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International Mobility of Capital Doesn’t Weaken the Case for Free Trade

In my latest column for AIER I tackle the mistaken assertion – much-loved by protectionists – that comparative advantage and free trade ‘work’ only if capital cannot migrate across international borders. A slice:

[David] Ricardo implicitly assumed that the reason the Portuguese require less labor than do the English to produce both cloth and wine is that conditions in Portugal for the production of each of these goods are more favorable than in England. If capital could easily move from England to Portugal, cloth makers would relocate from England to Portugal where they could produce cloth using less labor. With wine and cloth now both produced in Portugal, these two goods would no longer be exchanged internationally for each other.

English textile mills would be idled and English textile workers would lose their jobs. But it doesn’t follow that capital mobility renders the English people as a whole ‘losers’ from international commerce. Nor does this mobility nullify the operation of comparative advantage.

Idle capacity and workers are assets that can be used to produce other products. Entrepreneurs would seize on England’s currently idled resources and workers to produce some other good, say, beer. If these entrepreneurs acted wisely, the English would soon produce beer at a lower cost than can the Portuguese. The English would trade beer to the Portuguese in exchange for wine and cloth.

The important point here is that international mobility of capital does nothing to eliminate the gains from specializing according to comparative advantage. This mobility might well change the distribution of comparative advantages across countries, but unless a country literally becomes depopulated, it will not eliminate comparative advantage or the mutual gains that arise from specializing and trading according to it. Even when capital is internationally mobile, therefore, tariffs erected to obstruct trade damage the countries that impose them.

Paul Craig Roberts, Oren Cass, and other protectionists have only one possible response, which is this: When capital moves from the home country to another country, the home country’s new comparative advantage is worse than the one it lost. But this response fails. If Portugal could produce both wine and cloth at a lower cost than can the English, Parliament would make the English people poorer, not richer, by compelling them to acquire cloth at prices higher than they would pay were they to purchase it tariff-free from Portugal.

Protectionists will retort that, while Portugal might currently have a comparative advantage over England at producing both wine and cloth, if Parliament protects English cloth producers – thus giving them reason not to relocate their operations to Portugal – they will improve their efficiency at producing cloth in England, ensuring that in the future England will have a comparative advantage at producing cloth. One year ago in this space, I examined this particular protectionist argument and found it severely wanting. But even if this protectionist argument were valid, it’s not an argument against comparative advantage or international capital mobility. Instead, it’s an argument that government officials can determine better than can markets which particular industries should thrive, and which should not, in the home country.


A final point is worth making if only to reveal more fully just how deeply confused protectionists are about economic reality. When protectionists such as Oren Cass insist that international mobility of capital renders free trade dangerous for America, their specific concern is that capital flees from high-wage America to lower-wage foreign countries. Yet these protectionists also incessantly complain about America’s ongoing trade deficits, apparently unaware that whenever a country runs a trade deficit capital is flowing into that country. And so even if, contrary to fact, the international mobility of capital renders free trade harmful to some countries as it continues to benefit others, because the United States has for nearly a half-century now run an unbroken stream of annual trade deficits, Americans are unambiguously among the beneficiaries.

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