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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

-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

-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

-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

                 national tax rates have to be adjusted to the
                 lower existing rate if capital flight is to be

                 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

        * 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--------------------- 


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

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

c) consumer tastes are also fixed and independent of the influence
   of producers, because international consumer sovereignty

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

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.

                             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
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
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           

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

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
      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
                 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
                 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
                           AVERAGE ANNUAL GROWTH
                    G-5       METALS     CASH      FOOD      OIL
                 MANUFACTURES AND        CROPS    
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

M. Todaro, "Economic Development in the third world", Longman,1990