The theory of comparative advantage has always been a mystery to me. The theory says – quite logically – that if each country concentrates on what it is relatively best at, it will benefit everyone and everyone will get richer. But in real life, international trade more often leads to impoverishment than to rising living standards. So where is the problem?
It was only a few days ago – at a seminar with a left-wing economist – that I understood. For international trade not only brings efficiency gains, but also pressure for everyone to concentrate on what they are relatively good at. So if a large part of your economy is based on growing apples, you’re not going to move to making calvados, let alone food processing machinery. You will instead lose everything else and end up being a country of tree planting and fruit picking with minimal value added. And when one day the taste of your customers turns to plums, your economy will collapse completely.
If you connect differently developed areas by free markets, the inevitable result will be a steady increase in divergence, with some countries getting richer and others getting poorer. If anyone claimed after the fall of communism that economic integration would lead to a convergence of living standards between Eastern and Western Europe (for example), they were either totally incompetent or deliberately lying.
And some African or Latin American countries are much worse off.