The Basis for the International Division of Labor and International Trade Is Absolute Rather than Comparative Advantage: Theory and Empirical Evidence

Abstract:

According to the general consensus in academia, Ricardo’s theory of international trade embodies the theory of comparative advantage. The principle of comparative advantage he proposed, based on the model of physical trade and employing comparative cost analysis, holds that comparative advantage rather than absolute advantage forms the basis of the international division of labor and of international trade, and is thus the negation of Smith’s theory of absolute advantage. However, a complete examination of Ricardo’s theory of international trade shows that the comparative advantage determined by Ricardo on the basis of comparative cost analysis is precisely the absolute advantage of intra-sector competition across countries in physical trade. Moreover, Ricardo also established a monetary model compatible with his understanding of physical trade. This monetary model, which has generally been ignored by academics, and especially by those adhering to the mainstream, i.e., the neoclassical theory of comparative advantage, is in line with the principle of absolute advantage. In particular, Ricardo emphasized the decisive role of exogenous technological progress in altering positions of advantage. The present analysis, however, shows equally that what the neoclassical theory of comparative advantage actually proves is still absolute advantage.

Main article text

The principle of comparative advantage as demonstrated by Ricardo provides the theoretical foundation of modern international economics, ¹ and forms the main theoretical basis on which development economics in its second phase formulates economic development strategies for countries of the Global South. Not only that, but the principle of comparative advantage has also been used to explain the fundamental economic phenomenon of the division of labor and exchange. This gave Samuelson a reason to refer to the principle of comparative advantage as both an accurate and esoteric proposition (Warr 1995). However, the principle of comparative advantage has been controversial from the moment it was formulated. The German Historical School, represented by Friedrich List, categorically rejected the claim that the principle was applicable to any country at any stage of economic development, and proposed the theory of productive powers, thus initiating the protection versus free trade debate that continues to this day.

In China, since the 1980s, attitudes to the principle of comparative advantage have undergone a transformation, from negation to affirmation. A large body of literature now argues that the principle of comparative advantage has a rational core, and some literature also contends that Marx affirmed the principle of comparative advantage on the basis of his relevant discussion in volume three of Capital. Where policy proposals are concerned, these works suggest that the principle of comparative advantage should be applied in order to guide China’s foreign trade. It is believed that labor-intensive industries are where China’s comparative advantage lies, and that the country should join the international division of labor through expanding industries in this category, while adopting an export-oriented development strategy that conforms to the principle of comparative advantage. ² These ideas have had a practical impact on China’s foreign trade policy (Wei 2015).

It is worth noting that since the reform and opening up, China has created an economic miracle that has attracted worldwide attention. Some literature attributes this miracle to the application of the principle of comparative advantage and, on this basis, holds that the catching-up strategy adopted by China for the purpose of ending the backwardness of its economy is bound to fail. Such a strategy, this literature maintains, is at odds with China’s comparative advantage; for example, the heavy chemical industry that has been established in China is said to lack the capacity to survive on its own. Following the same logic, this type of literature explicitly opposes China’s competition with developed countries in the IT industry, and especially in the chip industry, once again on the grounds that China has no comparative advantage in this field. The scholars concerned therefore insist that China should continue to focus on labor-intensive industries where it has a comparative advantage. ³ Although the principle of comparative advantage is broadly endorsed in China, debate around this principle has not disappeared. Some literature persists in denying or questioning the principle of comparative advantage, though such voices have not been dominant.

To summarize, these views negating or questioning the principle focus mainly on the following aspects: first, the principle of comparative advantage violates the labor theory of value; second, the assumptions underlying the principle of comparative advantage are not realistic; third, the principle of comparative advantage represents a kind of static analysis, which is not in accord with the dynamic process of economic development; fourth, the principle of comparative advantage stresses only the profitability of the strategies involved for both sides in international trade, concealing the disadvantages for the lagging countries and even ignoring the fact that the developed capitalist countries exploit their economically backward trade partners; and fifth, the fact that economically backward countries following the principle of comparative advantage are at high risk of falling into the “comparative advantage trap,” with disadvantageous results.

Synthesizing the debate around the principle of comparative advantage, we can see that regardless of whether the literature affirms or denies this principle, it generally regards the $2\times 2\times 1$ physical model devised by Ricardo to illustrate his ideas on international trade as the entirety of his theory of international trade and as proof of the principle of comparative advantage. This principle has thus become the premise and basis of the debate, without any further reflection on the nature of the trade advantage determined by the comparative cost analysis adopted in Ricardo’s physical model. At the same time, there has been a general neglect of the $2\times 2\times 1$ monetary model developed by Ricardo in order to illustrate his ideas about international trade and, in particular, of Ricardo’s important ideas about the determination of trade advantage by technological progress. The present article, based on Ricardo’s argument, will set out to show that what Ricardo demonstrated by adopting the physical model of comparative cost analysis is the significance of absolute advantage in physical trade. What Ricardo’s monetary model expresses is the idea of absolute advantage, and according to his thinking, technological progress is the fundamental condition for changing the status of trade and obtaining absolute advantage. Although Ricardo set out to affirm the principle of comparative advantage, his theory of international trade, unlike the popular neoclassical theory of comparative advantage, is essentially a theory of dynamic absolute advantage.

The rest of the article is organized as follows. Section 1 offers a review and modern restatement of Ricardo’s $2\times 2\times 1$ physical model, while Section 2 analyzes this model with a view to showing that what it determines remains absolute advantage. To reinforce this conclusion, this section analyzes the Ricardian $2\times 2\times 1$ monetary model, which has been neglected in academia, to demonstrate further that what Ricardo articulated was absolute advantage. The section also points out that Ricardo emphasized the role of exogenous technological progress in achieving absolute advantage and that, as a result, his trade theory is dynamic. As an extension of the above analysis, the section further analyzes representative models of the popular principle of comparative advantage; the results show that what such models analyze is precisely absolute advantage. Therefore, the basis of the international division of labor and trade is still absolute advantage. Section 3 then uses the existence of trade friction between China and the US to show that what international trade follows is not comparative advantage but absolute advantage. Section 4 finally concludes the article.

1. Ricardo’s $2\times 2\times 1$ Physical Model and Its Modern Restatement

It is generally held that the principle of comparative advantage, as argued by Ricardo, is closely reflected in the $2\times 2\times 1$ physical model he developed. To arrive at this physical model, Ricardo analyzed the mechanism through which foreign trade affects capital accumulation by influencing wages and profits. According to this analysis, wages and profits are opposites, and the rate of profit can never be increased without a fall in wages; a permanent fall in wages depends on a fall in the prices of the goods needed to maintain the worker. If, as a result of an extension of foreign trade or improvements in machinery, the food and other needs of the worker can be brought to market at reduced prices, the rate of profit will rise. Thus, foreign trade, by increasing the amount and variety of items that can be purchased with revenue, and by making commodities abundant and cheap, provides incentives to savings and capital accumulation. Although Ricardo was clearly aware that it was possible to gain excess profits through foreign trade and to cause a flow of capital into foreign trade, thus averaging out the rate of profit, he made it clear that the same rule regulating the relative value of commodities in one country could not regulate the relative value of commodities exchanged between two or more countries. The reason for this is that capital and labor, because of general insecurity and the unwillingness of workers to leave their home countries, cannot flow freely between countries with different rates of profit as they can between regions with different rates of profit within a single country. Ricardo, however, did not believe that this impediment would obstruct commercial relations between countries, since under a system of perfectly free commerce, each country would naturally put its capital and labor to the uses most beneficial to itself, and the pursuit of individual interests would be united with the universal good of the whole. Under such a system, diligence would be encouraged, the most effective use would be made of the particular attributes bestowed by nature, labor would be distributed in the most efficient and economical manner possible, the general mass of production would increase, the whole people would benefit, and through common bonds of interest and intercourse, the nations of the civilized world would be bound together. As envisioned by Ricardo, wine would be produced in France and Portugal, corns would be grown in the US and Poland, and hardware and other industrial goods would be manufactured in England. That is to say, each country would produce commodities appropriate to its location, climate, and other natural or man-made attributes, and could expect to make more profits through trade on this basis. Taking Portugal as an example, Ricardo pointed out that if Portugal did not trade with other countries, it would not be able to use a great part of its capital and labor to produce wine, nor to employ the proceeds from its sales of wine to buy cloth and hardware from other countries for its own use. Meanwhile, any industrial goods that Portugal manufactured within its borders would probably be inferior in quality, as well as small in quantity. To illustrate this principle, Ricardo constructed a $2\times 2\times 1$ physical trade model using a hypothetical exchange of wine and cloth between Portugal and England (see Table 1) (Ricardo 1981, 114).

Table 1

Ricardo’s $2\times 2\times 1$ Physical Model

Before specialized division of labor				After specialized division of labor
Product	England	Portugal	Total	England	Portugal	Total	Labor saved
Production of cloth	100	90	190	2 × 100 = 200	0	200	10
Production of wine	120	80	200	0	2 × 80 = 160	160	–40
Total	220	170	390	200	160	360	–30
Labor saved	0	0	0	–20	–10	–30	–30
Output of cloth	1	1	2	2–1 = 1	1	2
Output of wine	1	1	2	1	2–1 = 1	2
Ratio of exchange a	0.83	1.125		1
Ratio of exchange b	1.2	0.89			1

Note: Ratio of exchange a = domestic cloth/domestic wine; Ratio of exchange b = domestic wine/domestic cloth. Calculated by the authors based on Ricardo (1981).

