Comparative advantage is one of the cornerstones of modern international commerce. The law of comparative advantage states that, under freer trade, an individual country will develop more of the goods it produces at the expense of other countries, and consume much less of those goods than the country with which it has a comparative advantage. In this way, nations become less reliant on others for their raw materials and technologies. This translates into lower imports and exports, lower prices, and a much more diverse range of goods in the markets of the world. These benefits translate into billions of dollars in potential revenue for each nation.
The emergence of protectionism, however, threatens to upset this balance. Protectionism is, in its basic form, the act of preventing another country from importing or expelling the goods of another. In recent decades, protectionism has come to encompass all aspects of international trade. Protectionism has now become a key force in national and international politics, leading to the growth of anti-trade sentiment throughout the world. It is also leading to a major rift in the global economy, with many analysts predicting a major recession before long.
One of the major difficulties in understanding the economics of comparative advantage and protectionism is the use of the word “comparative advantage.” Simply put, economists attempt to compare things of different values by measuring the difference between what it costs for a country to import that good and what it costs that country to export that good. By measuring the difference between the costs, we come to the conclusion of how much a nation could afford to export in the current circumstances. Thus, comparative advantage refers to the ability of a nation to produce something relative to the demand and ability of a nation to consume it. If a nation has an absolute advantage, then it has the resources to export whatever it needs to export, and whatever it wants to export.
In the case of comparing overall U.S. economic performance vis-a-vis the performance of other nations, the United States would clearly come out ahead in the short run because it has the largest economy. However, if we were to compare the comparative advantage vis-a-vis various countries, we would quickly see that our comparative advantage is very dependent on our ability to lower our costs of production vis-a-vis other nations. For example, if we want to build automobiles that are cheaper for the American consumer, then we must reduce our prices to the point where consumers across the country can afford them. But if we do not reduce our costs, then we run the risk of bankrupting our nation as our consumers cannot afford our products, and companies cannot sell them for a reduced price.
So, it makes sense to think about comparative advantage from an international trade perspective as well as a national security perspective. In the case of the international trade challenge posed by China, the best case scenario would be for the United States to pursue free trade agreements with other nations, including those with whom we have trade disputes. It would also help if the United States pursues aggressive measures to protect its interests – such as stopping or reversing the Chinese subsidies. If the Chinese government persists in pursuing its subsidized state industrial policies, the United States will suffer from a competitive disadvantage vis-a-vis China.
One could add to this list, “a stronger dollar, lower commodity prices, more domestic product sales, higher consumer spending, more exports, and less imports.” We need the above broad list to make sense of the competitive issues relating to China's ability to use its vast resources to undercut the U.S. economy. While I believe the above is correct in depicting the comparative advantage problem facing the United States in international trade, I believe there is also an opportunity for the United States to take advantage of lower opportunity costs in the case of our nation's reliance on foreign oil. Indeed, it makes sense to focus efforts on how we can develop alternative forms of domestic oil production such as “shale oil” to compete with the higher cost producers of oil in the Middle East and North America.
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