From: fpf@taurus.gasco.com (Frank Ferguson x3584)
Subject: Comparative Advantage
Organization: NorthWest Natural Gas Company of Portland Oregon
Distribution: na
Date: Fri, 14 Aug 1992 21:45:34 GMT

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.

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.

On 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.

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.

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.

francis p ferguson