According to Ricardo, the same rule regulating the relative value of commodities in one country cannot regulate the relative value of commodities exchanged between two or more countries. Therefore, the exchange of wine and cloth in the model, unlike their respective domestic exchanges, is not determined by the respective quantities of labor devoted to the production of each. Ricardo assumes that it takes the yearly labor of 100 people to produce 1 unit of cloth and the labor of 120 people to produce 1 unit of wine in England, while it takes the labor of 90 and 80 people, respectively, in Portugal. A mutually beneficial exchange would be for England to export cloth and import wine, and for Portugal to export wine and import cloth—that is, England would exchange products costing the yearly labor of 100 people domestically for products costing the labor of 80 people in Portugal. Although this would not be an exchange of equal amounts of labor, and England would be at a disadvantage in the creation of both products, through the trade between the two countries both of them could have more products than if the same exchange had taken place within their own borders. The two countries would thus develop a specialized division of labor, embodying what has come to be known as Ricardo’s principle of comparative advantage. As can be seen from Table 1, under the specialized division of labor, the two countries would save a total amount of labor corresponding to the work of 30 people, with England receiving 0.17 units of wine and Portugal 0.11 units of cloth more than before the division of labor began. Ricardo accordingly argues that under the conditions of exchange between different countries, it is possible for the product of the labor of 100 English workers to be exchanged for the product of the labor of 80 Portuguese, 60 Russians, or 120 East Indians (Ricardo 1981, 112–115). In other words, even if a country is at a disadvantage in terms of labor productivity in the production of all products, it can still benefit from international trade. But the law of relative value, i.e., the law of value, no longer plays a regulatory role.

According to modern international economics, although England is at a disadvantage in the production of both products, due to its higher production costs than Portugal, and Portugal is at an absolute advantage, the comparative cost of cloth in England is lower than in Portugal, 0.83 < 1.125, and the comparative cost of wine in Portugal is lower than in England, 0.89 < 1.2. Therefore, England has an advantage in the production of cloth and Portugal has an advantage in the production of wine. Since in England the cost of producing cloth is 11% higher than in Portugal, but 50% higher in the case of wine, the disadvantage of cloth production is less than that of wine production. The cost of producing wine in Portugal is 66.7% of that in England, i.e., 33.3% lower than in England, and the cost of producing cloth is 90% of that in England, i.e., 10% lower than in England. Portugal has a greater advantage in the production of wine than in the production of cloth. Therefore, England should specialize in the production of cloth, while Portugal should specialize in the production of wine, thus forming an international division of labor. Engaging in international trade on this basis is beneficial to both countries. This conclusion can also be illustrated by the opportunity costs of the two countries: the opportunity cost of producing cloth in England is 0.83, which is lower than the opportunity cost of producing wine, which is 1.2; meanwhile, the opportunity cost of producing cloth in Portugal is 1.125, which is greater than the opportunity cost of producing wine, which is 0.89. England should specialize in the production of cloth, while Portugal should specialize in the production of wine.

We can now generalize the Ricardian $2\times 2\times 1$ physical model. Let countries $i=1,2$ . Under closed conditions, each produces 2 units ( $q_i=2$ ) of two products $c$ and $w$ ( $j=c,w$ ). Country 1 consumes labor or labor inputs of $l_{1,c}$ and $l_{1,w}$ to produce 1 unit of $c$ and $w$ , respectively, with total labor of $l_{1,c}+l_{1,w}=L_1$ . The unit costs calculated in labor inputs $l_{1,c}$ and $l_{1,w}$ are at the same time the technical coefficients of production $a_{1,c}$ and $a_{1,w}$ . Country 2 consumes labor $l_{2,c}$ and $l_{2,w}$ , with total labor of $l_{2,c}+l_{2,w}=L_2$ . $l_{2,c}=a_{2,c}$ and $l_{2,w}=a_{2,w}$ are technical coefficients. The costs of the two countries are $l_{1,c}<l_{1,w}$ and $l_{2,c}>l_{2,w}$ , and also $l_{1,c}>l_{2,c}$ , $l_{1,w}>l_{2,w}$ , i.e., $L_1>L_2$ . $L_i$ constitutes the probability frontier of production, and the two countries have total labor of $L_1+L_2=L$ .

From the comparative costs of the two countries $\frac{l_{1,c}}{l_{1,w}}<\frac{l_{1,w}}{l_{1,c}}$ and $\frac{l_{2,c}}{l_{2,w}}>\frac{l_{2,w}}{l_{2,c}}$ , or from $\frac{l_{1,c}}{l_{2,c}}<\frac{l_{1,w}}{l_{2,w}}$ and $\frac{l_{2,c}}{l_{1,c}}>\frac{l_{2,w}}{l_{1,w}}$ , we can see that country 1 has an advantage in the production of product $c$ and country 2 has an advantage in the production of product $w$ . If country 1 specializes in the production of $2c$ , which costs the labor of $2l_{1,c}$ in country 1, and country 2 specializes in the production of $2w$ , which costs the labor of $2l_{2,w}$ in country 2, then both countries would benefit from exchanging 1 unit of $c$ for 1 unit of $w$ at the ratio of $c/w=1$ . The efficiencies ${\beta }_i$ calculated in terms of the labor consumption before the specialized division of labor and trade were:

$\frac{q_1}{L_1}={\beta }_1,\frac{q_2}{L_2}={\beta }_2.$

What happens after the specialized division of labor and trade is:

$\frac{q_1}{L_1-(l_{1,w}-l_{1,c})}={\beta }_1{\ast }^{}\text{},\frac{q_2}{L_2-(l_{2,c}-l_{2,w})}={\beta }_2{\ast }^{}.$

It is obvious that ${\beta }_1^{\ast }>{\beta }_1$ , ${\beta }_2^{\ast }>{\beta }_2$ . A specialized division of labor and trade allows both countries to save labor, to a total of $L-2(l_{1,c}+l_{2,w})$ , but they achieve the same results in a closed economy ( $q_i=2,j=c,w$ ). Hence a specialized division of labor and trade is strictly preferable to a closed economy:

$u_1\left({\beta }_1^{\ast }\right)>u_1\left({\beta }_1\right),u_2\left({\beta }_2^{\ast }\right)>u_2\left({\beta }_2\right);u({\beta }_1^{\ast },{\beta }_2^{\ast })>u({\beta }_1,{\beta }_2).$

In the model, $\frac{c}{w}=1$ , therefore $\frac{l_{1,c}}{l_{2,w}}\ne 1$ , i.e., the law of value does not work in international trade because trade between the two countries does not involve the exchange of equal amounts of labor. This conclusion still holds when the $2\times 2\times 1$ physical model is extended to $i=n$ countries and to the $n\times n\times k$ physical model for the production of $j=n$ products and k factors of production. The benefits of trade and of the international division of labor lie in obtaining more physical products with the same amount of labor consumption or in saving labor compared to production taking place domestically. This suggests that the law regulating the relative value of products within a country no longer regulates the relative value of products exchanged between two or more countries (Ricardo 1981, 112).

The terms of trade of the Ricardian model are implicit. To make the terms explicit, we examine the two countries separately, addressing the quantities of products $c$ and $w$ they produce on their production possibilities frontiers. For country 1, there is:

$c_1=\frac{1}{a_{1,c}}{L}_1,w_1=\frac{1}{a_{1,w}}{L}_1\Rightarrow \frac{w_1}{c_1}=\frac{\frac{1}{a_{1,w}}{L}_1}{\frac{1}{a_{1,c}}{L}_1}=\frac{a_{1,c}}{a_{1,w}}\Rightarrow w_1=\frac{a_{1,c}}{a_{1,w}}{c}_1,$

where $\frac{a_{1,c}}{a_{1,w}}=\frac{l_{1,c}}{l_{1,w}}$ is the comparative cost and the slope of the equation as well. Using the same method, the following is obtained for country 2:

$w_2=\frac{a_{2,c}}{a_{2,w}}{c}_2.$

Obviously, $\frac{w}{c}=\frac{a_c}{a_w}=R$ is the terms of trade. It is only when $\frac{a_{1,c}}{a_{1,w}}<R_1<\frac{a_{2,c}}{a_{2,w}}$ is satisfied that country 1 will be willing to specialize in the production of $c_1$ and to engage in trade. For country 2, meanwhile, the condition for the specialized division of labor and trade to take place is $\frac{a_{2,w}}{a_{2,c}}<R_2<\frac{a_{1,w}}{a_{1,c}}$ .

