Latest news with #DavidRicardo
Forbes
16-05-2025
- Business
- Forbes
What A 19th-Century Economist Can Teach Us About Today's Trade Wars
The original painting is by Thomas Phillips. Bettmann Archive In a competitive marketplace, businesses need to know their advantage over others. Is it lower prices? A differentiated product? A service that targets a particular type of customer? This is the theory of competitive advantage. To win in business, developing and using that competitive advantage is critical. While this notion works in the world of business, commerce between nations has been built on the concept of comparative advantage. First set out by the English economist David Ricardo in the 19th century, comparative advantage demonstrates that even if one country is better at producing all goods than another, they both still benefit from trade. Ricardo's textbook example shows a simplified world economy consisting of two countries (England and Portugal) producing wine and cloth. In Ricardo's example, Portugal could produce both more efficiently than England could. However, Portugal was superior to England at producing wine, so it made sense for England to produce cloth and trade it for Portuguese wine. If each country focused on producing the good for which it had a comparative advantage, then overall production of both wine and cloth would go up, leaving both countries better off as a result. The critical difference between competitive advantage and comparative advantage is this: competitive advantage increases wealth (wins) by outperforming others; comparative advantage increases wealth (wins) by working with others. One is a zero-sum game; the other offers the chance for both parties to prosper. Ricardo's new ideas came at the ideal time in world history. Mercantilism had been the predominant economic model of the prior two centuries, advocating for trade surpluses with all nations. The fallout from the Napoleonic Wars had turned the geopolitical landscape of Europe upside down. And the Industrial Revolution was rapidly reshaping national economies. More recently, comparative advantage has had a real-world impact over the course of the last century. In the current discourse on trade and tariffs, competitive and comparative advantages are being confused. Countries are not the same as companies – international trade is not a zero-sum game. It is important, of course, for one's own country to increase wealth. Greater wealth provides opportunities for economic mobility. Economic mobility provides hope for the future. Countries that build comparative advantage in critical growth industries – for example, artificial intelligence, robotics, medical innovations, and services for aging populations – provide that hope and will succeed over the long term. The countries that invest considerable capital in R&D, scientific and engineering talent, and ecosystems that support entrepreneurialism will maintain their comparative advantage, even if other countries also benefit. For companies, competitive advantage can manifest in the form of a price war, driving profits down for all parties. At the end of the day, one of those businesses may be the 'winner' – having put most of their competitors out of business. They may have won, but they only won because the others lost – all parties have weakened their businesses and their future prospects. When a disruption or new entrant comes along, the 'winning' business is unlikely to stay a winner for long. Countries can do the same with a trade war, like the one taking shape today. While other countries may lose out, when trade and wealth decline across the board – comparative advantage in reverse – we have a 'lose-lose' outcome. Each country still has to make the goods it needs, but they are less efficient at making them because of a new lack of supply. That diverts resources from building for the future and lessens the chance that the next generation will be better off than the last. It should go without saying that short-term gain for long-term pain is not a good strategy. Good long-term capital strategies for countries to follow are investments in scientific research, education, critical infrastructure, and building effective savings and investment systems for retirement and education needs. Two hundred years ago, David Ricardo put forth the idea that trade can be a win-win for countries of varying skills and specializations. It's critical that we do not forget that lesson now. Global trade in goods, services, and capital can increase wealth for all – done right, it is a win-win, not a compromise.
