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There’s No Such Thing As Free Comparative Advantage

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Here’s a letter to a high-school history teacher:

Mr. Logan Blanton

Mr. Blanton:

Thanks for your e-mail.  You ask if “a foreign government can unfairly elevate its economy relative to the US by giving its exporters an artificial comparative advantage.”

No.

If by “artificial comparative advantage” you mean that the foreign government subsidizes the exports of firms that would otherwise be unable to compete successfully in global markets, then that government makes the people of its country poorer rather than richer.  It does so by directing resources away from firms in which those resources would be used productively – that is, used by firms that have real comparative advantages at producing for export markets – and into firms in which those resources are used wastefully – that is, used by firms that have comparative disadvantages at producing for export markets.

But perhaps you mean instead that the foreign government uses subsidies and other interventions to actually transform over time an industry into one at which that country comes to have a comparative advantage that it would otherwise not have.  If this is your meaning, then recognize that a government cannot transform a producer that today has a comparative disadvantage into one that tomorrow has a comparative advantage without also transforming a producer that today has a comparative advantage into one that tomorrow has a comparative disadvantage.  If, for example, Beijing were to arrange for Chinese auto producers, which have today a comparative disadvantage at producing and exporting automobiles, to have tomorrow a comparative advantage at producing and exporting automobiles, it will also have arranged for some other Chinese producers who today have a comparative advantage at producing and exporting – perhaps, say, Chinese textile producers – to become producers who tomorrow have a comparative disadvantage.

Just as there’s no such thing as a free lunch, there’s no such thing a free comparative advantage.  And there’s also no reason to believe that government officials possess the knowledge, the foresight, and the immunization from political pressures that would be required to artificially engineer comparative advantages in ways that stand any chance of enriching their citizens over time.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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