An examination of the major literature on modern restatements of the Ricardian $2\times 2\times 1$ physical model reveals the characteristic approach found in these restatements. While basing itself on the above model, this approach introduces wage rates (actually factor prices), commodity prices, and even demand factors into it, thus changing the model’s physical nature. Relative wage rates are then used as the comparative costs for determining the specialized division of labor and trade, with a view to justifying the principle of comparative advantage (Krugman and Obstfeld 2011; Gandolfo 2005; Avinash Dixit 2011). Let ${\omega }_{ij}$ be the wage rate for the product $j$ produced by country $i$ ; $p_{ij}=a_{ij}{\omega }_{ij}$ is then the price of the product. When $j=c,w$ in a competitive economy that is closed but has free factor mobility, and if the wage rates paid by country 1 for the creation of both products are equal, $\frac{p_{1,c}}{a_{1,c}}=\frac{p_{1,w}}{a_{1,w}}$ , then that country will produce both products, $c$ and $w$ . If $\frac{p_{1,c}}{a_{1,c}}>\frac{p_{1,w}}{a_{1,w}}$ , then the factor of labor will flow to sector $c$ , and $w=0$ ; if $\frac{p_{1,c}}{a_{1,c}}<\frac{p_{1,w}}{a_{1,w}}$ , then the factor of labor will flow to sector $w$ , and $c=0$ . $\frac{p_{1,c}}{a_{1,c}}=\frac{p_{1,w}}{a_{1,w}}$ or $\frac{p_{1,c}}{p_{1,w}}=\frac{a_{1,c}}{a_{1,w}}$ is the opportunity cost condition for country 1 to produce both products simultaneously (Krugman and Obstfeld 2011). Now let us consider the conditions under which trade between the two countries takes place. For this purpose, assume $\frac{a_{1,c}}{a_{1,w}}<\frac{a_{2,c}}{a_{2,w}}$ , i.e., country 1 has a comparative advantage in the production of product $c$ and country 2 has a comparative advantage in the production of product $w$ . The international relative price of c is then $\frac{p_c}{p_w}$ . If $\frac{p_c}{p_w}<\frac{a_{1,c}}{a_{1,w}}$ , both countries will specialize in the production of $w$ ; if $\frac{p_c}{p_w}=\frac{a_{1,c}}{a_{1,w}}$ , there is no difference in the remuneration of country 1 for the production of the two products, and therefore it will produce both of them, while country 2 specializes in the production of $w$ . If $\frac{a_{1,c}}{a_{1,w}}<\frac{p_c}{p_w}<\frac{a_{2,c}}{a_{2,w}}$ , country 1 will specialize in the production of $c$ and country 2 will specialize in the production of $w$ ; if $\frac{p_c}{p_w}=\frac{a_{2,c}}{a_{2,w}}$ , country 2 will produce the two products simultaneously, and country 1 will specialize in the production of $c$ . If $\frac{a_{1,c}}{a_{1,w}}<\frac{a_{2,c}}{a_{2,w}}<\frac{p_c}{p_w}$ , both countries will specialize in the production of $c$ . It can be seen that the two countries will have a specialized division of labor and trade only when $\frac{a_{1,c}}{a_{1,w}}<\frac{p_c}{p_w}<\frac{a_{2,c}}{a_{2,w}}$ . This is equivalent to the aforementioned terms of trade. The quantity of $w$ that country 1 obtains by exporting 1 unit of $c$ is $\frac{p_c}{p_w}-\frac{a_{1,c}}{a_{1,w}}$ more than what it can obtain from exchanges at home, saving labor costs $a_{1w}\left(\frac{p_c}{p_w}-\frac{a_{1,c}}{a_{1,w}}\right)$ , while the quantity of $w$ that country 2 must exchange in order to import 1 unit of $c$ is $\frac{a_{2,c}}{a_{2,w}}-\frac{p_c}{p_w}$ less than what it pays for exchanges at home, saving labor costs $a_{2,w}\left(\frac{a_{2,c}}{a_{2,w}}-\frac{p_c}{p_w}\right)$ .

Adopting the continuum hypothesis of the products (Dornbusch, Fischer, and Samuelson 1977), and limiting the production of the products to the interval $[0,1]$ , i.e., there are $0\le z\le 1$ types for one product, and for each product type, the relative unit labor cost (comparative cost) is defined as:

$A\left(z\right)=\frac{a_2\left(z\right)}{a_1\left(z\right)},\text{and}{A}^{\prime }\left(z\right)<0.$

$A^{\prime }\left(z\right)<0$ means that products are ordered according to monotonically decreasing comparative advantage in country 1, and the price equation is $p_1\left(z\right)=a_1\left(z\right){\omega }_1$ , $p_2\left(z\right)=a_2\left(z\right){\omega }_2$ . If $p_1\left(z\right)\le p_2\left(z\right)$ , or $a_1\left(z\right){\omega }_1\le a_2\left(z\right){\omega }_2$ , that is,

$\omega \le A\left(z\right),\omega =\frac{{\omega }_1}{{\omega }_2},$

,

then the product $z$ is produced by country 1. If $\omega \ge A\left(z\right)$ , country 2 produces the whole range of products, and there is no trade. In order for trade to occur, the relative wage rate $\omega$ is required to be between two extremes of comparative cost: $A\left(0\right)<\omega <A\left(1\right)$ . From the continuum hypothesis, there must be a critical product $\tilde{z}=\tilde{z}\left(\omega \right)$ . Taking $\omega =A\left(\tilde{z}\right)$ , the critical product is defined as $\tilde{z}=A^{-1}\left(\omega \right)$ , and $A^{-1}\left(\omega \right)$ is the inverse function of $A\left(z\right)$ . The conclusion is that if the critical product is excluded, country 1 has a comparative advantage in the production of the product defined by $0\le z\le \tilde{z}\left(\omega \right)$ , while country 2 has a comparative advantage in the production of the product defined by $\tilde{z}\left(\omega \right)\le z\le 1$ . Thus, the relationship between the relative wage rate and the critical product determines the effective international division of labor and trade (we know, from $A^{\prime }\left(z\right)<0$ , that there is a one-to-one correspondence). Since $A\left(\tilde{z}\right)$ is a positive monotonically decreasing function, there is only a positive solution in the space of ( $\omega ,\tilde{z}$ ). Therefore, there exists a unique relative wage rate $\overline{\omega }$ and a critical product $\tilde{z}$ such that country 1 specializes in producing and exporting products in the range of $0\le z\le \tilde{z}$ , and country 2 imports the products exported by country 1 while specializing in creating products in the range of $\tilde{z}\le z\le 1$ and exporting them to country 1. According to the price equation, the relative price of the product $z_1$ produced by country 1, expressed in terms of any product $z_2$ produced by country 2, i.e., the terms of trade, is:

$\frac{p_1\left(z_1\right)}{p_2\left(z_2\right)}=\overline{\omega }\frac{a_1\left(z_1\right)}{a_2\left(z_2\right)}.$

Therefore, the terms of trade are endogenously determined.

2. Another Ricardo: The $2\times 2\times 1$ Monetary Model

Although modern international economics employs various specific forms for restating Ricardo’s physical model using mathematical methods, the purposes and conclusions of these modern restatements are exactly the same: comparative advantage is the general and universal condition for the formation of international trade. Since Ricardo in fact constructed his physical model in order to demonstrate the principle of comparative advantage with a given endowment, this implies that comparative advantage is a spontaneous choice of the market. Therefore, and regardless of the view we might take of Ricardo’s principle of comparative advantage, his physical model is seen as the sole, standard model for arguing the principle of comparative advantage. At the same time, the principle of comparative advantage that is based on the physical model is a product of the market mechanism and exhibits an obvious static nature. The generality of Ricardo’s physical model and the static nature of the principle of comparative advantage constitute the salient features of the modern restatements of Ricardo’s physical model, and this serves to reinforce the belief that comparative advantage is the result of spontaneous market selection. However, Ricardo had not only a $2\times 2\times 1$ physical model but also a $2\times 2\times 1$ monetary model; he not only formulated the principle of comparative advantage in a static way, but also analyzed the role of technological progress in changing the terms of trade. Even for Ricardo’s physical model, the existing literature fails to consider and analyze the meaning of comparative advantage in international competition, which is determined in the model by performing a comparative cost analysis. The available analysis shows that the comparative advantage Ricardo identified on the basis of his physical model was precisely the absolute advantage in intra-sectoral competition across countries. Before taking the analysis further, it is necessary to discuss the premises and underlying assumptions of Ricardo’s physical modeling.

