Explaining comparative advantage
In an extract from his new book 50 Economic Ideas, Edmund Conway considers the importance of comparative advantage built on the work of David Ricardo.
“Ricardo’s theory of comparative advantage is typically used as the backbone of arguments in favour of free trade – in other words abolishing tariffs and quotas on goods imported from foreign countries. It is claimed that, by trading freely with other countries – even those that, on paper, are more efficient at producing goods and services – one can become more prosperous than by closing one’s borders”
From supplier to buyer - China’s impact
Jack Ma (chairman of Alibaba Group) writing in the Financial Times reminds us of an important shift in trade flows between China and the rich advanced nations. Although growth in the Chinese economy is slowing down her export growth will continue to remain strong because of fundamental comparative advantages - but supporters of protectionism often fail to look at the other side of the ledger - the very fast growth of import demand into the Chinese economy - China is becoming a powerful global buyer and not just of mineral supplies from other developing nations.
“While there is a lot of competition from cheaper alternative markets, such as India, Bangladesh and Vietnam, nothing can beat China’s vast choice of products and suppliers. Over the years, Chinese suppliers have redefined themselves beyond pricing and sharpened their advantage in terms of quick turnround, good infrastructure, speed to market and compliance with international standards.....China’s role as top supplier, and now a leading buyer, is causing a new economic phenomenon that should be embraced rather than feared.”
High oil prices threaten Asian trade model
Ambrose Evans-Pritchard is on good form in the Telegraph today looking at how the spike in oil prices is theatening the very basis of the Asian trade model. In a world where distance now costs money - ever-rising freight charges are acting like an import tariff for countries whose export-led growth has been built on mass volume manufacturing and the ability to transport these products in huge bulk around the world’s shipping lanes at a relatively low cost.
“The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete. Asia’s intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin. Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded............globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.”
The rest of the article is here
The Fairer Sex
It’s been a great week for economics with plenty of macro issues in the news. Half term has also given me lots of time to think about the microeconomics of everyday life, inspired in part by reading Tim Harford’s The Logic of Life.
On Friday I rushed, fashionably late, into Rhyme Time at my local library. My daughter and I quickly joined in a rousing chorus of ‘The wheels on the bus’ and after a few lines I realised that my voice stood out, and not just because I am appalingly tone deaf; its defining characteristic was that it was probably at least two octaves lower than anyone else’s in the room. Of the thirty plus parents there, I was the only dad!
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