Humans have been trading goods with each other for a long time, and comparative advantage makes it beneficial to do so. David Ricardo saw these benefits when he stated “This pursuit of individual advantage is admirably connected with the universal good of the whole.” Long ago this only occurred on a small scale, and even during Ricardo’s time there was far less trade than today. But current technological advancements have made it possible to trade with people halfway across the world. And although Ricardo died in the early 1800’s when there was far less global trade, the benefits of comparative advantage still hold. Fortunately, in our world today there is a large degree of free trade between nations which helps every participating country reap the benefits.

Many reasons to support free trade under the system of comparative advantage have been widely agreed upon by economists. Trade is beneficial to both consumers and producers. Consumers benefit because it enables them to buy better goods for cheaper prices than they could get from the home country, and producers benefit because competition influences them to innovate, increase their production, and improve the quality of their products. It also enables importation of goods that cannot be made in the home nation, further improving quality of life for the citizens. This would be most beneficial to poorer countries that cannot produce a wide variety of goods on their own. On the other hand, protectionism is very costly because it is used to keep businesses producing goods they do not have a comparative advantage in from going bankrupt. This means that the country’s resources are not being used to their full potential, and consumers must pay higher prices for the good.

Free trade is most beneficial to countries that have a developed financial sector, a strong government, and high levels of education. Indeed, it has certainly been helpful to the United States, which was already developed substantially in those three areas before starting to trade on a massive scale. The average United States tariff rate has decreased from 19 percent in the early 1900’s to less than 2 percent in 2004. At the same time, trade increased from less than ten percent of total GDP to almost a quarter, and real per-capita GDP increased by seven times. It is also estimated that trade liberalization over the past half century has increased average household income by about $9,000. NAFTA has helped the United States substantially, with over a third of export growth attributed to trade with Canada and Mexico in 2005. The Institute for International Economics believes that if the United States shifted to completely free trade and investment, U.S. income would increase by $500 billion annually.

Free trade is also helpful to poor developing countries. It is believed that protectionist policies are part of the reason for economic problems in sub-Saharan Africa. In the end of the 20th century, real income grew three times faster for developing countries that increased trade than for those that did not. Half a billion people have been raised out of poverty in the past few decades because of increases in free trade and changing markets. It also reduces the need for child laborers, which enables impoverished countries to increase their education levels. And it can lead to higher employment rates.

From this, it is evident that Ricardo was correct about comparative advantage and free trade, and we ought to thank him beyond the grave. Had he not discovered the importance of comparative advantage, the world might be a different place today, with less international trade and more poverty.

 

A Thriving World Guided by David Ricardo