From Ideas on Liberty
Roughly 180 years ago David Ricardo discovered comparative advantage. He showed that trade benefits both trading partners even when one is less productive than the other across all activities. There are gains from trade and specialization even in that case.
Ricardo’s insight is in the news these days as talk continues about broadening free-trade agreements to the Americas and as the anti-trade forces that raised their heads in Seattle remain in the spotlight.
Or perhaps it is more accurate to say that Ricardo’s insight is not in the news. For it remains misunderstood or underappreciated by almost everyone other than professional economists.
I was recently discussing comparative advantage with a student. She said that the whole concept seemed to miss the point of how trade exploits the poorer nations. In explanation, she told me that when she had lived in Nepal she had done her laundry by hand. She considered hiring a local woman to do it for her. But to pay someone the tragically low prevailing wage would be, in the student’s view, a form of exploitation. She could have chosen to pay more than the prevailing rate—an amount that she would have considered “non-exploiting.” But at that rate, it was worth it for her to do her laundry herself. So rather than “exploit” the washerwoman, the student continued to do her own laundry.
I argued that the washerwoman did not see it as exploitation. She saw it as an opportunity. Surely she would be thrilled to have the job and would be better off from having it.
Ricardo was right: both parties benefit from trade even when there are gross inequalities of skill and productivity. Ironically, the poor may have more to gain than the wealthy. My student saved herself from the indignity of paying someone a pittance in return for cleaner clothes. Her arms and shoulders got a little sore from the novelty of washing her own clothes by hand.
But the washerwoman probably paid a higher price. She may have lost an opportunity to clothe her child. She may have lost an opportunity to keep a child in school instead of sending him off to work. What my student saw as a pittance may have been life-altering for the washerwoman.
The same is true at the national level. If we closed our borders, the impact on Americans would probably be smaller than the impact on our poorer trading partners.
If we closed our borders to avoid “exploiting” the poorer nations of the world, we would face higher prices and have a lower standard of living. There would be less innovation without the spur of foreign competition. The jobs that would be available would be a little less interesting. But if we only bought things made by other Americans the impact would be mitigated by the size and diversity of the U.S. economy.
Malaysia, Indonesia, and many of our other trading partners, however, would pay a heavy price. You can see the difference by imagining more and more severe forms of protectionism in the United States.
I live in St. Louis. Suppose I could buy things made only in Missouri. Life would get dramatically less interesting and a lot poorer. Missouri has some car factories, but they would get a lot smaller and be a lot less efficient if the cars had to be sold in-state. As a result, they’d be a lot more expensive. Think about the food in the grocery. If the store couldn’t import produce from California or Florida, oranges and avocados and garlic would either get a lot more expensive or they might not be available at all.
Then think of how poor life would be if I had to buy products made only in St. Louis and no imports were allowed from outside the city. I’d probably lose my job. There wouldn’t be enough students here in town to support the current number of universities here in town. A lot of us would have to become farmers if we wanted to feed our families. Houses would have to be destroyed in order to devote land to farming, pushing people into apartments. A whole string of economic changes would occur and all of them would be impoverishing.
The poorest countries are a lot like St. Louis or Missouri in that their size makes self-sufficiency extremely expensive. Trade lets them avoid that trap. Trading with them doesn’t exploit them—it allows them to escape the poverty of self-sufficiency.
The protesters of free trade would have us believe that Nike and other multinationals exploit their workers by paying low wages and creating an unpleasant work environment. Their claim would be that Nike pays pitiful wages and exploits its workers because it can.
But the workers in those foreign countries are thrilled to see a Nike factory open. They don’t stay away for fear of being exploited. People line up in China and Indonesia and Malaysia when American multinationals open a factory. And that is because even though the wages are low by American standards, the jobs created by those American firms are often some of the best jobs in those economies.
Even with trade, life is not easy for the Nepalese washerwoman or the Nike worker in Malaysia. It may make us uncomfortable at times to trade and interact with people who have such hard lives. But lack of education and marketable skills, not trade, are the cause of that hardship. Trade helps poor nations and their workers accumulate a bit of wealth and comfort. That in turn allows the poorest of the poor a chance to keep their children in school. It allows them the possibility of a brighter future. To deny them the opportunity to trade is the ultimate exploitation.