Ricardo Revisited: Sino-American Trade and Economic Conflict

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Much of the belief in the benign character of international trade is based on Ricardo's notion of comparative advantage. The concept of the comparative advantage is that if a country has the ability to produce a particular good or service at a lower opportunity cost than another country, they will fully specialize in producing that good, as opposed to producing a broad array of goods. In Ricardian trade theory, this country will then trade with a different country that specializes in the production of another good or service. In this model, trade is mutually beneficial for all partners.

However, the classical Ricardian model, applied to today's world in which nations can rapidly develop new capabilities, reveals inherent conflicts in the interests of trading partners. Gomory explains a two-state model that represents the relationship between dominant and subservient trade partners. In this model, a country can achieve a dominant position only when they have an underdeveloped partner. The subservient country can only avoid this relationship by developing their own industries and not allowing them to be destroyed. The logical end of the model is that the development of a trading partner is not always good, especially as the other country develops to a point that one’s own industries are being destroyed. Conversely, the destruction of your trading partner’s industries is necessary for you to reach your best outcome.

Within the context of the Sino-American trade relationship, it is possible that China has developed to a point that the United States no longer holds a dominant position. As China continues to develop, the US will experience a slow destruction of American industry. The model would indicate that the United States needs to act defensively in order to protect itself from the destruction of domestic industry, and to ensure that China does not achieve a dominant position in the trade relationship.

Participants

Featured Speaker
Ralph Gomory
Research Professor, New York University
President Emeritus, Alfred P. Sloan Foundation
Former Senior Vice President for Science and Technology, IBM

Moderator
Michael Lind
Policy Director, Economic Growth Program
New America Foundation

Event Time and Location

Tuesday, January 18, 2011 - 12:15pm - 1:45pm
New America Foundation
1899 L Street NW Suite 400
Washington, DC 20036

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