The inability of capital and labor to move across national borders is the premise underlying Ricardo’s physical modeling and provides the entire rationale for his denial of the role of the law of value in international trade. However, Ricardo clearly confuses two qualitatively different issues, notably profit equalization and the determination of the relative value of commodities—i.e., the principle of exchange of equal values whose premises and rationales are not valid. Whether capital can move across national borders only affects whether the international price of production can be established; this question thus bears on the further topic of whether international trade involves relations of the exchange of equivalents based on international value or on the international price of production (which is the transmuted form of international value), without affecting the regulating role of the law of value, or the law regulating the relative value of commodities, as Ricardo puts it. If capital can move across national borders, the differences in profit rates between sectors in different countries are averaged out as a result of competition made possible by the movement of capital across these national boundaries, resulting in average international profits and international prices of production. In this case, international trade is regulated by the international price of production. The international prices of production become the basis for determining the relative value of Ricardian commodities. National production prices are expressed as individual production prices, and the exchange of equivalents is implemented in international trade, according to the international prices of production. Value determination in the transformation governs the exchange of commodities between countries. If capital cannot move across national borders, differences in profit rates between sectors in different countries are not averaged out, and international prices of production cannot be formed. In this case, international trade is regulated by the international value formed as a result of competition between similar products in different countries based on national values. International value is determined by the international socially necessary labor time that is formed through competition by treating producers in different countries participating in international trade as if they were, in fact, homogeneous producers, whose unit of measure is the average unit of universal labor (Marx 2004, 645). National values, determined by the conditions of production in each country on which competition is based, are expressed as individual values. These individual values can be greater than, equal to, or less than international values, and the exchange of equivalents is carried out in international trade as per the international values. In order to illustrate the determination of international values, ⁴ we assume that there are $i=1\text{,}\cdots \text{,}n$ countries participating in trade. The national value for 1 unit of the product $c$ is $t_i$ , which is also the value basis of the competition between the countries participating in trade. The trade volume of the country participating in the competition is $q_i$ , the exchange rate is $e=1$ , and the production condition of the country is $f_i$ , so the international value $t_{c,s}$ of the traded goods $c$ is:

$t_{c,s}=\overline{t}=\frac{{\displaystyle \sum _{i=1}^n{q}_i{t}_i}}{{\displaystyle \sum _{i=1}^n{q}_i}},\text{or}{t}_{c,s}=Et={\displaystyle \sum _{i=1}^n{b}_i{t}_i},b_i=\frac{q_i}{Q_c},Q_c={\displaystyle \sum _{i=1}^n{q}_i},{\displaystyle \sum b_i}=1,$

where $Et$ is the international value expressed in the form of a mathematical expectation. Taking into account the differences in national labor productivity, and assuming $t_{i,j}(j=b,m,g)$ as the three different labor productivities and $b<m<g$ , and thus $t_{i,b}>t_{i,m}>t_{i,g}$ , $f_{c,s}\in F$ is the production condition playing a decisive role. The international value of the commodity

$t_{c,s}=t_{i,j},s.t.f_{i,j}=f_{c,s}\in F;\frac{q_{i,j}}{{\displaystyle \sum _{j=g}^b{q}_{ij}}}\gg \frac{{\displaystyle \sum _{j=g}^b{q}_{i,j}}-q_{i,j}}{{\displaystyle \sum _{j=g}^b{q}_{i,j}}}.$

The value determination process described above is not fundamentally different from the value determination process within a country, and there is no situation in which the Ricardian law regulating the relative value of commodities in a country cannot also regulate the relative value of commodities exchanged between different countries; that is, the law of value is ineffective in international trade, and thus there can only be the exchange of unequal value.

It can be seen that the reason why Ricardo viewed capital mobility as the precondition for the law of value to operate is that he confused the value of commodities and the price of production. The relative value of commodities that Ricardo discussed is in fact the production price of commodities. For the formation of the price of production, the movement of capital between sectors with different rates of profit is of decisive significance, and the same applies to international trade. In Ricardo’s view, however, it is not the production price of commodities but the value of commodities that is formed by the equalization of profit caused by the movement of capital. In circumstances where capital could not move across national borders and the differences in the rates of profit between sectors in different countries could not be averaged out to form the price of production, Ricardo argued that the law regulating the relative value of commodities—i.e., the law of value—did not work and that the exchange of equivalents based on the amount of labor contained in the commodities was no longer the case in international trade. ⁵ In fact, the regulation of the production and circulation of commodities by the law of value has nothing to do with whether value is transformed into the price of production. It should be emphasized that the premise of Ricardo’s physical model was the inability of capital to move across national borders. However, this premise long ago ceased to apply, and it is worth studying whether the Ricardian physical model constructed on the basis of this premise is still valid.

The underlying assumptions of the Ricardian physical model are the absence of intra-sectoral or like-product competition and the non-separation of producers and consumers. Such assumptions are unreliable, since they sidestep the effect of consumer choice behavior, based on utility maximization, on intra-sectoral competition in international trade. Generally speaking, intra-sectoral competition depends on the productivity of competitors and is therefore based on absolute advantage. Once intra-sectoral competition is taken into account, it is clearly absolute advantage that determines the benefits of international trade. An examination of the Ricardian $2\times 2\times 1$ physical model reveals that the model implies intra-sectoral competition, although Ricardo implicitly assumes that no such competition exists. An analysis of the Ricardian $2\times 2\times 1$ physical model in terms of intra-sectoral competition suggests that the comparative advantage indicated by the model is essentially absolute advantage. According to the Ricardian $2\times 2\times 1$ physical model, and leaving out consumer choice, the principle of comparative advantage should lead to England and Portugal having comparative advantages in the production of cloth and wine, respectively. The terms of trade $R_j$ $(j=c,w)$ determined by the comparative advantage are: $0.83<R_c<1.125$ and $0.89<R_w<1.2$ . However, the terms of trade determined in this way are in fact the conditions of price competition within the sector. For cloth production in England, the price of cloth in terms of wine is 0.83 in England and 1.125 in Portugal, which would induce England to export cloth to Portugal and exchange it for 1.125 units of wine at the price prevailing in Portugal, thus engaging in price competition with Portugal in the cloth market. It can be seen that the cloth produced in England has an absolute advantage in price competition. This is because England will be able to benefit from trade in its locally produced cloth as long as the international relative price is between 0.83 and 1.125, i.e., $0.83<p_c<1.125$ . For Portugal, however, 1.125 is the minimum price for its cloth, and as long as $p_c<1.125$ , cloth production in Portugal will lose money. In the cross-border competition within the cloth sector, England therefore has an absolute advantage. According to the law of one price, the international relative price of wine, $p_w$ , calculated in cloth terms, is $\frac{1}{p_c}$ . As long as $\frac{1}{p_c}>0.89$ , Portugal will obtain trade benefits. Thus, Portugal has an absolute advantage in cross-border competition within the wine sector. Since the relative price of wine in cloth terms is 0.89 in Portugal but 1.2 in England, this will induce Portugal to export wine to England and to exchange 1.2 units of cloth at the price prevailing in England, thus engaging in price competition with England in the wine market. For England, a relative price of 1.2 is the minimum price for its wine, and as long as the international relative price of wine satisfies $p_w<1.2$ , England will lose money on its wine production. For Portugal, however, the relative price of 1.2 is the maximum price of its wine and 0.89 is the minimum price. As long as Portugal can set the international relative price of wine $p_w$ in the range of $0.89<p_w<1.2$ to compete with the wine produced in England, it will be able to reap the benefits of trade. It is clear that in international competition within the wine production sector, Portugal has an absolute advantage. Similarly, according to the law of one price, the international relative price of cloth in terms of wine $p_c$ is $\frac{1}{p_w}$ . A competitive equilibrium based on absolute advantage will be established as long as $p_w=\frac{1}{p_c}$ and $p_c=\frac{1}{p_w}$ hold simultaneously. It is this international competition within sectors, which is based on absolute advantage, that determines the division of labor and trade between the two countries.

It follows that once the intra-sectoral competition that necessarily exists in international trade is taken into account, the comparative advantage indicated by the Ricardian physical model remains essentially absolute advantage. This is merely obscured by the underlying assumptions this model makes about the absence of intra-sectoral competition and about the non-separation of producers and consumers, as well as the novelty of comparative cost analysis. It is also ignored by the literature that has restated the Ricardian physical model in a modern fashion. In contrast to the $2\times 2\times 1$ Ricardian physical model, the long-neglected $2\times 2\times 1$ Ricardian monetary model reflects Ricardo’s idea of trade based on absolute advantage and the role of technological progress, thus presenting a different Ricardo.

In order to demonstrate that gold and silver, as currencies, were distributed among the countries of the world in proportions compatible with purely physical trade through commercial competition, Ricardo constructed a $2\times 2\times 1$ monetary model (Ricardo 1981, 115–119) (Table 2). In this model, the price of commodities is calculated in terms of money rather than comparative costs, and the following assumptions are made: in England, pending an improvement in its wine-making technology, the price of a certain quantity of wine is £50, and the price of a certain quantity of cloth is £45; in Portugal, meanwhile, the prices of the respective quantities of wine and cloth are £45 and £50. The price of cloth is thus lower in England than in Portugal, and the price of wine is lower in Portugal than in England. This difference in the prices of identical commodities will induce England to export cloth to Portugal and make a profit of £5 at the price in Portugal; meanwhile, Portugal will export wine to England and make a profit of £5 at the price in England. Suppose that the technology for making wine in England is improved, and that the price of wine falls from £50 to £45, but that the price of cloth remains unchanged. In this case, England can still export cloth at a profit, but Portugal will no longer export wine—i.e., the wine trade will end. As can be seen from the $2\times 2\times 1$ Ricardian monetary model, international trade is in fact a process of price competition within a certain sector, and its basis is absolute advantage premised on productivity or on the technical conditions of production. Before the technological improvement, England exported cloth and imported wine because the price of cloth was lower than that prevailing in Portugal, which endowed England with an absolute advantage in price competition. Meanwhile, Portugal had an absolute advantage in the production of wine. Following the technological improvement, England reached the same level as Portugal in the production of wine, meaning that there was no difference in the price of wine and no party was endowed with absolute advantage, making trade in wine meaningless. This suggests that for Ricardo, technological progress was a key factor in changing a country’s terms of trade and trade structure. According to Ricardo, even if a country is at a disadvantage in the production of the same product and is at a disadvantage in intra-sectoral competition, it can achieve an absolute advantage by improving its production technology. In his analysis of foreign trade, Ricardo in fact repeatedly emphasizes this role of technological progress (Ricardo 1981, 115–116, 118, 120, 121, 122, 123). ⁶ Although Ricardo does not provide the formation mechanism of the terms of trade or analyze the international division of labor underlying his monetary model, it can be seen from the model that the terms of trade and the international division of labor depend on the price level of the product as determined by the labor productivity of different countries producing the same product. Taking the example of England before the improvement of its wine-making technology, the terms of trade for its cloth and the wine produced in Portugal are expressed in terms of the competitive international prices $p_c$ and $p_w$ , which are $45<p_c<50$ and $45<p_w<50,$ respectively. Responding to the terms of trade, England would have set the competitive price at $45<p_c<50$ to obtain higher returns and force Portugal to withdraw from cloth production, and Portugal would have done the same to obtain higher returns and force England to withdraw from wine production, thus resulting in a specialized division of labor in both countries. Obviously, if England had an advantage in the production of both products, the result of the competition would be Portugal withdrawing from production and becoming a net importer. If the two countries had the same productivity in the production of both products, the international division of labor and trade would not occur.

