I. The fundamentals of international trade
A. David Ricardo's trade according to comparative advantage

2. Results

    How well does the Ricardian model of comparative advantage apply to the real world?
    Much too simplistic
    --Ignores resources other than uniform labor => no domestic income distribution effects
    --Implies complete specialization

    Does have an appealing implication concerning a more complicated world: rich and poor countries should both be able to find products that they can profitably export (i.e., products for which they have a comparative advantage).
    Trade competitiveness depends on two things: (1) wages and (2) productivity
    Most of the quotes overlook the fact that both of these factors play a role

    You should tend to export an item if:
    your higher productivity more than offsets your higher labor costs or
    your lower labor costs more than offset your lower productivity

    In general: product cost = wage / productivity
        MC = W / MPL
    High productivity countries have high wages and can still compete, just not in everything
    Produce only garments; US wages = 20 x Malawi
    Produce only PCs; US wages = 40 x Malawi
    Put US wages anywhere between 20 and 40 x Malawi
    Example: US wages = 30 x Malawi wages

    US: Comparative Advantage in PCs, Malawi: Comparative Advantage in garments
    Common error: you can never predict cost advantages from wage information alone. You need productivity information too.
    Empirically, it doesn't do too bad. (Classic study: G.D.A. MacDougall, 1951. "British and american exports: a study suggested by the theory of comparative costs," Economic Journal. Results confirmed with later data)

    Return to initial quotes reflecting popular misconceptions:
Quote 5: "American factories ... can't compete with cheap foreign labor."
    Example: US vs Mexico

    ? How can we possibly compete with such high wages?
    But productivity margins vary across goods
    For most standardized mfg goods, Mexican workers in modern factories are just as productive as U.S. workers in modern factories. So we can expect lots of job switching to occur. That's what's going on in Quote 5--some factories will close

Quote 2: With NAFTA: "there will be a giant sucking sound going south."
    Was there a giant sucking sound?
    Nafta came into effect on 1/1/94
    US Dept of Labor provided special trade adjustment assistance (TAA) for workers displaced by Nafta: Total Nafta/TAA  certifications issued: 525K http://www.doleta.gov/tradeact/nafta_certs.cfm

What do you notice from this information?

    (1) Nafta-related job losses < 0.2% of total jobs lost
    (2) lots of job turnover = churning (>30 million jobs per year)
    (3) total jobs increased rather than decreased (1.5M per year

The same reasoning applies to

Quote 6: ""Forcing our middle class to compete with cheap foreign labor will result in systemic job loss ..."

    And the same argument works in reverse if we go in the opposite direction:

Quote 7: "No single economic stimulus initiative would do more ... resuscitate U.S. employment ... than a fair "buy American" program."

    We'll spend less on imports
    But as a result, foreign countries will have fewer $ to buy American products (and may retaliate as well), so exports will shrink also
    The net result: jobs will shift from exports back to import-competing industries.

    The long-run impact of trade policy is to change only the types of jobs, not the aggregate level of employment.

    Technology, not trade, is the main driver behind job turnover:
    Manufacturing jobs lost,1995 to 2002: United States: 11%; China 15%, Brazil 20%, world 11% (Drezner, 2003)
    Since lost jobs get replaced, the long-run effect is on job composition, not total employment

    The US is in fact a very successful exporter:

    the US = the world's __ exporter of goods and services.
        Other top exporters:

    US comparative advantage these days:
    agricultural products: wheat, soybeans
    high-tech products: aircraft, computers
    In general: knowledge-intensive and land-intensive goods
    Intellectual property (we earn royalties on our patents)
    Makes sense with our abundance of cheap land and well-trained workers

    US comparative disadvantage:
    Non-agricultural raw materials
    Established manufactured goods: steel, autos, textiles
    Consumer electronics: TVs, VCRs
    In general: low-skill intensive, labor-intensive goods.
    Makes sense with foreign abundance of low-wage workers.

    Quote 1: "Some countries are so poor that they don't have a comparative advantage in anything."

    US per capita GDP > 50 times the level in Malawi.

    Wrong to say you probably can't trade if you are poor. More likely that you're probably poor if you can't trade.

    Why do some countries have such low exports?
    Ex.: U.S. a large, diversified economy
    Consider countries that export less than the US: Export shares worksheet

    Characteristics of countries with low export shares:
        1. large and diversified domestic economy
        2. in conflict or crisis
        3. landlocked
        4. trade restrictions

    Poorest country in the world: Democratic Republic of the Congo
    Export share: 34% in 2005; 15% in 2010 -- again due to conflict

    Low trade is not due to lack of comparative advantage or poverty
    Due instead to ease of self sufficiency, or natural or political trade barriers

    How can some countries export more than they produce?

    (Quote 5) "American factories...can't compete with cheap foreign labor."
    (Quote 1) "Some countries are so poor that they don't have a comparative advantage in anything."

    Irony: the same people say both, but they are contradictory:
    The 1st => rich can't compete. The 2nd => poor can't compete either

You can figure out comparative advantage without knowing anything about a country's wealth, wages or productivity.

Example:

Even though all you know are prices in domestic currencies, you can figure out that Alemania has a CA in beer and Vinland has a CA in wine. No information here about wages or productivity