Word of the Day – Comparative Advantage

Comparative Advantage is a bedrock economic theory of trade that says whenever nations vary in goods they grow or make, they gain when they trade with another nation that cannot grow or make those goods. This is a win-win situation. Both nations benefit when they sell another nation their main products that the other doesn’t have.

What makes nations different? Their locations around the globe, topographical geography, traditional cultures, their status in terms of being developed or less developed nations, education, values, and a host of other factors.

What comparative advantage relies heavily upon is weather. And that’s really a problem right now. Climate change is happening, no amount of denial can keep it from happening. Climate changes are affecting the comparative advantages of nations around the globe.

Capitalists are ignoring climate change at their peril. Donald Trump seems to have thrown out the whole theory of comparative advantage (if he every knew about it in the first place). He is using numbers instead of rational reasons to promote his trade wars.

Real trade is not based on using threats of gigantic monetary penalties to punish other countries – real trade is based on the comparative prices for which things of value are traded by countries who each need things others have.

Traditionally tariffs on trade have been used very selectively to “protect” domestic industries in a nation so that they can grow. History shows that these selective tariffs have worked short term but ultimately failed.

When it comes to tariffs, Trump has eschewed the surgical knife and picked up the medieval mace to use his weapon to bludgeon others with.

Trump is whacking trade partners right and left trying to shake their money (not their goods) out of their pockets. Like his refusal to acknowledge climate change, he refuses to tell Americans this is going to cost us all  a lot more money.

Trump is pursuing tariff wars, that like all wars are likely to leave all partied involved in a lose-lose position.

This is why financial markets are so volatile these days. We Americans are right in the middle of a zero sum game that Donald Trump is playing with China, Mexico, and our European allies.

Business people have no idea how to proceed as both changes to climate and Trump’s tariffs are so chaotic.

We Americans are being dragged into  trade wars all over the globe. This isn’t good. Last year, the Financial Times last year (on April 6, 2018), predicted “History holds little hope of a winnable trade war.”

That’s because trade wars are lose-lose games or at best zero sum games. Only trade agreements based on comparative advantage can be win-win games. Wars are always destructive, Peaceful agreements are usually not destructive.

President Trump tweeted last year, “When you’re already $500 bm DOWN, you can’t lose.” The FT strongly noted that this tweet “combined ‘economic illiteracy’ with the fallacy of an addicted gambler.”

The FT further noted that “The US and China now seem to be playing double or quits”. I agree.

I belive that China and the US are now clearly playing a fool’s game. And we Americans are the ship that will soon be going down right along with Donald Trump when the bell tolls.