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

• Pages: 46-61
• DOI: https://doi.org/10.1108/JITLP-01-2018-0005
• Published date: 01 April 2018
• Date: 01 April 2018
• Author: Elimma Ezeani
• Subject Matter: Strategy,International business,International business law,Economics,International economics,International trade

Comparative advantage in

de-globalisation

Brexit, America First and Africa’s 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 significant 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 profit from trading

amongst themselvesaccording to Adam Smith is reflected 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 find 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, Smith’s view was that whereas one country may be able to produce more than

one good to its benefit, where it will be cheaper to purchase one such good from another

country than to produce thegood itself, it is even more beneficial and indeed prudent for the

first country to purchase cheaply.

By the nineteenth century, another economist David Ricardo had expanded on Smith’s

view and proposed what is now referred to as the “principle of comparative advantage”.

This principle holds that “each country will benefit 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 benefit 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 benefit 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 efficient as A. Both would still benefit

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 conflicts, wars, internal displacement, migration and economicflux are

huge problems that impede investments in trade. Domestic and regional factors are also

significant 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, inefficient bureaucratic systems,

Advantage in

de-

globalisation

47