Hospitality Net
13-05-2025
- Business
- Hospitality Net
Part 3: What You Were Always Afraid to Ask…
Economics is essential in the hospitality industry because it helps businesses understand and respond to market dynamics, optimise resource allocation, and make informed financial decisions. These principles also allow companies to adapt to fluctuations in tourism and global economic conditions. A solid grasp of economics enables hospitality professionals to operate efficiently and competitively in a dynamic and often unpredictable environment. By studying economics, we gain insights into how markets function, how prices are determined, and how policies can influence employment, inflation, and economic growth. It also equips us to critically assess trade-offs, evaluate costs and benefits, and make informed decisions in both personal and societal contexts to understand how individuals, businesses, and governments allocate limited resources. Economics also provides a framework for addressing pressing global challenges such as inequality, financial stability and sustainability. In the previous articles, we explored key economic concepts that were often overlooked or misunderstood. In Part 1, we began by examining the stock exchange and bond market, and how these financial systems connect to broader themes such as tariffs, trade, trust, and tourism. In Part 2, we delved into trade benefits and introduced the foundational idea of comparative advantage. In this article, I will focus on a closely related concept: competitive advantage. In the early 1800s, David Ricardo discussed comparative advantage and how mutually beneficial trade was possible by applying the principles of specialisation and free trade. While this concept may seem 'too romantic' to some of us, there is a key takeaway: it is possible to create a win-win situation if the participants want to and can see beyond short-term profit maximisation. On the other hand, this may create significant dependencies (implying risks) and, due to modern global supply chains, may keep certain countries with cheap labour, causing countries to specialise in exporting primary commodities and raw materials, which can trap them in low-wage economies due to unfavourable terms of trade. — Source: Hotelschool The Hague Nevertheless, the philosophy of comparative advantage offers many takeaways that can help people think and focus on common wins. On the other hand, Porter's idea of competitive advantage (created a century later) tries to address some of the shortcomings of comparative advantage by adding a more company-related twist. "A firm is said to have a competitive advantage when it is implementing a value-creating strategy not simultaneously being implemented by any current or potential player." He envisioned this happening either by cost advantage, differentiation or focus. A cost advantage occurs when a company can offer the same products or services as its competitors but at a lower cost. A differentiation advantage arises when a company delivers different/unique products or services that better meet the specific needs of its customers compared to those of its competitors. The focus strategy can also be called the segmentation strategy, which includes geographic, demographic or behavioural segmentation. The idea of competition / competitive advantage is strongly business-oriented and focuses on profit maximisation strategies. A competitive strategy is defined as a company's long-term plan to gain a competitive advantage over its competitors in the industry. It aims to create a defensive position (a strong, sustainable market standing that protects the company from competitive pressures) in an industry and generate a superior ROI. Interestingly, we've ended up with two closely related terms: comparative advantage and competitive advantage, used in different contexts: one rooted in international economics, the other in business strategy. They're strikingly similar in wording, yet conceptually, they can be both remarkably close and fundamentally different simultaneously. What do you think? Were you already aware of these distinctions when shaping your business strategies? I'd love to hear your perspective. View source
Mint
29-04-2025
- Business
- Mint
Advocates of free trade should articulate an alternative to US tariffs
In this era of protectionism, defending globalization can feel like a losing proposition. But rather than retreat from the debate, it is more urgent than ever to spell out the costs of a trade war, which threatens to accelerate the fragmentation of the global economy because it is really a war on trade itself. To challenge the logic behind the US administration's protectionist agenda effectively, we must first understand it in clear and concrete terms. The US tariff regime stands on four arguments. The first is that tariffs will boost government revenue and help reduce the US budget deficit, which many economists see as unsustainable. The Congressional Budget Office expects the federal deficit, currently at 6.4% of GDP, to remain above 6% through 2035, notably higher than the 50-year average of 3.8%. High deficits could limit the ability to sustain key entitlement programmes. To prevent that outcome, US Treasury Secretary Scott Bessent has vowed to reduce the fiscal deficit to 3% of GDP by 2028, using tariff revenues as a tool. Tariffs, the argument goes, will generate revenue from imports that are exempt from federal taxes. The US government also misses out on income and corporate tax revenue that would have been collected if the same goods and services were produced in the US. In theory, tariffs would offset these losses. The second argument for tariffs focuses on reciprocity. Advocates contend that while US exports are often subject to high tariffs and taxes, imported goods face few, if any, barriers when entering the US. Thus, equivalent tariffs would level the playing field for American producers. Third, supporters