Ricardo’s 1817 theory of comparative advantage is the core of the case for free trade. But contrary to the popular myth that ascribes to this theory blanket validity, it is in fact vitiated by dubious assumptions and only offers a weak and contingent argument for free trade. The assumptions are as follows:
Assumption #1: Trade is sustainable.
This problem divides into two parts: unsustainable imports and exports. When America, for example, does not cover the value of its imports with the value of its exports, it must make up the difference by either selling assets or assuming debt. If either is happening, America is either gradually being sold off to foreigners or gradually sinking into debt to them. We are poorer simply because we own less and owe more. And this situation is unsustainable. We have only so many existing assets we can sell off, and can afford to service only so much debt. By contrast, we can produce goods indefinitely. So deficit trade, if it goes on year after year, must eventually be curtailed—which will mean reducing our consumption one day. We get a decadent consumption binge today and pay the price tomorrow, but because mainstream economics doesn’t traffic in concepts like “decadent,” it doesn’t see anything wrong.
The implied solution is to tax imports. And that is not free trade.
Now consider unsustainable exports. This usually means a nation that is exporting nonrenewable natural resources. The same long vs. short-term dynamics will apply, only in reverse. A nation that exports too much will maximize its short-term living standard at the expense of its long-term prosperity. But mainstream economics—which means free trade—will again perversely report that this is “efficient.” The oil-rich nations of the Persian Gulf are the most obvious example, and it is no accident that OPEC was the single most formidable disruptor of free trade in the entire post-WWII era. But other nations with large land masses, such as Canada, Australia, Russia, and Brazil, also depend upon natural resource exports to a degree that is unhealthy in the long run.
The implied solution is to tax or otherwise restrict nonrenewable exports.
And that is also not free trade.