The theory of comparative advantage suggests that total economic welfare in all countries is improved when countries focus on those industries where they have lower opportunity costs. The benefits of comparative advantage are reduced when domestic industries are subsidized or when foreign industries are subjected to import tariffs. Economists have been uncommonly uniform in advocating free trade policies for centuries.

Specialization and Gains from Trade

Comparative advantage applies to concepts of specialization and gains from trade to international actors. It emphasizes that opportunity costs matter. The basic argument can be summed up in the following argument: why don't NBA players mow their own lawns?

Ostensibly, NBA players are stronger and faster than their landscapers and could do it more effectively. However, NBA players can maximize their value and productivity by focusing on basketball rather than wasting energy with a lawnmower; the opportunity cost is too high. Instead, the basketball player and landscaper each specialize and trade, using money as an intermediary representation of their respective productivity.

Comparative advantage says that countries should behave similarly. Laborers in the United States have relatively high levels of education and relatively advanced capital goods; this makes them very productive. However, that doesn't necessarily mean that American workers should produce everything that American consumers need. Instead, maximum efficiency and output can be achieved by specializing in those areas with the lowest opportunity costs and trading with other countries.

Free Trade Policies

Free trade policies, in their truest form, advocate for a complete absence of import restrictions (such as tariffs and quotas) and for no subsidization of export industries. The proponents of free trade argue that restrictions on trade make all consumers, even Americans, poorer than they otherwise would have been.

The crux of the argument centers on the benefits of comparative advantage. When the laborers of one country specialize where they have the lowest opportunity costs, those industries achieve economies of scale and innovate. The increase in production causes prices to decline. American consumers see their real costs of living decline when cheap foreign goods are combined with cheaper domestic goods. Standards of living improve as a result.

This is an abbreviated and relatively unsophisticated representation of the debate between free trade versus protectionism. Despite this, it highlights the academic arguments in favor of open international markets.

Why Isn't there Complete Free Trade?

If economists – who rarely agree – are almost uniformly in favor of free trade, why doesn't the world have open trading between countries? There are many reasons, but the most influential is something that economists call rent-seeking.

Rent-seeking occurs when one group organizes and lobbies the government to protect its interests. Even if the producers of American shoes understand and agree with the free trade argument, they understand that their narrow interests would be negatively impacted by cheaper foreign shoes.

Even if laborers would be most productive by switching from making shoes to making computers, nobody in the shoe industry wants to lose his or her job or see profits decrease in the short run. This leads to calls for saving American jobs even though, in the long run, American laborers would be made relatively less productive and American consumers relatively poorer through protectionism.

  1. What are specialization and comparative advantage in international trade?

    Take a closer look at David Ricardo's revolutionary insight about specialization and comparative advantage and the benefits ... Read Answer >>
  2. How do tariffs protect domestic industries?

    Understand how tariffs are used by domestic government to protect its domestic industries, how they are levied, and whether ... Read Answer >>
  3. How do "factor endowments" impact a country's comparative advantage?

    Find out how factor endowments – namely labor, land and capital – affect a country's comparative advantage and how that advantage ... Read Answer >>
  4. How is an economy formed and why does it grow?

    Find out how an economy forms and why it grows, including the role that financial markets play and how productivity increases ... Read Answer >>
  5. Which factors can influence a country's balance of trade?

    Find out about the factors that affect a country's overall balance of trade and how it is used as an economic indicator. Read Answer >>
  6. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Answer >>
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  1. Free Trade

    Free trade is the unrestricted purchase and sale of goods and ...
  2. Free Trade Area

    Free trade areas are regions where member countries have signed ...
  3. Tariff

    A tariff is a tax imposed on imported goods and services.
  4. Specialization

    Specialization is a method of production where a business or ...
  5. Trade Liberalization

    Trade liberalization is the removal or reduction of restrictions ...
  6. Trade War

    A negative side effect of protectionism that occurs when Country ...
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