Why Ricardo’s Theory of Comparative Advantage Regarding Foreign Trade Doesn’t Work in Today’s Global Economy: Labor Arbitrage, Disloyal Capital, WTO Violations and National Security Implications

Abstract

The theoretical basis for international trade is Ricardo’s theory of comparative advantage. Paul Samuelson, one of the leading lights in the economics profession in the 20th century, referred to it as one of the most beautiful ideas in economics. Yet, no one seems to have considered its validity in the context of the current global trade environment.

What free-trade advocates have not done is to look at the bases underlying Ricardo’s theory, namely, that capital is loyal to the country of origin and that the value of currencies is responsive to imbalances in trade. This article demonstrates that capital is not loyal to the country of origin and that currencies do not move to smooth out imbalances in trade.

This then forces us to look at the political, economic, and national security aspects of global trade, rather than just repeating the mantra that free trade benefits all. Clearly, there are winners and losers and, thus far, American workers have been the losers. The last election demonstrates that exporting jobs to countries such as China has domestic political consequences when people believe that the system is not working for them.

The article then asserts we need an industrial policy for this country that seeks to benefit not just shareholders but also workers, and which recognizes the national security implications of global trade and the danger of supply chains that run through a potential adversary.

Keywords: international trade, David Ricardo, Paul Samuelson, comparative advantage, labor arbitrage, China, free trade, globalism, national security