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Deconstructing the Theory of Comparative Advantage

Reinhard Schumacher

Abstract

This article critically examines the theory of comparative advantage, which underlies the wide-spread support of worldwide trade liberalisations. Both the classical and neoclassical formulations of it are shortly discussed and its essential assumptions are scrutinised. These include the international immobility of capital and labour, balanced trade, the existence of an adjustment mechanism which is responsible for the transformation of comparative production advantages into absolute price advantages, full employment and the perception of international trade as a static and harmonious phenomenon. It is shown that all these assumptions are neither theoretical valid nor do they coincide with empirical research. The whole rationale why international trade exists according this theory is deficient. The New Trade Theory, which claims to enhance the theory of comparative advantage, is unconvincing as a complement. It is concluded that the theory of comparative advantage should be dismissed. International trade theory, by relying on this theory, risks ignoring the most relevant and important elements with regard to international trade. The deficiencies of the theory of comparative advantage are especially crucial for trade policies that are derived from this theory, which is discussed with reference to the WTO and its ongoing Doha Round.

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Published on 7 Feb 2013 in World Economic Review No 2, 2013