Ricardian Trade Theory Misappropriated by Corporations

What This Article Covers

  • A Misappropriated Theory
  • Is This What David Ricardo Was Talking About?
  • Understanding Fake Trade
  • Trade in the Future
  • How Globalization is Often a Scam


David Ricardo was the originator of the trade theory which is referred to as comparative advantage.

This book, Principles of Political Economy, introduces the theory of comparative advantage. According to Ricardo’s theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations. (Case & Fair, 1999: 812–818). Ricardo believed that wages should be left to free competition, so there should be no restrictions on the importation of agricultural products from abroad. Comparative advantage forms the basis of modern trade theory, reformulated as the Heckscher-Ohlin theorem, which states that a country has a comparative advantage in the production of a product if the country is relatively well-endowed with inputs that are used intensively in producing the product.- Wikipedia

A Misappropriated Theory

However, while Ricardo is often quoted by corporations and organizations that they pay to advanced their position (think tanks, major media outlets like Fortune, Forbes and the Wall Street Journal), what is often left out is how far current trade practices diverge from trade theory. Currently, businesses engage in trade to take advantage of the following:

  • Lack of environmental regulations in other countries
  • Lack of labor standards or safety standards in other countries
  • Transfer pricing (where a product is sold to a subsidiary and in a low tax country and then resold to another subsidiary in a high tax country, effectively removing the tax burden)
  • Use of the threat of relocating plants to drive labor concessions in high-cost countries

Is This What David Ricardo Was Talking About?

Ricardo discussed none of this, and most likely would have supported none of this. However, these “advantages” are driving a tremendous amount of trade. Engaging in business or setting up plants to remove oneself from regulation violates the spirit of having regulation in the first place, and furthermore reduces the leverage of countries in maintaining standards as businesses can threaten to move facilities to places with no regulation. Because of this, China is now an environmental catastrophe in the making. Maquiladoras in Mexico lack clean water for their workers, but it is not because of why you may think.

Understanding Fake Trade

It turns out that major US firms dump industrial waste containing heavy metals directly into their workers water supply. Secondly, as pointed out by Noam Chomsky, many of the activities that are listed as trade, would not have been considered trade in the past. Sending material over to Mexico for basic assembly to dump hazardous waste and then take the profits out of the product before it is brought back and sold to a subsidiary within the same company is not trade but an inter-company transfer.

Trade in the Future

Trade, a nice idea, in theory, has become an excuse and cover for unethical behavior by corporations. In addition to the direct negative ecological and human consequences of trade, “globalization” has become a catch-all excuse for companies to walk away from obligations and to further enrich their executives. One mindless business television programs, many individuals comment that in a global economy US executives are worth even more (hard to see how, as US executives are the most expensive in the world, in a real market, this would drive their rates down as it does for manufacturing workers).

How Globalization is Often a Scam

Conversely, we are told that globalization also means lower wages for normal American workers because “we have to be competitive in a global economy.” So which is it, does globalization increase wages or decrease them? The answer is it increases them for those that are protected from international competitions (executives, doctors, lawyers), but decreases it for those subjected to international competition (manufacturing workers, IT workers, etc..). Because it reduces the wages of normal or average Americans, it is even more popular with the wealthy.

Reducing the wages of average Americans and undermining the standards regarding workplace safety, clean drinking water, and public education and so on are the perennial interest of the elite all over the world, and in the US as well. Globalization is simply a handy tool to leverage toward that end.