Epilogue
The theory of international trade has grown in extent and complexity since the days of mercantilism when pamphleteers like Henry Martyn presented examples of gains from trade and quantified them by means of what Jacob Viner named the eighteenth-century rule (see Maneschi 1998 for more details on topics covered in this entry).
They viewed trade as an indirect method of production, where the commodities imported can be more cheaply obtained by means of exports than by attempting to produce them directly. The French Physiocrats, David Hume and Josiah Tucker also speculated about the reasons for and advantages of an international division of labour. Hume praised contact with foreigners as providing new commodities whose acquisition offers an incentive to work effort and a source of novel technology that can be profitably imitated. In the Wealth of Nations Adam Smith supplied further insights into the efficiency advantages of free trade in terms of the eighteenth century rule, the variety of commodities that it makes available, and the impetus to greater division of labour and productivity resulting from the widening of the extent of the market that trade secures.Ricardo’s discovery of comparative advantage in 1817 can be said to have established international trade as the first applied field of political economy. Ricardo’s numerical example provided a quantitative expression for the gains from trade. John Stuart Mill made important additions to Ricardo’s model by proving the existence and stability of a trade equilibrium in the case of two countries and two commodities. Following the lead of Robert Torrens, Mill highlighted the importance of reciprocal demand in determining the terms of trade. Neither Ricardo nor Mill speculated on the causes of comparative advantage, which they vaguely attributed to technological differences among countries and, in Ricardo’s case, to a country’s “situation, its climate, and its other natural or artificial advantages”.
The first thoroughgoing attempt to unearth these causes was made in the early twentieth century by Eli Heckscher and Bertil Ohlin in terms of differential factor endowments among countries coupled with an identical technology of production. The strategy adopted by these and subsequent innovators of trade theory was to discover a factor that differs among countries, hold everything else the same, and build a theory based on this difference. As the French put it, c’est la difference qui compte (it’s the difference that counts). In addition to factor endowments, international differences were sought in terms of the availability of resources in some countries but not others, of tastes, technological expertise and human skills.Although comparative advantage plays no role in some models of the new trade theory, where the industries that countries adopt are immaterial as long as they end up specializing and reaping economies of scale, differences among countries emerge once they specialize in the commodities that no other country can profitably produce. These models display irreversibility or hysteresis in their production patterns, in contrast to the more traditional trade models where changes in resource allocation are assumed to be reversible. Some of the new trade theory models combine economies of scale with traditional comparative advantage, as when a capital-abundant country specializes more heavily in increasing returns industries than a land-abundant one. Models of the Ricardian and neo-Ricardian types, based on differential technologies and exogenously given wage or profit rates, and of the Heckscher-Ohlin type based on differential factor endowments, endure as significant explanations of comparative advantage in the world economy.
Despite the role that actual and potential comparative advantage can play in mobilizing a country’s resources for economic development, some economists and policymakers in less developed countries have regarded it with suspicion as a static concept that depends on exogenous variables such as the technology of production or a given endowment of factors of production.
Some displayed an openly critical attitude towards the theory of comparative costs, viewing it as a rationalization for a frozen international division of labour in which their countries are assigned the role of “drawers of water and hewers of wood”, or providers of primary products for the developed countries which end up garnering the lion’s share of the gains from trade. This raises the issue of a possible “imperialism of free trade” (Robinson and Gallagher, 1953) that has attracted the attention of economists, political scientists and policymakers in developed and developing countries.The drastic changes in the structure of world trade in the past half century, and the emergence of major new exporters such as China and the countries of the “East Asian miracle”, present economists and policymakers with the task of keeping up with the rapid evolution of comparative advantage in the presence of multinational corporations, and of phenomena such as outsourcing and the rapid transmission of technological knowledge across frontiers. Whereas most textbooks in international economics are still subdivided into “international trade” and “international finance”, entries in The Princeton Encyclopedia of the World Economy (Reinert and Rajan, 2009) add “international production” and “international economic development” to these as categories of equal importance. The limited scope of this entry did not allow the examination of these and many additional aspects relating to trade such as imperialism, unequal exchange and North-South trade relations. My aim has been to provide an introduction to the richness of the issues and models that have been proposed till now by international trade economists.
Andrea Maneschi