Economist. com Studving? Economist.comopinion Economics focus Trade disputes From The Economist print edition Nagging doubts about the benefits of globalisation, and a look at the evidence WHEN David Ricardo, a 19th-century economist, criticised England's protectionist corn laws, he based his argument on the notion of comparative costs these days called comparative advantage. The idea, in brief, is that all countries can raise their living standards through specialisation and trade. Even if one country can make everything more cheaply than every other it still gains from focusing on the goods in which its relative advantage is greatest -ie, in which it has a comparative advantage-and importing the rest. But trade in Mr Ricardo's day involved grain sent by ship from Germany not computer code sent by e-mail from India. As the production of goods and increasingly, services is outsourced"or offshored"to developir countries, many people in rich countries worry that this new development in international commerce will do them and their national economies more harm than good Does such trade defy Mr Ricardo s insights or does it lead, just like the old-fashioned kind, to greater overall prosperity? Two papers in forthcoming issues of the Journal of Economic Perspectives, both by greatly respected economists, confront this question. The first paper is by Paul samuelson a nobel laureate whose textbook has introduced students to economics for decades. He paraphrases the defence of free trade by economists John and Jane Doe spread widely throughout academia": Yes, good jobs may be lost here in the short run But still total net national product Correct economic law recognises that some American groups can be hurt by dynamic free trade. But correct economic law vindicates the word creative destruction by its proof [sic] that the gains of American winners are big enough to more than compensate the losers Of course, says Mr Samuelson, Ricardo was right. Take the example of a poorer, less productive economy and a richer, more productive one: say China and America. In the classical model, trade does indeed benefit both economies. Though there are both winners and losers, the winners gains exceed the losers'losses. Productivity gains in China's export sector raise total wealth in each country But, he adds, not so fast. Suppose the poor country spurred by technical progress, improves productivity in the rich countrys export goods: think of China's advances in semiconductors or India's in financial services. Then, says the theory, trade can turn entirely to the poor countrys advantage. The improvement in productivity in the poor country can reduce the price of the rich country's exports by enough to make it worse off, despite the increased availability of cheaper goods. It may be that not just some Americans lose, but that the country as a whole is worse off. m/Printer Friendly. cfm? Story ID=3195Economics focus Trade disputes Sep 16th 2004 From The Economist print edition Nagging doubts about the benefits of globalisation, and a look at the evidence WHEN David Ricardo, a 19th-century economist, criticised England's protectionist corn laws, he based his argument on the notion of “comparative costs”, these days called comparative advantage. The idea, in brief, is that all countries can raise their living standards through specialisation and trade. Even if one country can make everything more cheaply than every other it still gains from focusing on the goods in which its relative advantage is greatest—ie, in which it has a comparative advantage—and importing the rest. But trade in Mr Ricardo's day involved grain sent by ship from Germany, not computer code sent by e-mail from India. As the production of goods and, increasingly, services is “outsourced” or “offshored” to developing countries, many people in rich countries worry that this new development in international commerce will do them and their national economies more harm than good. Does such trade defy Mr Ricardo's insights, or does it lead, just like the old-fashioned kind, to greater overall prosperity? Two papers in forthcoming issues of the Journal of Economic Perspectives, both by greatly respected economists, confront this question. The first paper* is by Paul Samuelson, a Nobel laureate whose textbook has introduced students to economics for decades. He paraphrases the defence of free trade by “economists John and Jane Doe spread widely throughout academia”: Yes, good jobs may be lost here in the short run. But still total net national product ... Correct economic law recognises that some American groups can be hurt by dynamic free trade. But correct economic law vindicates the word “creative” destruction by its proof [sic] that the gains of American winners are big enough to more than compensate the losers. Of course, says Mr Samuelson, Ricardo was right. Take the example of a poorer, less productive economy, and a richer, more productive one: say, China and America. In the classical model, trade does indeed benefit both economies. Though there are both winners and losers, the winners' gains exceed the losers' losses. Productivity gains in China's export sector raise total wealth in each country. But, he adds, not so fast. Suppose the poor country, spurred by technical progress, improves productivity in the rich country's export goods: think of China's advances in semiconductors or India's in financial services. Then, says the theory, trade can turn entirely to the poor country's advantage. The improvement in productivity in the poor country can reduce the price of the rich country's exports by enough to make it worse off, despite the increased availability of cheaper goods. It may be that not just some Americans lose, but that the country as a whole is worse off. Economist.com Page 1 of 2 http://www.economist.com/PrinterFriendly.cfm?Story_ID=3195901 11/4/2004