Wednesday, November 23, 2005

Believe in Santa Claus?

I equate believing in free trade like believing in Santa Claus.
Why? Because, like Santa, it was established in the stone-ages that the reasons why free trade doesn't work lie in its noble but utopian assumptions.
For instance, free trade is based partly upon the economic theory of the Heckscher-Ohlin model (H-O model), combined with a few other assumptions that delve into the shark infested waters of political economic policy.

What is the H-O model?

Generlly speaking, the model can be understood as follows:

"Relative endowments of the factors of production (land, labour, and capital) determine a country's comparative advantage. Countries have comparative advantage in those goods for which the required factors of production are relatively abundant. This is because the prices of goods are ultimately determined by the prices of their inputs. Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce.
For example, a country where capital and land are abundant but labour is scarce will have comparative advantage in goods that require lots of capital and land, but little labour - grains, for example. Since capital and land are abundant, their prices will be low. Those low prices will ensure that the price of the grain that they are used to produce will also be low - and thus attractive for both local consumption and export.
Labour intensive goods on the other hand will be very expensive to produce since labour is scarce and its price is high. Therefore, the country is better off importing those goods."

My contention with this model:

Well, I suppose that the HOS model - like many other economic theories - are for ideal markets where we have perfect information, perfect competition, perfect everything. Markets in which the market itself determines prices, etc. Sometimes, conditions are condusive for the HOS model to be seen to be holding. But more often that not, it doesn't.

Why? A quick stab in the dark would be that if the HOS model held perfectly, then the outcomes of globalisation would be all fantastic. The land and labour intensive countries would dominate that part of the market and the capital intensive (mostly western) countries would dominate that side of trade. Everyone would be a winner. However, globalisation is creating some segregation in the world. By that I mean that some regions appear to be left out and there doesn't seem to be a clear way as to how these isolated regions can be reintegrated and kept within the globalised system.

See the Leontief paradox. It just summises my point that in social science, there is generally too much assumption that the markets are rational, perfect, etc . Once political failure/agenda are considered, the economic models become disconnected from reality because they are not programmed to account for the "human condition" - a real stochastic element.

A free trade world is a world without international trade tariffs or barriers, with free movement of labour between countries, free movement of capital between countries and no trade-distorting policies such as subsidies.
WOW, that sounds like the biblical paradise to me. Perhaps we should all stick to pursuing fair trade, which is far more realistic and achievable.


Blogger Siel said...

Nice analogy! And perhaps you mioght join the Starbucks Challenge?

Friday, November 25, 2005 6:51:00 am  
Blogger UARIDI said...

Do you really believe in fair trade? It is a western construct with western ideas and ideals. To me it is just an inch removed from "free trade" and all those beautiful trade matixs and systems and promises so says this burnt out activitist

Monday, December 05, 2005 3:37:00 pm  
Blogger Curious said...


I appreciate your angle, but the fact of the matter is that given the current world political attitudes, we can either:

1: keep on bantering about free trade, which is extremely far fetched because it relies on the noble intentions of man where greed is the champion motivator.


2: Focus on the difficult, strife ridden fair trade, which, in all its flaws, is actually attainable.

Friday, January 06, 2006 4:35:00 pm  

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