Table 2

Ricardian $2\times 2\times 1$ Monetary Model

Before the improvement of technology					After the improvement of technology
Commodity	England	Portugal	Benefit for England	Benefit for Portugal	England	Portugal	Benefit for England	Benefit for Portugal
Cloth	45	50	5		45	50	5
Wine	50	45		5	45	45	0	0
Total	95	95	5	5	90	95	5	0

Note: Calculated by the authors based on Ricardo (1981).

Generalizing the Ricardian $2\times 2\times 1$ monetary model and considering the law of demand for consumer choice, let $l^{-1}$ be the labor productivity, the countries $i=1,2$ produce two products $c$ and $w$ , i.e., $q=2$ and $j=c,w$ , $p_{i,j}$ be the price, $p_{ij}=f\left(l_{ij}\right)$ , and $\frac{d{p}_{ij}}{d{l}_{ij}}<0$ . Assume that the two countries have the same demand preferences and demand structure and that $u\left(q_{1,j}\right)$ ~ $u\left(q_{2,j}\right)$ . If $l_{1,j}^{-1}>l_{2,j}^{-1}$ , i.e., $p_{1,j}<p_{2,j}$ , then according to the law of demand there exists $p_{1,j}\succ p_{2,j}$ and country 1 has an absolute advantage. The competitive international price of $j$ is $p_{1,j}<p_j<p_{2,j}$ , as per the terms of trade. Country 1 exports $j$ and conducts price competition with country 2, making a profit, while country 2 will quit the production of $j$ due to losses and will import $j$ , i.e.: ⁷

$D_j=d_{1,j}+d_{2,j}=a-b{p}_{1,j},a-b{p}_{2,j}=0.$

If $l_{1,j}^{-1}=l_{2,j}^{-1}$ , i.e., $p_{1,j}=p_{2,j}$ , $p_{1,j}$ ~ $p_{2,j}$ , then

$d_{1,j}=a-b{p}_{1,j},d_{2,j}=a-b{p}_{2,j}$

A specialized division of labor does not exist, and international trade does not occur. Extending the $2\times 2\times 1$ monetary model to an $n\times n\times k$ or $n\times m\times k$ model would not change the above conclusions.

Summarizing the above analysis leads to the conclusion that Ricardo’s theory of international trade is not a static theory of comparative advantage, as is commonly believed and is restated using modern methods, but a dynamic theory of absolute advantage conditioned on technological progress. In addition to ignoring the roles played by Ricardo’s monetary model and his ideas on technological progress, the literature that uses modern methods to restate Ricardo’s physical model in order to interpret and prove the principle of comparative advantage also provides unintended proof of absolute advantage. To illustrate this point, let us review the previously demonstrated endogenous terms of trade:

$\frac{p_1\left(z_1\right)}{p_2\left(z_2\right)}=\overline{\omega }\frac{a_1\left(z_1\right)}{a_2\left(z_2\right)},$

the implication of which is that if $p_1\left(z\right)<p_2\left(z\right)$ in the production of the product defined in $0\le z\le \tilde{z}\left(\omega \right)$ , country 1 will produce the product and export it to country 2; if $p_1\left(z\right)>p_2\left(z\right)$ in the production of the product defined in $\tilde{z}\left(\omega \right)\le z\le 1$ , country 2 will produce the product and export it to country 1. This is clearly an absolute advantage, not a comparative advantage, though the literature on modern restatements of Ricardo’s physical model refers to this situation as a comparative advantage.

In fact, once consumer choice and intra-sectoral cross-border competition are taken into account, an analysis of the international division of labor and international trade will show that it is absolute advantage, not comparative advantage, that determines the international division of labor and international trade, and that absolute advantage provides the actual basis on which international trade should be analyzed. This can be confirmed by the core literature on modern international trade theory, based on the Ricardian physical model that is theoretically extended and substantialized using modern methods. Take, for example, the E-K model created by Eaton and Kortum (2002). ⁸ This model is well known for its introduction of transportation costs (“icebergs”), i.e., geographic barriers, and extreme values of Frechet distributions, as well as for its adoption of a probabilistic approach and for its desirable feature of being positive. For the same reason, the model also uses the commodity continuum assumption. The model further assumes the existence of a finite number of countries $i\in S\equiv \{1,2,\cdots ,N\}$ , that consumers have constant elasticity of substitution preferences, and their utility function is:

$U={\left[{\displaystyle {\int }_0^{1}Q{\left(j\right)}^{(\sigma -1)/\sigma }\text{d}j}\right]}^{\sigma /(\sigma -1)}.$

Under the assumptions of perfect competition, unit elasticity, and constant returns to scale, the price $p_{ni}\left(j\right)$ at which country $i$ sells a unit of product $j$ to country $n$ is:

$p_{ni}\left(j\right)=\left(\frac{c_i}{z_i\left(j\right)}\right)d_{ni},$

where $z_i\left(j\right)$ is the efficiency with which country $i$ produces commodity $j\in [0,1]$ , $c_i$ is the cost to country $i$ of inputs (input set), $c_i/z_i\left(j\right)$ is the cost in country $i$ of producing a unit of commodity $j$ , $d_{ni}$ is the unit transportation cost (iceberg) from country $i$ to country $n$ , and $\forall n\ne i$ , $\exists d_{ni}>1$ , and $d_{ii}=1$ . $p_{ni}\left(j\right)$ is also the price paid by consumers in country $n$ to buy commodity $j$ . However, consumers in country $n$ buy goods from the international market and therefore choose to buy the least expensive offering of commodity $j$ , i.e.,

$p_n\left(j\right)=\underset{i\in S}{\min }\left\{p_{ni}\right(j);i=1,2,\cdots ,N\}\text{or}{p}_n\left(j\right)=\underset{i\in S}{\min }{p}_{ni}\left(j\right)=\underset{i\in S}{\min }\left(\frac{c_i}{z_i\left(j\right)}\right)d_{ni}.$

Since only the producer with the lowest cost of production will supply the commodity to the market, the likelihood that country $i$ will sell a particular commodity to country $n$ depends on the probability that the price of the commodity is the lowest price ${\pi }_{ni}$ :

${\pi }_{ni}=\mathrm{Pr}\left[p_{ni}\right(j)\le \min \{p_{ns}\left(j\right);s\ne i\left\}\right].$

The distribution of the prices of the commodities country $i$ supplies to country $n$ is $G_{ni}\left(p\right)=\mathrm{Pr}[P_{ni}\le p]$ , i.e., the probability that the price is lower than $p$ . Country $n$ will only purchase a commodity it needs from a country where the price is low, $G_n\left(p\right)=\mathrm{Pr}[P_n\le p]$ , so the distribution of the price of the commodity actually purchased (i.e., the probability of purchasing the commodity at a price lower than $p$ ) is $G_n(p)=1{\displaystyle \prod _{i=1}^N[1-G_{ni}(p)].}$ From

$G_{ni}\left(p\right)=\mathrm{Pr}[P_{ni}\le p]=1-e^{-\left[T_i{\left(c_i{d}_{ni}\right)}^{-\theta }\right]p^{\theta }}$

we can obtain $G_n\left(p\right)=1-e^{-{\Phi }_n{p}^{\theta }}$ , where the parameters of the price distribution ${\Phi }_n$ for country $n$ are:

${\Phi }_n={\displaystyle \sum _{i=1}^N{T}_i{\left(c_i{d}_{ni}\right)}^{-\theta }}$

The parameter ${\Phi }_n$ indicates that the prices of commodities in countries participating in international trade depend on the state of technology ( $T_i$ ), input costs, and geographical barriers in each country. From the price distribution and the parameter of the price distribution, the probability that country $i$ sells a commodity to country $n$ at the lowest price ${\pi }_{ni}$ can also be written as

${\pi }_{ni}=\frac{T_i{\left(c_i{d}_{ni}\right)}^{-\theta }}{{\Phi }_n}$

.

