The Theory of Comparative Advantage and Global Trade Policies

The theory of comparative advantage emphasizes that global economic efficiency increases when countries specialize in producing goods they can create more efficiently, trading them for products that others produce better. However, trading with countries that sell goods below manufacturing costs presents a challenge. This tactic may provide short-term benefits through cheaper goods but risks decimating local industries and, ultimately, could lead to unemployment in importing countries, pushing them into an unsustainable financial situation. Many economists advocate for free trade, viewing it as maximizing global economic value. Yet, current trade dynamics, characterized by excess savings and persistent surpluses, indicate that the system might not operate under genuine comparative advantage principles; instead, deficit countries like the US endure an imposed industrial policy shaped by dominant trading partners. Globalization has led to significant reductions in goods' prices, evidenced by the affordability of products like t-shirts over the decades. Skepticism remains regarding the wisdom of subsidizing manufacturing in non-competitive sectors, particularly in regions where production costs exceed those of competitors, which undermines future industry viability.