Why comparative advantage is a problematic guide to practical policy

Abstract

Previous criticisms of comparative advantage theory have mainly stressed the inapplicability of its theoretical assumptions. This article focuses on the dilemma involved in using it as a guide to practical policy. Since its inception, comparative advantage theory has gradually split into two schools, representing two ways of thinking and two methodologies. Economic policy based on comparative advantage may succeed in the short run but fail in the long run, because the development model based on this approach has an inherent destructive mechanism.

Strategic trading and Ricardian comparative advantage

“…The fndings in §3.2, together with the above fgures, also shed light on another facet of the RTCA: its unsustainability and limited applicability in practical policy. Xie (2019) argues that the RTCA is too static in nature for policy based on it to reap success. While RTCA-driven economic policy may succeed in the short run, it is bound to fail in the long run.…”

Advantage integration: A methodological framework for growth and development

“…If an individual, an organization, or a nation must achieve the goal of growth and development, it is necessary not only to play its own comparative advantage (note that the meaning of this vocabulary has changed dramatically, Xie, 2019) but also to integrate the advantages of competitors, that is, to dynamically discover and absorb the advantages of competitors and continue to accumulate, internalize, and reinnovate them. This requires active altruism and long-term openness in policy orientation.…”

“…But due to the cognitive habit of humans, we often unknowingly slide into the thinking model of comparative advantage because of inertia. However, due to the misunderstandings and misuses of comparative advantage theory, the comparative advantage–oriented thinking mode and economic policy naturally have an endogenous destructive mechanism, which is not appropriate as a long‐term development strategy (Xie, 2019).…”

“…Some politicians and scholars represented by Alexander Hamilton, the first U.S. Treasury Secretary, were keenly aware of the problems of this model. They believed that the manufacturing industry was the trend of the times and the fundamental way to achieve catch‐up and thus put forward the strategic proposition of advantage integration to cross the trap of comparative advantage (xie, 2019).…”

The disadvantage of misunderstanding comparative advantage: A response to Sherman Xie

“…Nevertheless, precisely because of the analytical power of the principle of comparative advantage, opponents of free trade continue to batter it. Sherman Xie’s in the previous issue of Economic Affairs is a recent example (Xie, ). And like the other critics of comparative advantage, Dr Xie seriously misconstrues it.…”