Free Trade vs the World Bank
This concept of Comparative Advantage hits a big wall if we accept the World Bank’s study on what generates wealth.
If comparative advantage is about what comes natural to a given nation, it has to include what the study referred to as natural capital. This is only 40% of the wealth generation for a poor nation but drops to 20% for a rich nation and is 5% overall world wide. Produced capital accounts for only 18% world wide.
77% of wealth creation is from “intangible capital”. Intangible capital is the results of societies efforts to improve it’s self as a society (making us better people). It is legal, it is education. It is civil rights, it is (or was here) free education to including college, it is management of our environment, it is (or was) the enlightenment, it is adaptation of knowledge for the betterment of living life. None of these things are the results of nature. They are the results of will and money. The money being spread for the benefit of all.
So, we look at China or India and see that they have taken steps to improve their society via education and legal. The comparative advantage however is still more in the natural capital. What is their “natural” capital? It is low relative wages as compared to the rich nations. Is there any naturally comparative advantage? I think not. It’s not like they are selling us natural resources. What they are selling are the results of moving the know how and productivity generating tools (using a hammer drill to drill a hole in concrete vs a star drill and hammer) to their countries. Their natural capital is in their labor.
This creates a dilemma for the free traders who think it is only a matter of stuff and things in exchange for currency. If 40% of poor nations wealth generation is natural capital, and produced capital is 18% of the wealth generation, then that leaves 42% of China’s wealth generation intangible. This is competing against us with numbers that most likely look closer to the world overall, 5% natural, 18% produced, 77% intangible. Being that our advantage is our society, and our society was created by creating a better distribution of wealth, then how are NAFTA, CAFTA etc. without emphasis on labor, rights, and environment promoting our comparative advantage?
This dilemma of promoting trade agreements on only the 2 tangible sectors of the 3 sectors that drive wealth creation ignoring that a rich country as moved vastly beyond the ratio of the 3 sectors to where investment in ones society is the dominating sector by far, is what is wrong with applying models that discuss comparative advantage as some kind of sliding scale based on only the tangibles. Wine vs wool was it?
We’re loosing the trade wars as a nation because we’re writing trading agreements to our partners advantage. That’s what comes of letting people who only think about business, do the trade agreements. They only think in terms of the natural capital and created capital. It is why the models are wrong when they say there will be or has to be “losers”. Bull crappy on that.