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 in order 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 in order to drive labor concessions in high cost countries
Is This What 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 in order to remove oneself from regulation violates the spirit of having regulation in the first place, and furthermore reduces the leverage of counties 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. It turns out that major US firms dump industrial waste containing heavy metals directly into their own 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. So, sending material over to Mexico for basic assembly in order 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 2010 and Beyond
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). 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 of the world, and in the US as well. Globalization is simply a handy tool to leverage toward that end.
“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.”
The “human consequences” of trade:
The problem is that governments of countries with developing and emerging economies, were there are people that want to eat, probably don’t recognize that “trade” and “globalization” further enriches fat-cat executives. What they do recognize is that trade and globalization achieve sustainable economic growth that absolutely brings an increase in living standards to poor countries.
Because of this economic fact, governments everywhere compete to attract foreign investment to their country. The numbers support this: in 1990, foreign direct investment (FDI) was worth less than 10% of world GDP. In 2006, FDI was worth about 25% of world GDP.
While there will always be “unethical” behavior, you should realize that overwhelmingly things like progress, economic expansion and growth, increases in production, and employment opportunities, are a good thing.
Not to completely explode the validity of your piece, but in general, foreign multinationals pay 40% higher in average wages than local firms, and the differential is higher in low-income countries of Asia and Latin America. (citation below)
http://www.oecd.org/dataoecd/53/8/40940418.pdf