THE POVERTY OF INTERNATIONAL TRADE THEORY (Notes by Róbinson Rojas)(1998)
Since David Ricardo's "Economic Principles" were published in 1817,
international trade theory has been based on his main tenets, even
when "fine tuned" by Heckschen, Ohlin and Samuelson (trying to build
a neo-classical framework for the theory), Leontieff and Vernon
(attempting the introduction of the concept of technology), and
Krugman (oligopoly theory). By and large, with fine tuning and all,
still the three basic assumptions of the classical trade theory are
the main conceptual structure of the model. That is, capital flows,
technology transfer and labour migration are excluded from the model.
From above:
A.- factor immobility within the borders of a nation-state
is the most crucial assumption of the model;
B.- comparative advantage is determinated before hand, that
is before the opening of an economy to trade, according
to the static comparative approach, dividing economies
into capital-abundant and labour-abundant.
(the above leads to the historical act of "creating"
situations of comparative advantage via exogeneous
agents such as colonization, imperialistic behaviour,
neo-colonization, neo-imperialism, and eventually
"dependent capitalist development" as defined by
Latin American theories of dependency)
C.- nation-states are the only actors in the international
economy, and thus, national economies are conceptualized
as "black boxes" inside which factors of production are
combined in perfectly competitite markets. Because of this
the model doesn't consider firms as economic agents, and
trade is reduced to a relationship among nation-states.
Of course, the real world economy doesn't have any of the above
features assumed by the classical theory.
In contemporary world economy trade flows, capital movements,
inward and outward foreign direct investment, and technology flows
are component parts of the same system. The system is dominated by
transnational corporations, and not nation-states.
Therefore, the very nature of the world economy is the existence of
close interactions between foreign direct investment, foreign
speculative investement, trade, technology transfer, finance and
labour movements. Unlike comparative advantage theory assumes,
world-wide economic integration is no longer built solely on more
intense trade flows among countries. IT IS NOW THE RESULT OF A
MULTIDIMENSIONAL AND COMPLEX SET OF ASYMMETRIC RELATIONS:
-industrialized countries are connected to other industrialized
countries through inward and outward flows of trade, foreign
direct investment, speculative investment, and technology.
-less developed countries are connected to industrialized countries
mainly through trade, while foreign direct investment, speculative
investment, technology flows and financial flows are managed from
abroad to meet the needs of discret economic agents (transnational
corporations).
-thus, in contradiction with the old theory, factors of production
are increasingly crossing national borders.
-also, foreign direct investment is becoming a crucial determinant
of a country's pattern of specialization. Therefore, "comparative
advantage" now is created by foreign direct investment to serve
foreign direct investment, creating dramatic economic effects
within the "black box".
-decisions regarding the location of new activities, or the
relocation of new ones, are taken by transnational corporations.
-the funding of economic activities (in both industrialized and less
developed countries) is made by transnational banks operating outside
the jurisdiction of central banks, which creates, from time to time,
dramatic macroeconomic disequilibria.
-more than 40% of international trade consist of intra-firm flows.
Thus, prices of goods and services that are channeled from one
foreign affiliate to the other are not determined by the market
( as assumed in the classical theory of trade ).
-specialization in production is the result of transnational
corporations' decisions to locate some of their activities
abroad.
-gains from competitiveness benefit transnational corporations and,
sometimes, as a residual effect, some firms in the host countries.
-oligopolistic competition is the rule. Of course, any undergraduate
is aware that an oligopolistic market does not produce the
conditions for an optimal allocation of resources.
-more importantly, economic policies tend to fail because of the
increasing asymmetry that exists between the globalization
process and the national interest.
Examples: with capital mobility, the targets of monetary
and fiscal policies can no longer be reached with
certainty. The power of transnational banks, when
confronted with policies of the central banks, is
inmense.
national tax rates have to be adjusted to the
lower existing rate if capital flight is to be
avoided.
by borrowing abroad, transnational corporations
are able to avoid paying higher interest rates for
financing domestic investments.
- the rationale for industrial policy in any nation-state is to
strengthen national firms, but there are mounting obstacles
arising from the rationale of globalization both for transnational
corporations and the local firms doing business with them:
* more and more transnational corporations are moving
towards a global approach, which means that investment
decision-making is less local market-oriented than in
the case of a multinational strategy (trying to jump over
trade barriers), and more world-market oriented, which adds
to the effect of economic fragmentation in the host
economy.