argue that tariffs will protect domestic industries and help restore America's manufacturing base, which has been hollowed out by trade arrangements that shifted production to low-cost countries like Mexico, India and China. By incentivizing local manufacturing, tariffs will fuel re-industrialization and job growth. Tariffs are also often portrayed as a means of rebalancing the economy and redistributing the fruits of globalization, which have disproportionately benefited capital over labour. In this view, tariffs would help restore the living standards of American workers, who have endured decades of stagnant or declining real wages. But the case for tariffs goes beyond economic rebalancing and job creation. The US, tariff advocates argue, has grown dependent on fragile and unreliable global supply chains. Relying on other countries, including geopolitical adversaries, for critical goods like semiconductors, food and pharmaceuticals poses a national-security risk. Tariffs, in their view, are not merely about competitiveness but also about resilience and sovereignty. Of course, these arguments largely disregard David Ricardo's theory of comparative advantage, which holds that countries should produce the goods and services they are best equipped to produce. They also diverge from today's economic realities. Consider, for example, the claim that tariffs would boost government revenue. While that may be true to some extent, tariffs also increase the cost of imported goods, placing a disproportionate burden on lower-income households. In effect, they will harm the working- and middle-class Americans they aim to protect. Moreover, the government may collect less revenue than expected if consumers avoid imports and shift to US-made goods. Notably, such an outcome would undercut the case for tariffs as a revenue source. Then there's the issue of reciprocity. Trump's tariffs have already triggered tit-for-tat retaliation and escalation, most notably with China, which ran a trade surplus of nearly $300 billion with the US in 2024. Beyond driving up prices, these conflicts will likely limit Americans' access to foreign-made goods, reducing consumer choice. As Amazon CEO Andy Jassy recently noted, many vendors will simply pass the added costs on to US consumers. Meanwhile, using tariffs to protect US manufacturing requires enormous government subsidies to rebuild and support uncompetitive domestic industries. The risk is that shielding American companies from global competition will undermine their incentive to innovate and evolve, ultimately weakening long-term US competitiveness. This approach also underestimates the disruptive impact of emerging technologies like AI, which are poised to reduce demand for human labour. Economic history offers a cautionary tale. The 1930 Smoot-Hawley Tariff Act is widely believed to have worsened the Great Depression. By stifling trade and slowing economic growth, it significantly delayed America's recovery and contributed to the global instability that preceded World War II. Amid the ongoing debate over the merits and drawbacks of tariffs, one thing is clear: A return to the global economic model of the past 50 years is neither economically viable nor politically realistic. While identifying and dismantling the claims made by tariff advocates is a useful step, supporters of global markets and free trade must go further and articulate a credible alternative to Trump's protectionist agenda. ©2025/Project Syndicate The author is an international economist, and author of including 'Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth – and How to Fix It'
Time of India
25-04-2025
- Business
- Time of India
What the tomato teaches us about free trade
Most tomatoes from Mexico will face a 21% tariff effective July 14, the US Department of Commerce said last week. Ironically, the 'love apple' may be the perfect illustration of how trade contributes to economic prosperity — and of the folly of President Donald Trump's protectionist policies. #Pahalgam Terrorist Attack Pakistan suspends Simla pact: What it means & who's affected What is India's defence muscle if it ever has to attack? Can Pakistan afford a full-scale war with India? First and foremost, the tomato trade gives Americans access to wintertime produce. While fresh US tomatoes are abundant and delicious in the summer, most states simply can't produce the fussy fruit on a year-round basis (Florida is the primary exception here, and I'll return to it shortly.) Before agricultural trade boomed under the North American Free Trade Agreement, US consumers had to pay significantly more for a tomato in December or January than in August or September. The growth of trade has not only slowed tomato inflation, it's also made supply and prices more stable. Bloomberg Second, trade has allowed the US and its partners to focus on their comparative advantages, just as the British economist David Ricardo famously predicted. In Mexico, tomatoes and other crops thrive thanks to year-round warm and arid conditions, as well as access to low-cost labor. Meanwhile, Mexican growers have perfected the use of greenhouses — often erected with government subsidies, to the chagrin of US competitors — to efficiently produce tasty tomatoes without all the pesticides. While Florida has a proud winter tomato-growing tradition, its comparatively humid weather makes it a haven for pests and fungal diseases. And the prevalence of hurricanes makes it significantly less hospitable to greenhouses. