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</strong></font> </td> </tr> </table> <br> <table width="392" border="0" align="left" cellpadding="0" cellspacing="0"> <tr> <td align="left" valign="top" width="392"><font size="2" face="Arial, Helvetica, sans-serif"><strong><font color="#ff0000">SPEAKING FREELY</font><br> <font color="#000000" size="3">Comparative advantage: Comparative exploitation</font></strong><br> By Gernot Kohler <br> <br> <i><b>Speaking Freely</b></i> <i>is an Asia Times Online feature that allows guest writers to have their say.</i> <i><b>Please</b></i> <a href="https://web.archive.org/web/20030402090613/http://www.atimes.com/atimes/Front_Page/DK29Aa01.html"> click here</a> <i><b>if you are interested in contributing.</b></i> <br> <br> Comparative advantage is like statistics: it may show part of the truth, but it may also hide the truth and fool the public. The theology of global neo-liberalism preaches that there is abundant comparative advantage accruing from free trade. Yet, as the United Nations Conference on Trade and Development (UNCTAD) and others have criticized, the reality of many countries tells otherwise: they export more and more, but do not reap the promised benefits. To understand this, it may be useful to understand how one can lie with "comparative advantage". <br> <br> Comparative-advantage theory makes four general claims: (1) if countries trade with each other, they are better off than if they have no trade (ie, the trade-versus-no trade argument); (2) the gains from trade are mutual (eg, in a two-country situation, both countries gain from trading); (3) gains from trade may result from "comparative advantage" - ie, even if one country is more efficient than the other, trade may still be advantageous for both; (4) because of 1, 2 and 3, it is generally advisable for countries (a) to trade with each other, (b) to specialize, and (c) to trade freely. <br> <br> The validity of comparative advantage depends on the wage-price levels of the trading countries. If the wage-price levels are the same or similar, then the theorem of comparative advantage may be valid. However, if the wage-price levels of the trading countries are significantly different, then the claim of comparative advantage is not valid and, on the contrary, then it hides the ugly reality of unequal exchange (global exploitation). <br> <br> I will examine a textbook model of comparative advantage in two different situations: (1) when both countries have the same wage-price level; and (2) when there is a significant difference in wage-price levels. <br> <br> Comparative advantage is usually explained in terms of an example with two countries and two goods. David Ricardo, the father of this theory in 1817, used the two countries of Portugal and England and the two goods of wine and cloth. I will use a modern textbook example with the countries United States and United Kingdom and the goods of wheat and cloth (Dominick Salvatore 1987, pp 27-29). Salvatore's example is summarized in Table 1. <br> <br> <table class="" id="table1" cellspacing="0" cellpadding="3" width="100%" border="2"> <tr> <td class="" valign="top" bordercolor="black" align="left" bgcolor="gainsboro" height="0"><strong><font size="2"><font size="3">Table 1 - Example of comparative advantage</font><br> <br> <font color="highlight">Please <a href="javascript:openWindow('/atimes/images/kohler-table-1.gif','list','resizable=yes,scrollbars,width=630,height=360');"> <u>click here</u></a>. The table will open in a new window.</font></font></strong></td> </tr> </table> <br> <b>Explanation of Table 1</b><br> [Line 1] In a situation of autarky (no trade) the US could produce and consume 90 units of wheat and 60 units of cloth. The UK could produce and consume 40 units of wheat and 40 units of cloth. It seems to be assumed that both countries have the same number of workers. Thus the US is more efficient than the UK in both wheat production and cloth production. <br> <br> [Line 2] If the two countries engage in international specialization and international trade, they might produce what is shown in Line 2 - namely, the US produces 180 units of wheat (and no cloth); the UK produces 120 units of cloth (and no wheat). (This is based on a separate argument, not shown here, concerning the opportunity costs of the two countries.) <br> <br> [Line 3] They trade with each other - namely, they exchange 70 units of each product. <br> <br> [Line 4] After the trade is made, the US consumes 110 units of wheat and 70 units of cloth. The UK consumes 70 units of wheat and 50 units of cloth. <br> <br> [Line 5] A comparison of the consumption patterns in autarky (no trade, Line 1) with the consumption patterns with trade and international specialization (Line 4) reveals that there are gains from trade for both countries, which are shown in Line 5 - namely, both the US and the UK consume more of each product due to specialization-with-trade. <br> <br> Table 1 illustrates the four claims of comparative-advantage theory, namely: <br> 1. Trade may be better than no trade. <br> 2. Both sides may gain from trade. <br> 3. Even the side, which is less efficient in each category than the other, may