Trade and trade offs:

It was then really interesting to learn about the Ricardian model of comparative advantage. It gives an example of wine and cheese industries in two countries A and B. When they start trade with each other, finally each country would specialize in one of these two industries. A beautiful diagram shows how nations are always better off because of trade. This argument can be extended to ‘n’ nations and eventually we concluded that globalization is the greatest thing that can happen to all of us. However it has now started appealing to me (based on recent events and observations) that there are some broad assumptions which we missed out when we learnt this model:

1. Labor movement across industries is easy: Wine makers can move to cheese industry and cheese producers can produce wine. How far is this generalizable? Can a person with 30 years of experience in manufacturing can learn Java and move to a software company? Even if he is capable of learning, will any one recruit him.? Leave that extreme case. An MBA with just 2 yrs experience in IT will find it extremely extremely difficult to move to Finance though he had specialized in Finance and scored really high. In an ideal world, this guy should still have been given the job with a lower salary that compensates for his inexperience. But no company would do it. Ideally if this happens, there will be 100% employment. Oops, that is another assumption of Ricardo model. In real world there is huge inflexibility in labor movement and 100% employment just doesn’t happen.
2. Over all social welfare ONLY matters: Take an example. An Indian IT company starts exporting software and in turn we import cheaper clothes. If the domestic productivity ratio of software to clothes is 5:1. Now for every employee added to software industry 5 people in the textile industry lose their job to the imports. Ricardo makes a judgment that over all the country’s pie becomes bigger though trade creates winners as well as losers. When a country moves up in value chain, the effect (livelihood and basic needs) on the losers (textile workers in this example) is much larger than the gain produced for the winners (who may buy a luxurious good).
3. Taxation and redistribution is efficient: Economists would say that trade creates bigger pie and so through proper redistribution of wealth from winners to losers, people receive more than what they would have without trade. The society as a whole benefits. How easy is the distribution? Who identifies the losers (direct as well as indirect)? How long would the redistribution happen? Hard questions. And in all practical sense, this doesn’t work.
4. No politics, only economics: Lets go back to our wine and cheese example. Country A specializes in wine and B in cheese. People in respective countries switch industries and they live happily. After few years, there is a political problem or a natural disaster or cows don’t produce enough milk ;) (a supply shock) in country B and it doesn’t produce enough cheese even for itself. Ideally consumers either in A or B can consume whatever is produced based on their buying capability. But B bans exports to help its citizens! Now what will people in A do? They cant start producing cheese as they have sold off the equipments, lost all knowledge to produce cheese. Even if they start again now, it may take few years to produce on a large scale. If this is the case for trade between just 2 countries, imagine a truly globalized world. Every day your purchases would be subject to price fluctuations due to some thing happening in a country whose name you wouldn’t even have heard before. Does this sound familiar? Remember the recent global food crisis and the effect it has everywhere. The globalized world can be compared to a human body with each part specializing in some function. When one important part fails, the whole body can go to stand still.

This means that there are some trade offs with trade and globalization. Its upto the individual nations and societies to decide what is good for them. The models (in fact economists) aren’t necessarily the best judges. And why didn't we ask these questions when we were taught Global economics? That is a different question.