From: cbbrowne@csi.uottawa.ca (Christopher Browne)
Newsgroups: sci.econ
Subject: Re: Comparative Advantage
Date: 15 Aug 92 04:25:10 GMT
Distribution: na
Organization: Dept. of Computer Science, University of Ottawa

In article <1992Aug14.214534.6206@gasco.com> fpf@taurus.gasco.com (Frank Ferguson x3584) writes:
>In his article: Free Trade or Comparative Advantage
>Robert Vienneau writes that Ricardian Comparative Advantage Theory
>attempts to demonstrate........
>
><deletions>.......
>
>>that the employment impact of the new free trade agreement is nothing
>>to worry about.....
>
><deletions>
>
>>This argument can be generalized to many countries, many goods, many
>>factors, and more flexible production conditions......
>  
><deletions>.......
>
> >This still does not mean that a sudden
>>removal or decrease in tariff barriers will not cause problems.  An
>>adjustment process must occur in which a country's whole structure of
>>production is transformed for specialization in the production of a
>>different set of goods.  Economists set themselves too easy a task if
>>they confine themselves to demonstrating that the sea is calm after the
>>storm has passed.  These transitional problems remain.  Capital goods
>>are not ectoplasm that can be instantly and costlessly transformed from
>>being appropriate to producing one set of goods to being appropriate for
>>another.  Nor can one casually assume the ultimate direction in which
>>the economy is headed is independent of the route it travels to get
>>there. 
>
>I believe that the transitional problems mentioned here are more
>serious than Mr. Vienneau seems to belive.  Comparative advantage takes
>little heed of the path through which trading nations evolve.  Were
>all parties to trade developed, industrialized nations (or at least
>highly developed agricultural producers), the movement in each nation
>to those comparatively advantaged areas of production would merely be
>moderately disruptive.  The long run goal of optimized global efficiency
>could be achieved, therefore, without serious short to medium
>term economic effects.  Such is not the case in the present.
>
>Increased free trade has had the effect of fueling development in 
>less developed (or developing) areas of the world.  Countries (particularly
>on the Pacific Rim) have achieved substantial growth through a shift
>in manufacturing activities away from the developed industrial nations
>to those offering more attractive wage costs.  This movement benefits
>everyone so long as the purchasing nations do not lose the ability
>to continue fueling this development through their consumer demand.

In that imports of goods from both Europe, Japan, Mexico, and the
"Pacific Rim" have not decreased, but rather increased, it is clear
that North America has NOT lost any of its ability to import goods.

>As a practical matter, the developed nations cannot expect to maintain
>their ability to consume these imported goods unless they produce an 
>equivalent stream of items which can be sold to the people in these 
>developing supplier nations (or other countries).
>As employment and manufacturing facilities
>increasingly locate in low wage, offshore centers, people in the developed
>nations will be required to accept lower wages and standards of living in
>order to compete against foreign goods and for investment.

It is interesting to note that once in a while it actually goes in the
OTHER direction.  A local company (Mitel) has moved manufacturing
facilities from Korea to Kanata (a suburb of Ottawa) because it was
actually cheaper to PRODUCE their products here (They were cheaper to
BUILD in Korea, but that's only part of the costs.  Transportation and
inventory costs are also part of the equation.). 

>One used to assume, of course, that highly capital intensive industrial
>jobs would be retained in the developed world because of their inherent
>efficiency advantage over the less capital supplied workers in the 
>developing world.  The tendency now, it seems, it for manufacturers to
>construct factories with the latest capital equipment in those developing
>countries.  This results in these developing nations having advanced 
>capital and low wages as well.

Is this a TOTAL capital system, or just the factory?

>Given the disparity between income and wage levels between the developed
>and developing world; and given the vast number of potential workers in
>the developing world's low wage pool, one would expect the process of
>lowering the industrial nation's workers wage level to go on for some
>time.  At the extreme, the wages of people in all nations would achieve
>the a common level, and given the current situation that would mean that
>wage earners in developed countries would see their wages fall to 
>equality with those of third world competitors.  
>
>Obviously, such a drastic outcome would take time.  In the shorter run,
>one might expect to see chronic "depression" in the more advanced nations 
>as consumers reacted pessimistically to falling (or at best stagnant) living
>standards.  These "depressed" conditions would tend to reduce demand for
>the output of the developing, trading nations, thus slowing the gains
>these nations make and the pace of development within their economies.

This of course contradicts the pattern that we have seen since WWII.
International trade has been increasing by leaps and bounds since that
time, and we have NOT seen chronic "depression."  Yes, there have been
recessions.  But if trade caused "depression," we would certainly have
seen it already.

>The probable effect of free trade, in the medium to long term, is to
>depress wages and living conditions in the developed nations and to
>(perhaps slowly) improve conditions in the less developed world.
>After perhaps several hundred years, the process of free trade and
>investment may well significantly improve global living standards and
>achieve the global efficiencies which original theorists said it
>would.  In the meantime however, in our and our childrens lifetimes
>(at least), the promise of free trade is very bleak.

One thing that people always seem to miss when they think of the "lost
jobs" (i.e. - those people replaced by cheaper Mexican/Korean/...
workers) is the fact that the money that is SAVED actually goes
somewhere.  It does not just "disappear."

Joe's Manufacturing Company moved its factory from Cleveland to Mexico
City, which had FOUR significant effects:

(1) They now have a labour bill of $5 million, rather than $30
million.  This results in a long-term savings with an NPV of $200
million.

(2) They invested $40 million (NPV) in a factory in Mexico City.

(3) They sold the factory here for $20 million.

(4) Sales increased by virtue of access to the Mexican market,
increasing profits by $5 million per year, NPV of $200 million.

Now, the employees happen to be out $30 million per year.  

The company is, on the other hand, ahead by $380 million dollars (in
the long term).

Guess what?  Joe, the owner, is going to be spending that money
SOMEWHERE.  It may result in any number of things.  Possibly this lets
him cut prices, making it easier for people to buy the products.
Maybe it lets him do capital expenditures to revitalize the factory in
Dayton.  Maybe he buys an extra Cadillac, or a Lear Jet.  Maybe it
goes out in dividends, or gets paid to bondholders.  The government
will get a piece of it, too.

Thus, while there is a LOSS of stimulation of $30 million in the
economy, there is a stimulation that offsets this, at least in part.

And we're ignoring the fact that more market means more sales, and
thus more sales staff.

Plus, there's going to be more transportation costs.  The transport
industry wins.

And who builds the "advanced manufacturing equipment"?  There isn't a
company in Mexico doing that, at this point.

Of course, the BIG question is, what is the alternative?  Joe could
wait, and see somebody from Europe install a factory in Mexico, and
take the opportunity that Joe COULD have taken.  They can take the
"windfall profits," and possibly undercut Joe's costs in Cleveland,
which would put Joe out of business.  In THAT case, both Joe AND the
Cleveland employees lose.

The only real alternative is to put a tariff on the Mexican goods,
which will move the price of Mexican goods up to the same price as
Joe's product.  Guess who wins?  Not Joe's employees...  Not Joe...
Not the unemployed Mexicans...  Just the government.  And is THEIR
spending going to be any better directed than Joe's spending?  Joe's
industry is "subsidized," but without the actual benefit of "subsidy."

-- 
Christopher Browne
cbbrowne@csi.uottawa.ca
University of Ottawa
Master of System Science Program