LONDON – The World Trade Organization’s ministerial conference in Bali in December produced a modest package of encouragements to global trade. More broadly, the WTO’s multilateral approach has shown its worth by preventing a massive increase in trade barriers, unlike in 1929-1930, when protectionism helped deepen and broaden the Great Depression. But the main question – whether globalization is a good thing, and for whom – remains unanswered.
The essence of globalization – free trade – rests on the theory of comparative advantage, which views international trade as profitable even for a country that can produce every commodity more cheaply (in terms of labor or all resources) than any other country.
The textbook example given by the Nobel laureate Paul Samuelson is that of a town’s best lawyer who is also its best typist. Provided that he is better at law than at typing, he should specialize in law and leave his secretary to do the typing. That way, both of their earnings will be higher.
The same logic applies to countries. Each country should specialize in producing those things that it produces most efficiently, rather than producing a bit of everything, because that way its income will be higher.