Are our economic problems matters of bad theory or bad practice?
More than two centuries ago, British economist and Parliament member David Ricardo laid siege to the longstanding notion that nations were better off exporting more than they imported, classical mercantilism. His theory of comparative advantage, instead, became the reigning view. The result: enormous growth in trade and globe-wide enrichment.
Now, some on the right want to scrap that theory. Donald J. Trump would bludgeon trade with tariffs and attempt to boost domestic production by pushing other countries to set up factories in the U.S. And well-schooled critics such as Oren Cass would toss out the Ricardo model altogether.
“The theory works great in the classroom, but in reality it wasn’t just T-shirts that ended up going overseas,” Cass says of the notion that countries should specialize in what they do best, thus enriching us all. “The most sophisticated industries have left too. The United States ran consistent trade surpluses in advanced technology products until China joined the World Trade Organization. In 2002, that surplus flipped to a deficit that in 2023 exceeded $200 billion, with the nation importing more than $3 of advanced tech products for every $2 it exported.”
Let’s kill the old order and bring in the new, as the French once said and he seems to be saying. Then we’ll wind up with, what, a new Napoleon? Perhaps more Napoleons (or Trumps) across the globe?
Yes, China – practicing a form of mercantilism – has enriched itself enormously since the 1980s. Its exports have far exceeded its imports, as it has bested much of the world, first in low-price production and, more recently, in many areas of high-tech. There is good reason now that Elon Musk wants to build an AI center in the country — the country’s brainpower is immense.
And it’s clear that much of U.S. manufacturing has suffered as production of everything from Cass’s T-shirts to cars has grown overseas and in neighboring Mexico and Canada. Jobs in the sector peaked at 19.6 million in mid-1979. They now stand at below 12.9 million. (Is it any wonder that Trump, slamming global trade, won so many votes in dead-factory communities, even if his tariffs are likely to deal another blow to such supporters?)
So, comparative advantage brings curses as well as blessings. Well, duh.
Lots of stuff is cheaper worldwide – and there is much more of it – but there’s no doubt that some countries and sectors pay the cost. Indeed, for all the benefits Chinese mercantilism has brought much of the country – and for all the impoverished Chinese villagers who have been helped – China has penalized millions of its citizens by failing to develop a more import-welcoming consumer economy. Yes, the Chinese approach has eliminated extreme poverty, but per capita GDP there at less than $13,000 remains a far cry from the U.S. level of $86,600. China has also developed exceptional income inequality, even as relative poverty hasn’t disappeared.
Cass, in his early 40s, may not recall that we’ve seen parts of this mercantilist movie before. Free-trade advocate Clayton Yeutter, a Republican who opened world markets for Presidents Reagan and Bush, contended with Japanese trade barriers in the 1980s and ‘90s. Protectionism was rife in the U.S. at the time and the great fear was that Japanese tech would hobble us (and well-heeled Japanese would buy up all our real estate). In fact, our trade deficit with Japan has shrunk and Silicon Valley seems to be keeping us pretty competitive in tech.
So, should the U.S. follow the Chinese model? Should it make more T-shirts, as well as cars, solar panels, etc? Would making iPhones in California (or Michigan) really help us overall? And will the self-styled “tariff man’s” threatened 25 percent tariffs on Canada and Mexico help us and them?
To be sure, Cass has a point that the real-world operation of comparative advantage has problems. But that’s because governments, such as that of China (or as that of tariff-happy Trump) don’t want to let free trade flourish. Instead, they meddle with it, creating all sorts of imbalances. Recall the huge farmer bailouts of Trump’s first term, a consequence of his trade war battles.
But does meddling mean that the theory is off? Does it not, in fact, make the theory of frictionless trade even more useful, more compelling? Is it not the proof that we’re better off overall when comparative advantage is our north star and that most of us suffer when it’s tampered with? Indeed, the problem seems to be less one of economics and more one of politics.
Yes, such trade brings costs – often searing human ones — to high production-cost countries, as they see competitors rise. A friend, Peter Coy of The New York Times, bemoans the withering of trade adjustment assistance in the U.S. , which may in part account for the Trumpian successes. We need a robust system of such aid, he argues, because it “compensates workers, firms, farmers and communities for damages related to trade, such as job losses caused by offshoring or competition from cheap imports. Workers, for example, get supplemental unemployment insurance benefits, job training and help with job search and relocation.”
One could argue that such aid to those displaced by trade is meddling of a different sort. But is aid to one’s citizens in need not one of the more useful functions of government? Has that not been a value since at least the New Deal, the program that saved American capitalism?
Indeed, capitalism by its nature creates winners and losers. Outdated technology goes the way of the buggy whip. That’s the nature of a competitive and innovative system in which all players can leap ahead of others, given capital and brainpower. And countries, including the U.S., need to work hard to keep up.
In his New York Times opinion piece, “What Economists Could Learn From George Costanza,” Cass argues that rigidity in economic circles is what is keeping theorists from developing a successor to Ricardo’s views. “Few things are harder to change than the minds of experts who have staked their reputations on a particular theory,” he holds. And it’s no doubt true, as my old economics prof observed, that economics advances from funeral to funeral.
Still, Ricardo’s revolutionary idea has endured for good reason. One has only to look around the globe and see how billions have been helped by trade to find proof of that. For all his criticisms, Cass doesn’t seem to be offering an alternative explanation for such successes. Perhaps that will come in a forthcoming commentary. Or, perhaps there is none.