Under the commodity continuum assumption, this probability is also the proportion of commodities that country $n$ buys from country $i$ . Moreover, the price of the commodities that country $n$ actually buys from any country $i$ is also distributed as $G_n\left(p\right)$ . Thus, a higher level of technology, lower production costs, and lower transportation costs create a trade advantage for a country, and that country with a trade advantage will have a higher proportion of its commodities to export to country $n$ , meaning that the distribution of the prices of the commodities it sells in country $n$ will be exactly the same as the overall distribution of prices in country $n$ as a whole.

The E-K model shows clearly that international trade follows absolute advantage; the equilibrium price in international trade is formed at the lowest price level. The exporting country has to ensure that the exported commodity has the lowest price, while the importing country chooses to import only the commodity with the lowest price. Although the E-K model defines $\theta$ as the heterogeneity reflecting comparative advantage, it is precisely absolute advantage that constitutes the core idea of the model and that the model proves. Clearly, once consumer choice and intra-sectoral cross-border competition are taken into account, it is absolute advantage, not comparative advantage, that determines the international division of labor and international trade.

3. Empirical Evidence

Whether international trade is based on comparative advantage or absolute advantage is ultimately an empirical question that needs to be tested by empirical evidence. If international trade follows the Ricardian principle of comparative advantage, it should be empirically possible to observe that the commodity $a$ exported from a low-productivity country $L$ to a high-productivity country $H$ satisfies the condition that the absolute cost $l_{L,a}$ is higher than that of the same commodity from the high-productivity country $l_{H,a}$ , while the comparative cost or relative price is lower than that of the latter, i.e., that it satisfies the Ricardian condition of $l_{L,a}>l_{H,a}$ , $\frac{l_{L,a}}{l_{L,b}}<\frac{l_{H,a}}{l_{H,b}}$ . This condition determines at the same time that what country $L$ imports is the commodity $b$ . Thus, testing the principle of comparative advantage empirically requires, at a minimum, calculation of the absolute cost and comparative cost or relative price of the relevant commodity in the two countries with different productivity. However, the most common method used to test the principle of comparative advantage in empirical studies is the calculation of various forms of revealed comparative advantage indices, typically the RCA (Revealed Comparative Advantage) index, the RSCA (Revealed Symmetric Comparative Advantage) index based on the RCA index, and the NTR (Net Trade Ratio) index:

$RC{A}_{ij}=\frac{X_{ij}/X_{it}}{X_{Wj}/X_{Wt}},RSC{A}_{ij}=\frac{RC{A}_{ij}-1}{RC{A}_{ij}+1},NT{R}_{ij}=\frac{X_{ij}-M_{ij}}{X_{ij}+M_{ij}}.$

Here, $RC{A}_{ij}$ is the revealed comparative advantage index of commodity $j$ exported by country $i$ . $X_{ij}$ is the total value of $j$ exported by country $i$ , while $X_{it}$ , $X_{Wj}$ , and $X_{Wt}$ represent respectively the total value of the exports of country $i$ , the total value of the export commodity $j$ in the world, and the total value of the world’s exports. $RSC{A}_{ij}$ is the revealed symmetric comparative advantage index, $NT{R}_{ij}$ is the net trade ratio index, and $X$ and $M$ are the values of exports and imports, respectively. It is clear from the structure of the indices that they measure the proportion of commodity $j$ in the exports of country $i$ , and do not involve the absolute and comparative costs of the commodity, which do not meet the Ricardian conditions. In the meantime, other things being equal, the share of the exported commodity $j$ clearly depends on the cost or price of the same commodity abroad, according to the law of demand for consumer choice. As mentioned earlier, as long as intra-sectoral competition and consumer choice are taken into account, if $l_{1,j}^{-1}>l_{2,j}^{-1}$ , then $p_{1,j}<p_{2,j}$ and thus $p_{1,j}\succ p_{2,j}$ , there must be:

$D_{1,j}\left(p_{1,j}\right)>D_{2,j}\left(p_{2,j}\right),D_{2,j}\left(p_{2,j}\right)=0$ .

To further illustrate this point, assume that there are $i=1,2,\cdots ,N$ countries and use the homothetic utility function to express that consumers have the same preferences, i.e., all countries have the same demand structure. Let the payment of consumers in country $n$ who buy commodity $j$ from country $i$ be $p_{ni}\left(j\right)$ . In the international market, the prices of similar (homogeneous) commodities produced in different countries are not the same, and these prices form an increasing (or decreasing) sequence of prices: $p_{1j}<\cdots <p_{kj}<\cdots <p_{nj}$ . A budget-constrained consumer who maximizes his utility by purchasing a certain quantity $\left(q\right)$ of commodity $j$ on the international market will, other things being equal, choose commodity $j$ with the lowest price, i.e., the consumer will pay the lowest price demanded by any seller of the homogeneous commodity $j$ , i.e.:

$p_n\left(j\right)=\min \left\{p_{ni}\right(j);i=1,2,\cdots ,N\}.$

This is a realization of the price series $p\left(j\right)$ determined by the law of demand. The price series shows that different countries produce the same commodity $j$ with different productivity $l_{ij}^{-1}$ and form a productivity series $l_1^{-1}\left(j\right)>\cdots >l_k^{-1}\left(j\right)>\cdots >l_n^{-1}\left(j\right)$ , which is consistent with the basic assumptions of the Ricardian model. This productivity heterogeneity gives rise to intra-sectoral international competition for profit maximization under the law of demand. Leaving other conditions out of account, intra-sectoral competition depends on the cost or price of the homogeneous commodity $j$ , which is determined by productivity. Without loss of generality, let the market demand function for the homogeneous commodity $j$ be $q=D\left(p\right)$ , which satisfies $D^{\prime }\left(p\right)<0$ , while $p$ is the price of commodity $j$ , which is determined independently by producers in different countries. The unit cost is $c$ , and the profit function is

$\pi \left(p\right)=(p-c)D\left(p\right).$

Or, for country $i$ , taking into account the intra-sectoral international competition, the profit function is

${\pi }_i(p_i,\cdots ,p_n)=(p_i-c)D_i(p_i,\cdots ,p_n).$

For the sake of facilitating analysis, assume that the international equilibrium price of commodity $j$ is $p^e\left(j\right)$ , and that the price series determined by productivity can be divided into two subsets: $P_L$ , and $P_H$ , where $P_L<p^e<P_H$ , $P_L<P_H$ . According to the law of demand, consumers pay the lowest price for the homogeneous commodity $j$ , and above the price of $p^e$ there is no demand, i.e., $D\left(P_L\right)>0$ , $D\left(P_H\right)=0$ . Therefore, countries whose prices belong to the subset $P_L$ produce and export commodity $j$ , while countries whose prices belong to the subset $P_H$ import commodity $j$ . According to the assumption, the prices of commodity $j$ in country $i$ and country $n$ are $p_{ij}\in P_L$ , $p_{nj}\in P_H$ , respectively, and $p_{ij}<p_{nj}$ ; that is, country $i$ produces and exports commodity $j$ to country $n$ . This is exactly the same as the conclusion drawn under the previous commodity continuum assumption. The share of commodity $j$ exported by country $i$ in its total exports is $a_{j,t}=X_{ni}/X_{it}$ , and the share of commodity $j$ in the total imports of country $n$ is $b_{ij}=X_{ni}/X_{nt}$ . The $RCA$ index of country $i$ is

$RC{A}_{ij}=\frac{X_{ij}/X_{it}}{X_{Wj}/X_{Wt}}=R_{ij}=\frac{a_j}{w_j},$

where $X_{ni}=X_{ij}$ . Noting that the subset $P_L$ is also a monotonic series determined by country-specific productivity, there is necessarily price competition based on country-specific productivity, i.e., intra-sectoral international competition. To simplify the analysis, assume that the representative country $k$ is competing with country $i$ in the market of country $n$ . If $l_k^{-1}\left(j\right)=l_i^{-1}\left(j\right)$ , then $p_{kj}=p_{ij}$ , consumers are equally likely to choose imports from both countries, and the profits of country $i$ are

${\pi }_{ij}(p_i,p_k)=\frac{1}{2}{D}_i\left(p_i\right)(p_i-c).$

Demand $D_{ij}\left(p_i\right)$ , i.e., the volume of exports $X_{ni}$ , is significantly lower than before, which is 50%, and $b_{ij}$ , which is the share of standardized imports supplied by country $i$ to country $n$ , decreases by $b_{ij}=0.5X_{ni}/X_{nt}$ . Accordingly, the share of exports in country $i$ declines by $a_{ij,t+1}=0.5X_{ni}/(X_{it}-0.5X_{ni})<a_{ij,t}$ , and the index of revealed comparative advantage becomes smaller:

$R_{ij,t+1}=\frac{a_{j,t+1}}{w_j}<R_{ij,t}=\frac{a_j}{w_j}.$

If $l_k^{-1}\left(j\right)>l_i^{-1}\left(j\right)$ , then $p_k\left(j\right)<p_i\left(j\right)$ , $p_i\left(j\right)-p_k\left(j\right)=\Delta$ , country $k$ has an absolute advantage in the production of commodity $j$ , and $\Delta$ is the magnitude of this advantage. Country $k$ can choose a sufficiently small $\epsilon$ ( $0\le \epsilon \le \Delta$ ) and use this absolute advantage to compete with country $i$ in the same market:

$p_k+\epsilon <p_i,p_k+\epsilon >c_k$

.

