Pragmatic Pluralism 9: International Trade

This chapter provides a map through the complex jungle of economic theories. There are many different theoretical approaches, and each aspect of the economy has been analysed by a number of different ones. However, it is neither feasible nor productive for students to engage with every possible angle for every topic. Hence, the chapters on different topics, together with Building Block 8: Economic Theories, sets out an alternative approach: pragmatic pluralism. Rather than pursuing the extreme of either only focusing on one approach, or including every possible strand of thought for every topic, we propose a pragmatic middle ground: teaching a select number of approaches for each topic. In this way, it is possible to introduce students to the variety and diversity of economic thinking, whilst still having enough time and space to properly discuss each of the insights in detail with them.

Topics:

We live in a globalized world in which many products are produced in global value chains and shipped overseas to be sold to customers all around the world. What drives globalization, what forces counter it? And why are electronics produced in East Asia and many raw foodstuffs grown in Africa? Does everyone benefit from trade or does it systematically favour some at the cost of others?

Main opposing perspectives

■ Post-Keynesian economics: Absolute advantage

■ Neoclassical economics: Comparative advantage

Main complementary perspective

□ Structuralist economics: Unequal terms of trade

Additional perspectives and insights

+ Other: International trilemmas (you can’t have everything)

The two main theories on international trade were developed within classical political economy, respectively by Smith and Ricardo. Ricardo argued that only comparative advantages matter when nations trade. He did so, because he believed that Hume’s quantity theory of money showed how automatic exchange rate adjustments would arise in case of trade imbalances. Smith, argued, instead, that absolute advantages matter because international capital flows would prevent trade imbalances from being automatically corrected. Just like domestic competition and specialization happens on the basis of absolute advantages, Smith argued that international trade operates the same way because capital is both nationally and internationally mobile.

Most neoclassical economists, such Eli Heckscher, Bertil Ohlin and Paul Krugman, followed Ricardo with comparative advantage, while other economists such as Karl Marx, John Maynard Keynes and Roy Harrod, followed Smith with absolute advantage. Based on these different conceptions of what drives international trade, extensive and complex frameworks and models continue to be built. Some models focus on technological differences, others on variations in the abundance of production factors, and yet others on return to scale. 

The issue about whether comparative or absolute advantages are relevant might seem minor and abstract, but many ideas on international trade are based on one of these two ideas to come to conclusions about, for example, exchange rates, current accounts, free trade, and globalization. One recent example is whether one sees currency manipulation as crucial in explaining US-China’s trade imbalance, as the comparative advantage approach suggests, or whether one sees unequal real competitiveness and productivity as crucial driver, as the absolute advantage approach argues (Weber & Shaikh, 2020).

Contrary to the widely held view in rich countries, that they are already giving poor countries more than enough money through developmental aid, structuralist economists pointed out that the aggregate money flows are mainly the other way around. The terms of trade are systematically in favour of the rich countries because their export exists mainly of high value manufactured products, while those of poor countries are mainly low value agricultural products and raw materials. Instead of being simply the result of the economic efficiency and hardworking population of an individual country, the wealth of a country is largely a reflection of its power in respect to other countries. Poor countries, however, try to develop, industrialize and diversify their economies by pursuing protectionist policies, which help move from low-skill labour-intensive to high-skill capital-intensive sectors.

Other: Within international economics a few trilemmas, in which only two of three things can successfully go together, are debated. The first and most well-known, is generally referred to as the impossible trinity and describes the impossibility to have independent national monetary policy, free capital movement and fixed exchange rates all at the same time. Countries are thus forced to choose two of the three as their monetary policy will otherwise fail. Besides this international monetary trilemma, recently it has been argued that there is also an international financial trilemma. It is argued that it is impossible to have independent national financial policy, international financial integration, and financial stability simultaneously (Obstfeld, 2015). Finally, Dani Rodrik has argued that there is also an international political trilemma arising from the impossibility to have democracy, national sovereignty and global economic integration all at the same time. 

Chapters & Papers: 

Books: