Defending Globalization Means Embracing Comparative Advantage
Oct 3, 2023
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Exploring the concept of comparative advantage and its relevance to international trade. How individuals, not countries, possess comparative advantage. The impact of subsidies on comparative advantage. The unseen consequences of protectionism, such as the loss of jobs and reduction in efficiency and wealth for a country.
Comparative advantage is about specializing in what you do best and using income to purchase goods produced more efficiently by others.
Protectionism and subsidies shift resources away from industries with a comparative advantage, leading to inefficiency and a net loss in economic welfare.
Deep dives
Comparative Advantage and Short-Sighted Trade and Immigration Policy
Comparative advantage, a classic concept in economics, applies to international trade. Short-sighted trade and immigration policies can short-circuit comparative advantage. The notion of 'bringing it all home' reflects an economic misunderstanding. Comparative advantage is about doing what you do best, earning income from it, and using that income to purchase other things produced more efficiently by others. Examples like LeBron James choosing basketball over typing demonstrate the importance of specializing in what you have a comparative advantage in. Comparative advantage exists at the individual level, and countries do not trade, but rather individuals within countries.
Subsidies and the Distortion of Comparative Advantage
Subsidies can alter comparative advantage by enabling producers to obtain a comparative advantage they previously lacked. However, subsidies often mask or short-circuit comparative advantage. If subsidies allow American producers to sell a product at a lower price than their foreign competitors, it is not because they can produce it more efficiently, but because the government is providing financial support. This overrides economic signals, encourages wasteful resource allocation, and hinders consumer and taxpayer welfare. Protectionism and subsidies shift resources and workers away from industries with a comparative advantage, making the overall economy less efficient.
The Misunderstandings of Protectionists
Many protectionists focus only on the benefits and jobs created within the protected industry, without considering the costs and jobs lost in other industries. Protectionism and subsidies shift resources and workers away from industries in which a country has a comparative advantage, leading to inefficiency and a net loss in economic welfare. Protectionism ignores the unseen jobs and output that could have been produced had resources been allocated efficiently. Economists emphasize the importance of understanding the full picture and the long-term consequences of protectionist measures.
When politicians decry the production that's done overseas, it's a good time to take stock of a most basic economic concept: comparative advantage. Don Boudreaux discusses what it means.