The profits of country $i$ are

${\pi }_{ij}(p_i,p_k+\epsilon )=\{\begin{array}{l}\frac{1}{2}{D}_i\left(p_i\right)(p_i-c_i)\epsilon =\Delta ,p_k+\epsilon =p_i\\ m{D}_i(p_i,p_k+\epsilon )(p_i-c_i)0<\epsilon <\Delta ,p_k+\epsilon <p_i,\left\{m\right\}<0.5\end{array},$

where the demand or export is ⁹

$D_{ij}(p_i,p_k+\epsilon )=\{\begin{array}{l}\frac{1}{2}D\left(p_i\right)\epsilon =\Delta ,p_k=p_i\\ mD(p_i,p_k+\epsilon )0<\epsilon <\Delta ,p_k+\epsilon <p_i,\left\{m\right\}<0.5\end{array}.$

From the relationship between $a_{ij}$ , $b_{ij}$ , and $R_{ij}$ , we can see that the size of the index of revealed comparative advantage $R_{ij}$ depends on the parameter $m$ determined by the competitive strategy of country $k$ . ¹⁰ It can be seen that $a_{ij}=m{X}_{ni}/(X_{it}-(1-m)X_{ni})$ , $b_{ij}=m{X}_{ni}/X_{nt}$ . If country $k$ abandons price competition, the result is the same as if they had the same productivity, $m=0.5$ , but country $k$ will earn excess profits $\Delta {\pi }_{kj}=0.5\Delta D\left(p_k\right)(p_k-c_k)$ . If it uses its absolute advantage to conduct price competition with country $i$ , then the share of country $i$ ’s exports $m$ will decline as $\epsilon$ decreases, and the index $R_{ij}$ will decline accordingly. In contrast, the share of country $k$ ’s trade ( $1-m$ ) will rise with the decrease of $\epsilon$ , and the index $R_{kj}$ will increase.

In the above discussion, transportation costs and government intervention, which constitute factors in commodity prices, have not been considered. Other things being equal, the level of transportation costs of a commodity will determine the price level at which the commodity is sold. Assuming that the transportation costs of country $k$ and country $i$ are ${\tau }_{kj}$ and ${\tau }_{ij}$ , respectively, if ${\tau }_{kj}-{\tau }_{ij}\ge \Delta$ , the absolute advantage of country $k$ based on its high productivity will be offset by its excessively high transportation costs, and its absolute advantage will cease to exist. This will result in an adjustment in $a_{kj}$ and $b_{kj}$ that will eventually cause the index $R_{kj}$ to fall. Country $i$ with low productivity can offset the negative effects of low productivity by having lower transportation costs, and if the transportation costs of country $k$ are sufficiently high, satisfying ${\tau }_{kj}-{\tau }_{ij}>\Delta$ , then country $i$ has an absolute advantage, its share of exports to country $n$ increases, and the index $R_{ij}$ rises as a result. This conclusion is also easy to deduce from the aforementioned E-K model. Another factor that affects commodity prices is government intervention. If the government decides to impose a tariff of the amount $t$ on an imported commodity, the price of that commodity increases and its absolute advantage is weakened. As a result, demand for the commodity in the country is reduced, imports fall, and the index $R$ declines.

It can be seen that the prevailing revealed comparative advantage index $R_{ij}$ depends entirely on the absolute advantage of different countries in producing the homogeneous commodity on the international market and is a measure of absolute advantage. Similarly, the indexes RSCA and NTR also measure absolute advantage rather than comparative advantage. Based on the above analysis, this article regards $R_{ij}$ , RSCA, and NTR as all being absolute advantage indexes.

Summarizing the relevant literature and comparing China with the US, it is found that in agriculture, China has an absolute advantage in aquatic products, vegetables and related products, gums, plant preparation materials, animal wool, etc. The US has an absolute advantage in meat, fruits and nuts, grains, oilseeds, gums, vegetables and related products, and cotton, etc., of which oilseed products containing soybeans have an RCA index as high as 2.841 (Chen and Zhang 2021). In manufacturing, China has an absolute advantage in electronic products, optical equipment, textiles and clothing, footwear, leather products, toys, furniture, etc., while the US has an absolute advantage in aerospace equipment, pharmaceutical products, chemical products, transportation equipment, and other goods (Li 2019; Ding and Chen 2021; Song, Yu, and Bai 2021; Zhao, Ding, and Guo 2022; Huang and Yang 2022).

Let us take the trade dispute between China and the US as another example. The trade war with China initiated by the US shows clearly that the target of additional tariffs is export commodities in which the other party has an absolute advantage. If we examine the key Chinese commodities on which the US has levied tariffs, the first round worth US$50 billion focused on electrical machinery and equipment, automobiles, and optical and photographic equipment. The tax rate was 25%, ¹¹ and the purpose was to hit China’s manufacturing in 2025. In the second round of US$200 billion and the third round of US$300 billion, the range of commodities subject to increased tax was expanded to include a wide variety of areas. The tariffs levied on China now encompassed cell phones, computers, textiles and apparel, boots and shoes, toys, and other products. The rate of tax on products such as telephones, boots and shoes, textiles and apparel, and toys is as high as 15%, while the rate of tax on products such as communication switches, furniture, lamps, and other goods has been further increased from 10% to 25%. ¹² As a countermeasure, China, on April 2, 2018, suspended its observance of tariff reduction obligations and imposed tariffs on US goods worth US$50 billion, US$60 billion, and US$75 billion, successively. The highest tariffs were imposed on pork and pork offal, at a rate of up to 60% and with a tax coverage of 100%. In addition, aluminum, cherries and other fruits, soybeans, corn, wheat, cotton, and other agricultural products attracted high tax rates, with the coverage reaching 100%. ¹³ The commodities taxed in the Sino–US trade war are in line with the aforementioned RCA index, i.e., commodities with an absolute advantage.

The prices of key taxed commodities deserve to be noted. Taking as an example the shirts in the category of textiles and apparel on which the US has imposed additional tariffs, the cost of manufacturing a shirt in China is about US$1.12, while in the US it is as high as US$5 (Zhang 2005). Of the toys sold in the US market, about 85% are produced in China; if they were made in the US, the average manufacturing cost of each toy would be US$10, and the selling price would rise by a factor of 3. ¹⁴ If we take electronics, and use iPhone manufacturing as an example, China’s Foxconn is the world’s largest manufacturer of original equipment for the iPhone and is mainly responsible for assembly of the whole apparatus. According to IHS Markit analysis, the cost of assembling an iPhone 7 32GB in China is US$5 dollars, and the cost price of the whole apparatus is US$224.8. If just the assembly process were moved back to the US, the price of assembly would increase by US$30–40 due to higher labor and transportation costs. If the world provided the raw materials and the US produced components and assembled them, the production cost of each iPhone would increase by US$100 (Zhang and Fan 2020). Let us also take the agricultural products such as pork, soybeans, wheat, corn, cotton, and so on that are the focus of the tariffs levied by China on the US. In 2017, the cost of pork production in the US was RMB 8.74/kg, while that in China was RMB 12.42/kg; the cost of pork production in the US was thus only 70% of that in China (Zheng, Li, and Wang 2019). The total costs per mu (a unit of area, 1 mu = 0.0667 hectares) of soybeans, wheat, corn, and cotton in the US during 2010–2020 were also lower than in China (see Figures 1 and 2). These figures in turn show that China and the US have formed a specialized division of labor and participate in international trade with products for which each country has an absolute advantage.

Figure 1

Total Cost per mu of Soybean and Wheat Production in China and in the US during 2010–2020

Note: NDRC (2015, 21, 27, 622, 624). The horizontal axis in this figure stands for time (year), and the vertical axis stands for amount of money (RMB/mu).

Figure 2

Total Cost per mu of Corn and Cotton Production in China and in the US during 2010–2020

Note: Calculated by the authors based on NDRC (2015, 2021). The horizontal axis in this figure stands for time (year), and the vertical axis stands for amount of money (RMB/mu).

