Economics Focus: Trade Disputes

Might the new wave of outsourcing to poor countries be different from trade in manufacturing, and make rich countries poorer? A paper by Jagdish Bhagwati, author of a recent book on globalisation, Arvind Panagariya, his colleague at Columbia University, and T.N. Srinivasan of Yale provides more help. They show, also using classical trade models, that outsourcing is no different in economic terms from the trade that has been going on since Ricardo's time. The standard results still hold.


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Abstract: 

WHEN David Ricardo, a 19th-century economist, criticised England's protectionist corn laws, he based his argument on the notion of “comparative costs”, these days called comparative advantage. The idea, in brief, is that all countries can raise their living standards through specialisation and trade. Even if one country can make everything more cheaply than every other it still gains from focusing on the goods in which its relative advantage is greatest—ie, in which it has a comparative advantage—and importing the rest. But trade in Mr Ricardo's day involved grain sent by ship from Germany, not computer code sent by e-mail from India. As the production of goods and, increasingly, services is “outsourced” or “offshored” to developing countries, many people in rich countries worry that this new development in international commerce will do them and their national economies more harm than good.