* foreign affiliates located in different countries tend to
be specialized, and flows among them are INTERNALIZED to
reduce transaction costs, which makes transfer pricing
easier, damaging even more the local economy's balance
on current account.
* as a result of the above, imports of home countries consist,
in part, of imports produced abroad by the affiliates of
the home country's transnational corporations.
* also, an increasing share of the turnover of these
transnational corporations is generated by its foreign
affiliates selling in the markets of host countries, or
exporting to third countries, including the home country.
* by and large, in the 1990s, countries are no longer in
a position to screen and control potential investors as
was the case in the past decades. Now, big companies
select countries on the basis of their location-specific
comparative advantages...but that "comparative advantage"
is not the Ricardian one, but the transnational corporation
own international competitiveness. Once again, is a
comparative advantage "created" by the powerful in the
world of the weak to meet the needs of the powerful. Like
the set of comparative advantages created by powerful armies
during the period of colonization by Western European
nation-states, Japan and the United States from XV to
early XX century, today, late XX century, the historical
process of creating comparative advantage is being done
by the not with powerful armies, but with huge amounts
of capital owned-managed by transnational corporations.
--------------------------RRojas Research Unit/1997---------------------
TRADE, DEVELOPMENT AND THE THEORY OF COMPARATIVE ADVANTAGE
Drawing from M. Todaro (1990), there are five questions related
to international trade:
1) How does international trade affect the rate, structure and
character of LDC economic growth?
2) How does trade alter the distribution of income and wealth
within a country, and
among different countries or
groups of countries?
3) Under what conditions can trade help LDCs achieve their
development objectives?
4) Can LDCs by their own actions determine how much and what they
trade?
5) In the light of experience, what is best
a) outward-looking policies
b) inward-looking policies, or
c) a combination of both (in a regional economic
cooperation agreement)?
Neo-classical free trade model will provide a general answer
stating that if capital-abundant societies specialize in
capital-intensive production for exports and labour-abundant
specialize in labour-intensive production for exports, trade
among them will
1) be an important stimulator of economic growth, because trade
enlarges consumption, increases world output, and provides
universal access to scarce resources;
2) tend to promote greater international and domestic equality:
equalizes prices
rises real income of trading countries
rises relative wages in labour-abundant
countries and lowers them in capital-
abundant countries
3) help countries to achieve development through specialization
Neo-classical trade theory will argue that "international prices
and costs of production determine how much a country should
trade", and, therefore, outward-looking strategies of production
are neccesary. Of course, if international prices and costs of
production are mainly the business of transnational corporations
and not domestic economies, then the neo-classical argument will
be valid only for the welfare of transnational corporations and
not the host countries.
Neo-classical trade theory assumes perfectly competitive market
in both the international market and each individual domestic
market, and, because of that, builds the model upon the
following assumptions:
a) all productive resources are fixed in quantity and constant in
quality across nations. They are fully employed and there is no
international mobility of productive factors.
( this assumption is critical, because if there was mobility of
productive factors, then "comparative advantage" will be a
product of market forces competing, which will mean that
powerful capitals would create comparative advantage for
them all the time. Thus, eventually, there will be
comparative advantage only for transnational corporations.)
b) technology is fixed or similar and freely available to all
nations.
c) consumer tastes are also fixed and independent of the influence
of producers, because international consumer sovereignty
prevails.
d) within national borders factors of production are perfectly
mobile between different production activities, and the economy
as a whole is characterized by the existence of perfect
competition. Because of the latter there are no risks and
uncertainties.
e) the national government plays no role in international economic
relations, so that trade is strictly carried out among many
tiny and anonymous producers.
f) trade is balanced for each country at any point in time and
all economies are readily able to adjust to changes
g) the gains from trade that accrue to any country benefit the
nationals of that country (the theory excludes the possibility
of transnational corporations being the main producers for
export in export-led economies)
Apart from the possibility that the above assumptions are either
extremely naive or extremely dishonest, some simple statistics
prove that none of the predictions of the theory is correct.
