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Comparative Advantage: Theory and Practice in Globalization

The law of comparative advantage is a basic tenet of economics, based on a comparison
between the production costs of one country versus another. The law states a basic observation:
that for optimal efficiency, it is best for every country to maximize the production of the good
they produce best and with the lowest opportunity cost, and to import other goods where they do
not have a relative advantage. This can be summarized as, do what you do best. This law was
first synthesized by David Ricardo and is the oldest proposition in the pure theory of
international trade (Deardorff, 1980). Comparative advantage is purported to enhance and
maximize net welfare for the world through the mechanism of free trade, which allows countries
to tap into new consumption opportunities and to specialize their production processes. However,
because the law of comparative advantage, like most economic laws, relies on a variety of
assumptions, it has its critics. These critiques have become more prevalent in the age of
globalization, questioning its underlying assumptions, practical feasibility, and effects (Bhala,
2008), especially as it relates to global inequality and measures of poverty, and the long-term
effects of more integrated international markets.
We can define globalization as the development of rules by nations to govern
international trade for the purpose of increased efficiency in the production and distribution of
goods and services (Kahn, n.d.). On a global scale, we can assume that comparative advantage
will promote free trade, given there are no restrictions, and lead to increased wages and incomes
for people in the trading countries. This produces a win-win scenario. Comparative advantage
rests on some very important assumptions, which include there being two countries trading two
commodities, perfectly competitive markets, equal access to technology, no trade barriers, and
perfect rationality, among others. The difficulty of implementing theory in the real world is

that economic agents are not typically perfectly rational as economic theories rely on. Bhala
(2008) explains that many of these assumptions are further from reality than others, namely,
the assumptions of the labor theory of value, constant costs, and constant returns to scale. These
are all modeled in historical representations of the Ricardian theory in a way that contrasts
completely liberalized trade against the autarkic economy, or one that is completely closed.
Bhala gives an example using India and its theoretical production of medicine and oil, where
India would be better off by reallocating resources from oil into medicine. This proves to not be
so simple with just a brief consideration of the transaction costs, mobility of capital and
technology into a new industry, and the willingness of workers to enter a different field.
However, defendants of comparative advantage explain that the theory does not describe exactly
what will happen in nations that allow free trade, only what can happen and what parameters are
necessary for maximum net benefits. The Ricardian model is said to have simple suggestions,
which are to simply fully employ resources, allocate resources to industries with a comparative
advantage, and then to engage in free trade (Suranovic, n.d.).
The World Bank (2001) states that globalization began after World War II and the main
driver of this shift to increased interdependence among the worlds countries has been the
expansion of free trade. Free trade is promoted by reductions in protectionist trade policies,
including import tariffs, quotas, and export restraints, which have been lifted in developed
countries as well as in countries transitioning from central planning to market economies.
Utilizing comparative advantage theory means developing and transition countries can better
find their place in the international division of labor, and avoid depriving [themselves] of the
enormous economic benefits of international specialization (World Bank, 2001). These
economic benefits present themselves in increased growth and trade; the World Bank (2001)

gives an example of the Eastern bloc, where newly market economy countries saw an increase in
trade as a share of GDP from 10% to 20% between 1990 and 1995. Free trade allows new
technologies and ideas to spread between nations, and for consumers to access a broader array of
goods and services at lower costs and higher quality.
In developing nations, acting upon comparative advantages through the free and open
market is predicted to be the best way to become a part of the global economy and reduce
poverty. Because the theory of comparative advantage is so broadly accepted by the worlds
economists, this prediction of standard trade theory is widely accepted. Stronger comparative
advantage occurs in developing countries for unskilled-labor-intensive goods, especially where
labor laws do not restrict forced or child labor (Harrison 2006).
Frank Ackerman (2001) of Tufts University addressed free trade in a talk given at the
Peoples Summit in Quebec, characterizing comparative advantage as having limited validity.
He cites the same reasons as Bhala (2008) for this, which are the unreasonable assumptions
regarding the mobility of labor, technology, capital, and resources between industries. Ackerman
(2001) posits that free trade alone has rarely resulted in economic development, and that
government intervention in private markets (including actions such as setting tariffs, promoting
key industries, and offering export subsidies) has been integral to economic growth. He
goes on to say that free trade in the form of unregulated markets, combined with non-democratic
circumstances, leads to environmental degradation and social inequality. The Economist cites
figures from a 2014 study of the Gini index, a measure used to look at inequality where a higher
coefficient means increased inequality, where Chinas index rose 34% over 20 years, and subSaharan Africas rose 9% between 1993 and 2008. The lack of a democratic structure, and the
real-world politics involved in trade policies and strategies, means that the surplus created and

