Comparative advantage in de-globalisation. Brexit, America First and Africa’s Continental Free Trade Area

Author:Elimma Ezeani
Position:Law School, Robert Gordon University, Aberdeen, UK
Pages:46-61
SUMMARY

Purpose This paper aims to examine the relevance of the theory of comparative advantage in the present realities of a world undergoing de-globalisation, that is, a retreat from closer integration. Design/methodology/approach This paper presents eight arguments that analyse the theory as posited by Adam Smith and David Ricardo and that theory remains the underpinnings for trade... (see full summary)

 
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Comparative advantage in
de-globalisation
Brexit, America First and Africas Continental
Free Trade Area
Elimma Ezeani
Law School, Robert Gordon University, Aberdeen, UK
Abstract
Purpose This paper aims to examinethe relevance of the theory of comparative advantage in thepresent
realitiesof a world undergoing de-globalisation, that is,a retreat from closer integration.
Design/methodology/approach This paper presents eight arguments that analyse the theory as
posited by Adam Smithand David Ricardo and that theory remains the underpinningsfor trade liberalisation
as regulatedby the World Trade Organisation (WTO).
Findings The arguments do not contend with the role and achievements of the WTO in the era of
globalisation. Rather, these call for an acknowledgement of the changing realities of countries in the face of
changesin the political,economic and legal landscapes, across the globe.
Originality/value This is an original submissionby the author.
Keywords WTO, Trade, Brexit, Comparative advantage, African union CFTA
Paper type Research paper
1. Introduction
The world is undergoing signicant political changes. These changes have a direct impact
not only on domestic economies but also on the future of trade relationships. Beyond the
political changes across the world, there are also changes in perception and value of trade
agreements from within developing and emerging economies that constitute majority of the
global trade polity. This paper in acknowledgment of these changes presents eight
arguments that re-examine the theory of comparative advantage with a view to adapting it
to present day realities. Section 2 revisits thetheory of comparative advantage as set down
by Adam Smith and expounded on by David Ricardo. Section 3 develops the afore-
mentioned eight arguments as a retreat from the simple interpretation, which have been
proposed in support of the modern rules-based system of trade under the World Trade
Organisation (WTO).The paper makes its conclusions in Section 4.
2. Theory in the arena of de-globalisation the retreat
As an economic theory, there is no understatingof the impact and relevance of the theory of
comparative advantage. The original expression on how countries can prot from trading
amongst themselvesaccording to Adam Smith is reected in his analogy:
What is prudent in the conduct of every private family, can scarce be folly in that of a great
kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can
make it, better buy it of them with some part of the produce of our own industry, employed in a
way in which we have some advantage. The general industry of the country [...] will not thereby
be diminished [...] but only left to nd out the way in which it can be employed with the greatest
JITLP
17,1/2
46
Received23 January 2018
Revised23 January 2018
Accepted23 January 2018
Journalof International Trade
Lawand Policy
Vol.17 No. 1/2, 2018
pp. 46-61
© Emerald Publishing Limited
1477-0024
DOI 10.1108/JITLP-01-2018-0005
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1477-0024.htm
advantage. It is certainly not employed to the greatest advantage, when it is thus directed towards
an objective which it can buy cheaper than it can make (Smith, 1776, pp. 478-479).
Put simply, Smiths view was that whereas one country may be able to produce more than
one good to its benet, where it will be cheaper to purchase one such good from another
country than to produce thegood itself, it is even more benecial and indeed prudent for the
rst country to purchase cheaply.
By the nineteenth century, another economist David Ricardo had expanded on Smiths
view and proposed what is now referred to as the principle of comparative advantage.
This principle holds that each country will benet if it specialises in the production and
export of those goods that it can produce at relatively low cost(Samuelson and Nordhaus,
1998, p. 689). In other words, each country will benet if it imports those goods which it
produces at relatively high cost(Samuelson and Nordhaus, 1998, p. 689). The WTO
embraced the postulations of Ricardo holding it out it as the single most powerful insight
into economics(WTOa,1990)[1]. It presents the case for open trade:
But what if a country is bad at making everything? Will trade drive all producers out of business?
The answer, according to Ricardo, is no. The reason is the principle of comparative advantage.
It says, countries A and B still stand to benet from trading with each other even if A is better
than B at making everything. If A is much more superior at making automobiles and only slightly
superior at making bread, then A should still invest resources in what it does best producing
automobiles and export the product to B. B should still invest in what it does best making
bread and export that product to A, even if it is not as ecient as A. Both would still benet
from the trade. A country does not have to be best at anything to gain from trade. That is
comparative advantage.
It is often claimed, for example, that some countries have no comparative advantage in anything.
That is virtually impossible (WTOb, 1990)[2].
The WTO is correct to the extent that it isimpossible to claim in absolute terms, that some
countries have no comparative advantage.The limitation to the assertion of the rules-based
system is that the impossibility must surely only refer to a wrong presumption on the
question of potential: thatis, that a country cannot produce anything. Every country with its
human capital, can by acting on itsinitiative develop opportunities and exploit its potentials
towards developing comparative advantage. At the level of actual trade capacity, if
countries do not engage activelyin building a trade capacity whether for goods or services,
no amount of economic theory can negate the evidence that for non-producing counties, a
comparative advantage is virtually impossible. Why is this so? This is because in practical
terms, and this is the crucial factor,some countries hardly have anything traded in the open
market because they do not produce those goods and services that others want, or are
encouraged, to buy. There are a myriad of factors for this but the main contributor is the
absence of dedicated investment (human and capital) in growing a sustainable trade
capacity for goods and services.
Modern life offers its own evidence of the challenges that confront a country in the
development of a comparative advantage. From an international perspective, political
upheavals, running conicts, wars, internal displacement, migration and economicux are
huge problems that impede investments in trade. Domestic and regional factors are also
signicant inhibitors to trade, often neglected in the global discourses on growing
comparative advantage.Poor education and skills capacity in the labourforce, bad economic
policies, insecurity, poor political relations across regions, inefcient bureaucratic systems,
Advantage in
de-
globalisation
47

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