The following is from the September 1996 Philadelphia Inquirer series America: W

Question

The following is from the September 1996 Philadelphia Inquirer series America: Who Stole the Dream? by Donald Barlett and James Steele Companies that produce goods in foreign countries to take advantage of cheap labor should not be permitted to dictate the wages paid to American workers. A solution: impose a tariff or tax on goods brought into this country equal to the wage differential between foreign workers and U.S. workers in the same industry That way competition would be confined to who makes the best product, not who works for the least amount of money. Thus, if Calvin Klein wants to make sweatshirts in Pakistan, his company would be charged a tariff or tax equal to the difference between the earnings of a Pakistani worker and a U.S. apparel worker If this or some similar action is not taken, the future is clear. Wages of American workers will continue to slip, as well as their standard of living. 15. Bartlett and Steele's arguments ignore a fundamental point. Discuss.

Explanation / Answer

Bartlett and Steele's arguments ignore the fundamental theory of comparative cost advantage as advocated by Ricardo. The theory states that even when a country (such as the U.S.) enjoys an absolute advantage in the production of two or more commodities, the trading partner (Pakistan, in this case) may have a comparative advantage in the production of at least one commodity. In this way, the trade of goods and services with Pakistan is still beneficial for the U.S. In this situation, both the U.S. and Pakistan can specialize in the production of those commodities in which these nations have the greatest comparative advantage (i.e. the opportunity cost of production of a particular good is lower in the home market than in foreign market). This can result in gains from trade to both the countries.

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