gain; and the trade may also be beneficial for the side that is more efficient in each category. <br> 4. International specialization of production may be advantageous for both sides. <br> <br> <b>Problem No 1</b><br> The first mistake in the above model of comparative advantage arises from the fact that the example represents <i>barter trade; </i>that is to say, wheat and cloth are exchanged in <i>physical </i>units (bartered). <br> <br> However, most international trade takes place in <i>money-valued </i>terms. A country's exports and imports are usually measured as dollar, yen, ruble, etc. The balance of payments of a country is defined in terms of money balances (export revenue and import payments, etc), rather than physical measures (tons, number of pieces, etc). <br> <br> In order to correct for this problem, we must insert a money dimension into the table and show how the trade is made in terms of money values - eg, $70,000 worth of wheat exchanged for $70,000 worth of cloth. This leads us to a revised Table 2. In this table we assume that the wage-price levels of the US and the UK are the same.  <br> <br> <table class="" id="table1" cellspacing="0" cellpadding="3" width="100%" border="2"> <tr> <td class="" valign="top" bordercolor="black" align="left" bgcolor="gainsboro" height="0"><strong><font size="2"><font size="3">Table 2 - Example with money dimension</font><br> <br> <font color="highlight">Please <a href="javascript:openWindow('/atimes/images/kohler-table-2.gif','list','resizable=yes,scrollbars,width=800,height=460');"> <u>click here</u></a>. The table will open in a new window.</font></font></strong></td> </tr> </table> <br> <b>Explanation of Table 2</b><br> Columns 2, 4, 6, 8 have been added. Thus, for each column with physical units, we now have another column with money values. For example, 90 physical units of wheat (eg 90 tons of wheat) are now associated with 90 monetary units (eg 90,000 rupees). We arrive at the monetary value by multiplying the physical quantity times the wage-price level - in this case, 90 (monetary units) = 1 (wage-price level) times 90 physical units. <br> <br> Another major difference between the previous table and this one is in Line 3. The export-import values of +70 and -70 are placed in the money-valued columns and not in the physical quantity columns. This represents the reality that international exchange takes place in terms of values (dollars, rupees, yuan, rubles, etc) and not in terms of physical quantities (kilograms, tons, number of pieces, etc). <br> <br> Table 2, like the previous table, illustrates the four claims of comparative advantage theory, namely:<br> 1. Trade may be better than no trade. <br> 2. Both sides may gain from trade. <br> 3. Even the side that is less efficient in each category than the other may gain, and the trade may also be beneficial for the side that is more efficient in each category. <br> 4. International specialization of production may be advantageous for both sides. <br> <br> <b>Problem No 2</b><br> The second mistake in the standard model of comparative advantage is the fact that the global wage-price differential is ignored. We all know that there are high-wage and low-wage countries, and global capitalists benefit greatly from this differential; yet comparative-advantage theology takes no note of this fundamental reality. <br> <br> In order to correct for this problem, we must revise our table once more and introduce an international wage-price differential. This leads to Table 3, in which one country has a wage-price level equal to 0.5 (this is the low-wage country) and the other country has a wage-price level equal to 1 (this is the high-wage country). In the real world, the wage-price gaps between poor and rich countries can be greater than that. <br> <br> <table class="" id="table1" cellspacing="0" cellpadding="3" width="100%" border="2"> <tr> <td class="" valign="top" bordercolor="black" align="left" bgcolor="gainsboro" height="0"><font size="2"><font size="3"><strong>Table </strong><font size="2"><strong><font size="3">3 - Example with global wage-price differential</font> </strong>(levels = 0.5 and 1.0)</font><br> </font> <br> <font color="highlight"><strong>Please <a href="javascript:openWindow('/atimes/images/kohler-table-3.gif','list','resizable=yes,scrollbars,width=850,height=500');"> <u>click here</u></a>. The table will open in a new window.</strong></font></font></td> </tr> </table> <br> <b>Explanation of Table 3</b><br> The format of Table 3 is the same as that of the previous table. I have changed "United Kingdom" into "high-wage country" with the same wage-price level as before, namely, equal to one. Its production pattern is the same as in the previous table. "USA" is changed into "low-wage country" with a new wage-price level of 0.5. Its production pattern is the same as in the previous table, but the money-value of the produced output is changed. <br> <br> [Line 2] When USA was "USA" in Table 2, it earned 180 monetary units for 180 physical units of wheat (namely, 180 = 1*180). Now, this country is a "low-wage country" in Table 3, with a wage-price level of 0.5, and it earns only 90 monetary units for 180 physical