Getting Comparative Advantage Straight

by Don Boudreaux on March 20, 2023

in Myths and Fallacies, Trade

This essay by Curtis Ellis is a monument to protectionist fallacies. I’ll write several responses, each to address the most alluring of these fallacies. (For alerting me to Ellis’s essay, I thank Nick Waller.)

Editor, American Greatness


If there were an annual prize for Most Tendentious Argument, a likely winner for 2023 would be Curtis Ellis’s case for widespread protectionism in the U.S. (“An American System for America Prosperity,” March 18). Ellis weaves his case mostly from yarns of half-truths, misunderstandings, and downright fallacies.

Consider Ellis’s accusation that “today’s free-trade-über-alles lobby ignores the important premise underlying Ricardo’s theory [of comparative advantage]: he assumes capital will not cross national borders; it will stay in its country of origin.”

Ellis is correct about Ricardo’s assumption but incorrect about its implications. Contrary to Ellis’s conclusion, the validity and applicability of comparative advantage do not disappear, or even lessen, when capital is internationally mobile.

When explaining comparative advantage, Ricardo took as given the conditions that prevailed in the early 19th century, including the difficulty of investing capital abroad. The international immobility of capital kept countries with low worker productivity across all industries from receiving investments that would have raised that productivity. The result was that in some countries labor was less productive in all of its possible applications than was labor in other countries. This fact prompted many people to conclude that high-productivity countries cannot gain from trading with low-productivity countries. (Even today, of course, capital is not close to be mobile enough to equalize worker productivity across all countries.) By explaining comparative advantage, Ricardo exposed the error of this conclusion: Even if Portugal is more productive than is England at producing both wine and cloth, mutually advantageous trade is nevertheless possible if Portugal’s productivity advantage at producing one good (for example, wine) is greater than is its productivity advantage at producing the other good (cloth).

In other words, Portugal has a comparative advantage over England only at producing wine, while England has a comparative advantage over Portugal at producing cloth.

The upshot is that low-productivity England need not fear that it can’t ‘compete’ with high-productivity Portugal, and high-productivity Portugal need not fear that it can’t profit from trading with low-productivity England.

Increased international mobility of capital, while it changes the global pattern of comparative advantage, does nothing to nullify the logic of – or to destroy the existence of – comparative advantage. Only in a world in which every productive unit – every worker, firm, and country – can produce every good or service at the same cost as every other productive unit will there be no comparative advantage. And only in this practically impossible world there be also almost no incentive for any productive unit to specialize and trade. Obviously and thankfully, such a world is not ours.

As long as we witness people willingly specializing and trading, we can be certain that comparative advantage exists and, thus, ensures that the gains from this specialization and trade are mutual.

Donald J. Boudreaux
Professor of Economics
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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