augmented by free trade is not always captured by the labor force. This is counter to theoretical
predictions, by which poor countries should be experiencing reduced inequality because they
experience a comparative advantage of unskilled labor. Economist William Easterly found that
increasing trade integration is associated with falling inequality in developed countries and
greater inequality within developing countries (as cited in Harrison, 2006). Again, this is related
to the difficulty of workers mobility and the flexibility of labor laws, especially in rural
developing areas, where adjustment has been impeded by labor restrictions. This is unsurprising
in developed nations, because of the spread of technology that occurs with globalization. For
developed nations with a comparative advantage in skilled-labor-intensive products, this spread
can be utilized. This also affects developing countries where there can also be a shift in skill bias
that occurs, leading to an increase in the demand for skilled labor and a decline in the demand for
unskilled labor, leading to increased wage inequality (Rattso and Stokke, 2009). Rattso and
Stokke (2009) give the example of South Africa, which experienced trade liberalization as well
as a jump in inequality in its post-Apartheid society. To the extent that comparative advantage
has affected globalization and thereby global poverty and inequality, Harrison (2006) concludes
that relying on trade or foreign investment alone is not enough the poor need better
education, [and] access to infrastructure.
Since David Ricardo theorized about the theory of comparative advantage, this economic
law has been the basis for policy in much of the worlds countries and trade organizations. The
theory supports the concept of free trade and theoretically, unregulated markets. The law of
comparative advantage makes some strong assumptions about the state of the world, that include
assumptions about the ease of labor and capital mobility in all markets in all countries.
Proponents of comparative advantage and the open market point to the results of free trade over

the years, which has included numerous advantages and innovations that would not have
occurred otherwise in autocratic environments. The industrial revolution in the United States and
Europe at the turn of the 20th century marked the beginning of the mass production and
consumption of goods and services outside of local markets. Since then, we have seen an
extremely fast-growing globalized world where countries now have the opportunity to increase
their access to innovative technologies and higher quality goods at lower prices due to
international trade specialization. Many assumptions have been made about the success of free
trade in this globalized world based on the theoretical models that support the law of
comparative advantage. In developing nations, theory predicts wage inequality and poverty
should be reduced when their economics can harness their comparative advantage in unskilled
labor. However, as we see through some case studies and theoretical examples, this has had
somewhat of the opposite effect in many countries, resulting in an actual increase in inequality.
This means that additional measures may need to be implemented to arrest the inequality
increases and to bring the advantages of trade to the worlds poorest. Harrison (2006) makes the
argument that additional resources such as access to healthcare, infrastructure, and education,
along with government subsidies for these services, are all necessary for reducing inequality in
the poorest of the worlds developing nations. While the economic predictions of trade theory
have many merits, the factors left out of traditional models may not be sufficient for homogenous
implementation and successful results in all countries.

References
Ackerman, Frank. "Can Openers and Comparative Advantage: Alternative Theories of
Free Trade and Globalization." Environment Forum of the People's Summit. Quebec.
Global Development and Environment Institute, Tufts University. Web.
Bhala, Raj. International Trade Law: Interdisciplinary Theory and Practice. Newark,
NJ: LexisNexis, 2008. 207-55. Print.
Deardorff, Alan. "Benefits and Costs of Following Comparative Advantage." (n.d.): n.
pag. School of Public Policy, University of Michigan. University of Michigan, 12 Jan.
1998. Web.
"Globalization and International Trade." World Bank. World Bank Organization, 13
Sept. 2001.

Harrison, Ann. "Globalization and Poverty." National Bureau of Economic Research

(2006): n. pag. Web.
Kahn, Alice. "Globalization." Iowa State University. N.p., n.d. Web.
Ratts, Jrn, and Hildegunn E. Stokke. "Wage Inequality, Comparative Advantage and
Skill Biased Technical Change in South Africa." European Trade Study Group (2009):
n. pag. Web.
Suranovic, Steven M. "The Theory of Comparative Advantage - Overview."
International Trade Theory and Policy. N.p., 15 Jan. 2015. Web.
"Why Globalisation May Not Reduce Inequality in Poor Countries." The Economist.
The Economist Newspaper, 02 Sept. 2014. Web.