units of wheat (namely, 90 = 0.5*180) - half of its previous earnings. <br> <br> [Line 3] The exchange of +70 and -70 (import and export) takes place as in the previous table. However, the international wage-price differential enters the exchange. Cloth is exported from high-wage country (and imported by low-wage country) at the (high) prices of high-wage country. In contrast, wheat is exported from low-wage country (and imported by high-wage country) at the (low) prices of low-wage country. As a result of this trading between unequal partners, we arrive at a highly unequal outcome. <br> <br> [Line 4] Whereas low-wage country produces all internationally available wheat (namely, 180 units), it consumes only 40 units of wheat after the so-called comparative advantage trade. In contrast, high-wage country, which produces no wheat at all, consumes 140 of the globally produced 180 units of wheat. At the same time, high-wage country was able to sell a substantial part of its cloth production to low-wage country at its comparatively high high-wage-country price. <br> <br> [Line 5] The bottom line shows how bad the unequal exchange was. This line compares the free-trade situation with the autarky situation. In free trade, low-wage country consumes less wheat than in autarky (-50 physical units), even though it is now specialized as being the world's only producer of wheat. In contrast, high-wage country consumes substantially more wheat than in autarky (+100 units). Both countries consume more cloth in free trade, as opposed to autarky. <br> <br> Table 3 shows that, due to the global wage-price differential (levels 0.5 and 1.0), the payoffs of free trade do not conform to the promises of comparative advantage at all. On the contrary, Table 3 illustrates that:<br> 1. For the low-wage country, trade may be worse than no trade.<br> 2. Only one side may gain from trade, while the other side is exploited.<br> 3. Free trade and international specialization of production may lead to comparative disadvantage for one side.<br> 4. The claim of comparative advantage is false and is a mask of unequal exchange, if the wage-price levels of the trading partners are significantly different. <br> <br> <b>Unequal exchange and immiserizing growth</b><br> My results are in line with well-known teachings on international trade by Raul Prebisch, Arghiri Emmanuel, Samir Amin and others, who have pointed out that international trade between developing and developed countries is unequal (ie, unfair) and is biased in favor of the developed countries and against the interests of the Third World. <br> <br> Emmanuel, who coined the term "unequal exchange", argued that unequal exchange is, ultimately, caused by the difference in wage levels between developed and developing countries. Emmanuel points out that there is a relationship between the undervaluation of labor and the undervaluation of exports of low-income countries and stresses that "... inequality of wages as such, all other things being equal, is alone the cause of the inequality of exchange" (Emmanuel 1972, p 61). Another scholar who raised a warning flag was Jagdish Bhagwati (1956), who pointed out that deteriorating terms of trade may lead to immiserizing growth. <br> <br> <b>Conclusion</b><br> The talk about comparative advantage is frequently nothing but propaganda. The theorem of comparative advantage lends itself to that kind of abuse because its validity is limited to trade between countries with similar wage-price levels. However, if there are significant wage-price differences between countries, as is frequently the case, then the theorem of comparative advantage is invalid and the trade tends to be an unequal exchange. <br> <br> <i><b>References</b></i><br> Bhagwati, Jagdish (1956) "Immiserizing Growth: A Geometrical Note," Review of Economic Studies, June 1956. <br> <br> Emmanuel, Arghiri (1972) "Unequal Exchange: A Study of the Imperialism of Trade." New York, USA: Monthly Review Press. <br> <br> Ricardo, David (1817) <i>On The Principles of Political Economy and Taxation.</i> London, UK: John Murray, Albemarle-Street, 1817. <br> <br> Salvatore, Dominick (1987) <i>International Economics.</i> 2nd ed. New York, USA: Macmillan, 1987. <br> <br> <i><b>Gernot Kohler,</b> is professor emeritus at the School of Computing and Information Management, Sheridan College, Oakville, Ontario, Canada.</i> <br> <br> <i><b>Speaking Freely</b></i> <i>is an Asia Times Online feature that allows guest writers to have their say.</i> <i><b>Please</b></i> <a href="https://web.archive.org/web/20030402090613/http://www.atimes.com/atimes/Front_Page/DK29Aa01.html"> click here</a> <i><b>if you are interested in contributing.</b></i></font> </td> </tr> <tr> <td align="left" valign="top" width="392"> </td> </tr> </table> </td> <td width="105" align="middle" valign="top"> <table width="100%" border="0" cellspacing="0" cellpadding="0"> <tr> <td height="44" align="middle" valign="center"><font class="time"><strong> Jan 29, 2003 </strong> </font> </td> </tr> </table> <table width="100%" border="0" cellspacing="0" cellpadding="0"> <tr> <td height="75"><img height="75" 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