- The Washington Times - Monday, March 8, 2004

The conflict between theory and reality has always driven debates over international trade.

This discussion has often been sliced between economists on the one hand, and historians and political scientists on the other. Economics is a social science, not a hard science, despite the disguise of graphs, equations and computer models.

Economics is filled with contrasting philosophical views of how the world should work. Nowhere is this more evident than in the current use of the theory of comparative advantage by those resisting any change in U.S. policy despite a $549 billion trade deficits in goods production. In the simplistic theory being used, countries are to specialize in particular fields and then trade with those who have specialized in complementary fields. The emphasis is on cooperation, not competition. Each trading state recognizes and accepts its place in the integrated global economy. Whatever happens in the market is assumed to be the optimal outcome for all concerned.

There is, however, very little in the history of international trade to support this concept. David Ricardo conceived his comparative advantage model at a time when even his native England was not yet a fully industrial nation. He thus drew heavily on pre-industrial concepts of a “natural” division of labor and specialization based on climate, raw materials and local artisan skills. One of the more famous examples of this approach is Adam Smith’s observation about the difficulty of growing bananas in Scotland.

Today, it is possible to manufacture products almost anywhere because technology is not limited by soil or climate like agriculture; transportation costs have dropped, capital is fluid and there are smart, skilled people everywhere.

Related to this is another critical fact the theory does not take into account. In a large and complex world, multiple nations can have a comparative advantage in the same field. They thus become rivals in the attempt to gain as large a share of world markets as possible.

The United Nations Conference on Trade and Development (UNCTAD) puts out measurements of “revealed” comparative advantage based on an index comparing the share of a given sector in national exports to the share of the sector in world exports (known as the Balassa formula).

According to this measurement, the United States, China, Germany and Japan all have a comparative advantage in miscellaneous manufacturing; the U.S., China, Japan and Singapore have comparative advantages in electronic components; the U.S., Germany and Japan have advantages in transportation equipment (mainly cars and trucks) and in nonelectrical machinery; the U.S. and Germany have an edge in chemicals; China and Germany both have comparative advantages in basic manufacturing, while Japan has just lost it advantage. In information technology and consumer electronics, China, Japan, and Singapore are rivals, with the United States having lost ground but still close enough to recover its advantage with a little effort.

Comparative advantage is a dynamic function, subject to change over time as rivals actively compete, trying to better their position and knock out the others.

One economist who understands this is William Baumol, economics professor emeritus at Princeton University and a former president of the American Economics Association. Mr. Baumol has argued, “A developed country’s interests require it to compete a vigorously as it can against other nations that are in anything like a comparable stage of development to avoid being hurt by their progress.”

America’s largest trade deficits are with countries that fit Mr. Baumol’s definition or rivals. Indiana University Political Science Professor William R. Thompson has noted from his studies of trade rivalries that “commercial challenges are aimed immediately at the leading commercial power.” Today, that target is the U.S., whose leaders have left it a sitting duck.

Ambitious nations are never satisfied with their “assigned” place in the system. The American Colonies revolted against a British Empire that did not want them to develop industry but simply maintain their comparative advantage in producing raw materials. Ricardo’s own classic “wine and cloth” example was meant to show Portugal should accept its role as a traditional supplier of wine and let England move ahead with the new industrial process of cloth production. This example was denounced as “free trade imperialism” by all nations that understood developing new technology and manufacturing capacity was the path to both prosperity and power.

China will not accept the U.S.-Japanese-German edge in automobile production and import vehicles. It will build its own auto industry, along with industries in aerospace, chemicals and steel. It will push forward with its shipbuilding industry, even though South Korea, Japan and the European Union are currently more advanced.

What moves international commerce are the same things that move business in general, cutthroat competition and a relentless desire to expand. But this contest effects national capabilities, which can shift the world balance of power with consequences far greater than those experienced by private enterprises. The term “trade war” is far more applicable than most people want to admit.

In this global competition, the United States is losing. A widening trade deficit and increasing penetration of foreign firms into key economic sectors indicate how rivals are running up the score. There is no field in which its domestic producers are without rivals, which means if national leaders adopt the attitude it doesn’t matter who wins, America will be defeated by those who do care about winning — a defeat that will inevitably move from economic weakness to political and military decline.

William R. Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council.

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