One of the most influential and clear-cut economic concepts is “comparative advantage.” As significant and simple as this concept is, however, it seldom seems to inform public discussions of international trade. Almost everyone “knows” that we can’t compete with countries that have cheap labor—if we have free trade with such countries either wages will be driven down or many workers will lose their jobs. As Will Rogers once observed, “It’s not what people don’t know that is the problem, it is what they do know that’s not true.” Lee, Dwight
Understanding comparative advantage has the same effect on concerns about
free trade as water had on the Wicked Witch of the West. Free trade with other
countries (regardless of how much or little their workers are paid) doesn’t
increase unemployment or lower wages. Indeed, one of the best ways of
increasing the wages of U.S. workers is by allowing them to compete with
workers (even very low paid workers) in other countries through free trade. Lee, Dwight
The most simple case for free trade is that countries have different
absolute advantages in producing goods. One really good example that I found is that, because of differences in soil and climate, the United States is superior at producing wheat than Brazil, and Brazil is superior at producing coffee than the United States. Evidently both countries are superior off when Americans produce wheat and exchange a portion of it for some of the coffee that Brazilians produce.
But does this indicate that a country with an absolute advantage in the production of a good should at all times produce that good rather than import it? No, as the English economist David Ricardo first explained in the early 1800s. A country can have an absolute advantage in the production of a good without having a comparative advantage. Comparative advantage is what determines whether it pays to produce a good or import it.
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Free trade refers to the lack of limitations...