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TABLE 1
Trade as % Real GDP per capita
of GDP as % of ind. cts.
avg. GDP per capita
1960 1990
17 less developed countries 33% 50 44
48 less developed countries 17% 10 5
61 less developed countries 15% 11 8
Chile 30% 62 35
Brazil 7% 21 33
South Korea 29% 15 47
Papua New Guinea 36% 21 12
Nigeria 31% 12 8
Turkey 19% 27 32
Sri Lanka 30% 21 17
All less developed countries 20% 17 15
Least less dev. cts. 14% 9 5
Sub-Saharan Africa 23% 14 8
source: World Tables, World Bank, several years
Data processed by Dr. Robinson Rojas
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TABLE 2 Annual average growth rate (percent)
countries GDP EXPORTS as % of GDP
1970-80 1980-91 1970 1991
40 low-income 4.5 6.0 21 28
42 lower middle-income 5.5 2.7 14 26
21 upper middle-income 6.1 2.1 13 18
20 OECD 3.1 2.9 13 19
source: World Development Report 1993
Data processed by Dr. Robinson Rojas
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TABLE 3 Internal distribution of income
quintiles from poorest to richest
country year 20% 20% 20% 20% 20% richest 10%
Chile 1968 4.4 9.0 13.8 21.4 51.4 34.8
1989 3.7 6.8 10.3 16.2 62.9 48.9
1994 3.5 6.6 10.9 18.1 61.0 46.1
Brazil 1972 2.0 5.0 9.4 17.0 66.6 50.6
1989 2.1 4.9 8.9 16.8 67.5 51.3
Mexico 1977 2.9 7.4 13.2 22.0 54.4 36.7
1984 4.1 7.8 12.3 19.9 55.9 39.5
1992 4.1 7.8 12.5 20.2 55.4 39.2
source: World Development Report, various years
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Drawing from Todaro (1990), the real effects of trade, in
conditions of international capital domination of the world
economy (conditions of neo-colonialism), are that "the
principal benefits of world trade have accrued disproportionately
to rich nations and within poor nations disproportionately to
both foreign residents and wealthy nationals".
The above reflects the highly inegalitarian institutional, social
and economic ordering of the global system in which a few powerful
nations and their transnational corporations control vast amounts
of world resources.
"Trade, like education, tends to reinforce existing inequalities".
In a word, as expected from the internal dynamics of the
capitalist system, "any initial state of unequal resource
endowments will tend to be reinforced and exacerbated by the very
trade that these differing resource endowments were supposed to
justify".
The following figures were calculated by GATT, when it was going to
be replaced by the World Trade Organization, to illustrate the
benefits of the new free trade agreements:
Benefits from the extra trade generated
by the new agreements. In US$ billion
1991 prices. Up to the year 2002
Total extra trade in the world 211.8
of which
Australia 1.6
Canada 5.9
European Union 78.3
EFTA 34.2
Japan 35.5
United States 26.3
TOTAL OECD 181.8
Total rest of the world 29.9
Benefits per capita:
OECD US$ 260
Rest of the World US$ 7
source: GATT
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From: GLOBAL ECONOMIC PROSPECTS AND THE DEVELOPING COUNTRIES,World
Bank, World Bank, 1996
Commodity prices and manufactured goods prices. Index
G-5 unit value index of manufactures*
1965 100
1970 114
1975 205
1980 327
1985 314
1990 455
1994 486
Commodity price indexes
Metals Cash
and Crops Food Oil
Minerals
1965 100 100 100 100
1970 105 97 113 100
1975 166 155 194 850
1980 283 300 326 2,400
1985 210 198 255 2,100
1990 244 227 213 1,667
1994 207 250 270 1,167
Commodity price indexes as % of G-5 manufactured goods index
Metals Cash
and Crops Food Oil
Minerals
1965 100 100 100 100
1970 92 85 99 88
1975 81 76 95 415
1980 87 92 100 734
1985 67 63 81 669
1990 54 50 47 366
1994 43 51 56 240
__________________________________________________________________
CENTRAL TENDENCY FOR VARIATIONS- 29 YEARS
AVERAGE ANNUAL GROWTH
G-5 METALS CASH FOOD OIL
MANUFACTURES AND CROPS
MINERALS
------------------------------------------------------------------
1965-1994 5.6 2.5 3.2 3.5 8.8
------------------------------------------------------------------
1965-1980 8.2 7.2 7.6 8.2 23.6
------------------------------------------------------------------
1980-1994 2.9 -2.2 -1.3 -1.3 -5.0
__________________________________________________________________
__________________________________________________________________
* United States, Japan, Germany, France, United Kingdom
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M. Todaro, "Economic Development in the third world", Longman,1990
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