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Play War Thunder now for free War Thunder Play Now Undo Fortunately, US consumers get the benefits of the Mexico tomato trade with only modest collateral damage. When Florida farmers retreat from the tomato business, they tend to sell out to residential real estate developers, sometimes netting a fortune. Florida cropland has seen some of the fastest growth in value and is now the nation's third-most expensive after California and New Jersey. Just last month, the Palm Beach Post reported that one family had received approval to turn its five-decade-old tomato farm into a patch of 'large estate homes.' A few years ago, another family sold its 332-acre tomato, squash and pepper farm to residential builder GL Homes for $215 million. While Florida has lost millions of acres of farmland, the decline actually happened at a much faster clip prior to the enactment of NAFTA , now called the United States-Mexico-Canada Agreement. The most abrupt declines happened between 1970 and 1990, coincident with Florida's emergence as a retirement mecca. Since 1990, the retreat has basically mirrored the broader national trend. Live Events Evidently, Florida's Ricardian comparative advantage is not fresh produce but residential real estate, hotels and theme parks. While the state has lost agricultural jobs, they tend to be the sorts of positions that Floridians shy away from anyway (farms are staffed by temporary workers on H-2A agricultural visas). At the same time, the economy has gained opportunities for construction workers, not to mention the myriad service-industry professions catering to the booming population. Bloomberg If there's an obvious downside, it's environmental. A report from the University of Florida last year showed that the loss of rural land and the unfettered march of residential development makes the area much more susceptible to the effects of climate change. But that's an issue better managed through specific land-preservation initiatives rather than tomato tariffs. And while farms may be better than McMansions, Florida's industrial agriculture business — with its reliance on powerful pesticides — has hardly been kind to the environment. All this said, the tomato trade has survived many prior protectionist pushes, including the Supreme Court's Nix v. Hedden decision of 1893, which unanimously held that tomatoes were vegetables (despite what the dictionary says) and were therefore not eligible for the fruit exemption under the Tariff of 1883. Since 1996, the Mexico-US tomato trade has operated under several so-called suspension agreements, under which the US agrees to put off anti-dumping cases partially in exchange for commitments by Mexican producers to sell above an often-renegotiated reference price. Like clockwork, every half-decade or so the US has gone to the brink of restarting anti-dumping investigations, only to reach an 11th-hour deal that broadly maintains the status quo. Americans who love fresh tomatoes with their pasta can still hold out hope that this spat will get resolved in a similar fashion. And all Americans, even those misguided few who don't like tomatoes, should hope that the Trump administration soon comes to its senses and realizes that trade leaves both parties better off.
South China Morning Post
14-04-2025
- Business
- South China Morning Post
China searches for new role in global trade system as US puts faith in tariffs
On November 15, 1999, when the US and China reached an agreement on the terms of China's accession into the World Trade Organization (WTO), students in my dormitory were full of joy watching the news on a tiny television hanging from the ceiling. As junior students at China's top trade school, the only university under China's foreign trade ministry, we were excited to see the country's new status in the global trading system. Advertisement In classrooms, many professors proudly talked of, or even bragged about, how their theories – echoing those from Adam Smith and David Ricardo – had finally won the debate over whether China should join the General Agreement on Tariffs, and later the WTO, after discussions on tariff levels, among other things, with capitalist countries such as the United States. After all, a hallmark of China's 'century of humiliation' was that the central government had lost control of its customs and import duties. So the argument against joining the WTO was, why should the People's Republic of China, after half a century of independence, again make concessions to the imperialist powers to allow their products, such as cars, to flood the Chinese market? In this file photo taken on September 14, 2019, shipping containers from China and other Asian countries are unloaded at the Port of Los Angeles. Photo: AFP The Chinese leadership at the time made the decision that the country must join the global trade system. Beijing's aspirations to be embedded in a globalised economy pushed aside opposition from those with a nationalist sentiment. In fact, the China-US deal came as a surprise as it was only six months after US-led Nato forces mistakenly bombed the Chinese embassy in Belgrade, triggering massive anti-US protests in Beijing and other major cities. In fact, China's marathon quest to join the global trade system started as early as 1986, a time when the country's economic size and foreign trade were both tiny, and the process was repeatedly stalled. Back then, China had to win the approval of the US, the guardian and promoter of world trade at the time, to join the exclusive club. With the 1999 bilateral agreement, China became an official member of the WTO in 2001. The rest is history. Fast forward to 2025, and I can't help wondering how the world has changed. China has swapped roles with the US to become the most vocal defender and supporter of free trade, while the US president is an ardent fan of tariffs. Advertisement If the US retains its 145 per cent duties on Chinese products, most Chinese exporters are likely to lose access to the US market, cutting off the biggest source of China's trade surplus. Therefore, decoupling of the world's two largest economies will become a reality. Looking at the long-term perspective, as Washington is destroying the trade system it played a leading role in building, China has to seriously think about the future global trade system and its role in it.