When we consider the relationship between the prices of key taxed commodities and the volume of trade, an instructive example is provided by textiles and apparel, in which China has an absolute advantage. A US Congressional report on the American textile and apparel industry points out that this industry faces fierce competition from the Far East. Comparing the wholesale price of US-produced garments with those imported from the Far East, the report points out that “topweight” fabrics from the Far East cost 35% less than the equivalent domestic fabrics and that the cost of “bottomweight” fabrics is 15% lower. As a result, most US apparel producers must find ways to cut between 10% and 35% of their costs in order to compete directly with foreign suppliers (Office of Technology Assessment of the US Congress 1987, 25). The report also analyzes the reasons behind the massive takeover of the US market by textile and apparel imports from China and other countries in the 1980s from the perspective of the exchange rate, pointing out that the strengthening of the US dollar made imports of textile and apparel products far less expensive in the US relative to domestically produced items. The depreciation of the US dollar against the currencies of industrialized countries can do only a modest amount to alleviate this trend, which is considered unavoidable (Office of Technology Assessment of the US Congress 1987, 4). Once again, this shows that the basis of international trade is absolute advantage in the area of commodity prices. This lesson emerges with particular clarity from an analysis of US imports of Chinese textile and apparel products before and after China’s accession to the World Trade Organization (WTO). During 1996–2001, US imports of Chinese textile and apparel products were relatively stable, despite rises and falls in the import growth rate and market share. After China’s accession to the WTO, US imports of Chinese textile and apparel products rose sharply. Both the import growth rate and market share continued trending upward (see Figure 3), particularly following the abolition of the quota system on January 1, 2005. US imports of textile and apparel products from China reached US$16.8 billion in 2005, an increase of 57% over the previous year. According to US officials, in the first three months of 2005, imports of shirts, coats, and trousers from China increased by more than 1,000% over the same period of the previous year, while imports of underwear increased by 300% (Zhang 2005). An analysis of US textile and apparel imports from China before and after the Sino–US trade war shows that the imposition of the 15% additional tariffs that came into effect in September and December 2019 led directly to a climb in the cost of these goods, ¹⁵ bringing about a significant reduction in US import demand for them, from US$25.4 billion in 2019 to US$18.6 billion in 2020, or a decrease of 27% (see Figure 3). A further example is provided by agricultural products, in which the US has an absolute advantage. On July 6, 2018, the imposition of a 25% additional tariff led directly to a climb in the cost of China’s imports of various agricultural products from the US. This is illustrated by the prices for soybeans and corn. The Dalian Commodity Exchange lists the import costs of US soybeans and corn calculated before and after the imposition of tariffs. ¹⁶ For the July shipment calculated on July 3, 2018, Chinese importers of US soybeans paid about RMB 2,851 per ton, while the cost of corn imports was about RMB 1,567 per ton; for the August shipment, the cost of soybean imports was about RMB 2,846 per ton, and the cost of corn imports was about RMB 1,567 per ton. ¹⁷ After the imposition of the 25% additional tariff on July 6, 2018, the cost to China of the July shipment, now including the new charges, was about RMB 3,786 per ton for soybeans and about RMB 1,663 per ton for corn; the cost for the August shipment was about RMB 3,779 per ton for soybeans and RMB 1,669 per ton for corn. ¹⁸ The rising import costs associated with the tariffs have dampened China’s demand for imports of key agricultural products from the US. In 2018, China’s imports of soybeans, corn, and wheat from the US fell markedly. From 32.85 million tons, 0.76 million tons, and 1.56 million tons respectively in 2017, the totals declined to 16.64 million tons, 0.31 million tons, and 0.36 million tons the following year, representing drops of 49%, 59%, and 77%. ¹⁹ China’s imports of US pork also declined from 170,000 tons in 2017 to 90,000 tons in 2018, a drop of 48%. ²⁰ The rising costs of agricultural imports from the US have led to an increase in China’s imports of low-priced agricultural products from other countries. Soybeans may be taken as an example. The cost of soybean imports from the US increased by about RMB 900 per ton after the imposition of the additional tariff, to a point about RMB 300 per ton higher than for Brazilian soybeans. ²¹ The US provided 19% of China’s total soybean imports in 2018, down from 34% in 2017, while imports of Brazilian soybeans rose sharply, from 53% to 75%. ²²

Figure 3

US Textile and Apparel Imports from China and China’s Share of the US Apparel Market during 1996–2020

Note: Calculated from US Office of Textiles and Apparel data. The horizontal axis indicates the year. The vertical axis on the left indicates the value of imports (in units of 100 million US$), while the vertical axis on the right shows the growth rate and market share (in percent).

These developments show that changes in commodity prices have a direct impact on the volume of commodity imports. This further demonstrates that countries participate in the international division of labor and trade on the basis of absolute advantage expressed in commodity prices.

4. Conclusions

The analysis in this article shows that Ricardo’s theory of international trade is actually a theory of absolute advantage. The foundation of the international division of labor and of international trade is absolute advantage, which is the inevitable result determined by the law of value. Regardless of the existence of international trade, producers will adopt the strategy of cheapening commodities to maximize profits and will participate in competition under the law of value (Marx 2004, 722). In the meantime, other things being equal, consumers will always choose the commodities with lower prices, in order to maximize utility. The above dual relationship, determined by the law of value, shows that competition based on the producer’s strategy of cheapening commodities depends on the cost of production of commodities, i.e., on the absolute advantage of cost. Even the Ricardian $2\times 2\times 1$ physical model on which the theory of comparative advantage is founded, and the theory of comparative advantage that has been developed on this basis, demonstrate that what is involved is still absolute advantage: the comparative advantage determined by analysis employing relative prices, comparative costs, or opportunity costs is precisely the absolute advantage of intra-sectoral cross-border competition. In this sense, the theory of comparative advantage can be viewed as a theory of absolute advantage determined by relative prices, comparative costs, or opportunity costs in physical trade. Unlike the Ricardian $2\times 2\times 1$ physical model, the $2\times 2\times 1$ Ricardian monetary model, which is completely ignored by the prevailing theory of comparative advantage and which includes technological progress, is clearly a model that analyzes the international division of labor and international trade in terms of absolute advantage and that embodies the principle of dynamic absolute advantage. The idea that technological progress can change a country’s dominant position is an important element of the model—an element that is related to the choice of industrial policy and, especially, to the development strategy of economically backward countries. The latter is a long-debated issue in academia and bears directly on how the economic achievements of China’s reform and opening up should be interpreted, so it is necessary to make a brief analysis.

According to the prevailing theory of comparative advantage, a country should follow the principle of comparative advantage by concentrating its resources on the development of industries with a low opportunity cost, while abandoning or not developing industries with a high opportunity cost. In this scheme, the former industries participate in the international division of labor as trading sectors that earn foreign exchange through exports and then purchase products involving high opportunity costs from abroad, on the basis that it is better to buy than to make. For economically backward countries, this means choosing an export-oriented economic development strategy rather than an import-substitution or catching-up strategy. If a catching-up strategy is adopted, it will inevitably distort prices and lead to a misallocation of resources. Since catching-up industries have a high organic composition of capital and the economically backward countries lack capital, technology, and human resources, catching-up industries do not have a self-generating capacity; attempts to develop them thus run counter to the principle of comparative advantage and are therefore bound to fail (Lin, Cai, and Li 1994, chapters 2 and 3).

First of all, however, it should be remembered that the level of opportunity cost, which is the basis of the principle of comparative advantage, is spontaneously determined by the market mechanism. An export-oriented strategy is nothing more than a requirement that economically backward countries choose an industrial structure formed in accordance with spontaneous regulation by the market under the existing distribution of resources. Since comparative advantage is determined spontaneously by the market, export orientation is also inevitably formed spontaneously, and in these circumstances, there is no need for an artificially formulated development strategy. Second, and more important, is the fact that for economically backward countries, the industries with high opportunity costs are precisely the modern industries formed since the Industrial Revolution. The Industrial Revolution completely altered the mode of production practiced by human beings; it initiated mass production using the machine system and also created an equipment manufacturing industry to meet the needs of different industries. The sector producing the means of production came to provide the material and technological basis that is of decisive significance for promoting economic growth and efficiency and that represents the main characteristic of developed economies. Under the law of value, the industries in which economically backward countries have comparative or absolute advantages have usually been confined to the traditional fields that existed before the Industrial Revolution, and for these countries, the resulting international division of labor has been subordinate to the needs of developed states. ²³ If economically backward countries do not establish modern industries, they will not only be unable to overcome their backwardness, but the relationships they form with developed countries will also be dependent. Without modern industries, the socialist system in China could never have established a sound material and technological basis. This meant that China, beginning its development under conditions of economic and technological backwardness, was compelled to seek initial assistance from the socialist countries, to give full play to the advantages of the socialist system, to adopt a catching-up strategy, and to reallocate resources to favor certain industries. China was obliged to set up a whole range of systems compatible with the catching-up strategy in order to accumulate capital, absorb technology, and train human resources. In this way, the country set about completing its socialist industrialization within a relatively short time, creating a complete and independent system of industry and national economy. For a certain period of time, the adoption of a catching-up strategy would have the effect of slowing the improvement of people’s lives, but that cost would yield long-term benefits. An important reason why China since its reform and opening up has been able to create a world-renowned economic miracle is precisely the fact that it established its industrial system and formed its processing and manufacturing capacity through a catching-up strategy. There is a certain literature that interprets China’s economic achievements since the reform and opening up as the result of following the principle of comparative advantage and adopting an export orientation giving full play to labor-intensive industries in which China has a comparative advantage. This interpretation is clearly at odds with reality, neglecting the fact that labor-intensive industries are not manual labor industries that do not require capital input; on the contrary, labor-intensive industries also rely on big inputs of factors, including machinery and equipment, electricity, transportation, chemical raw materials, and so on. Without a complete industrial system and strong processing and manufacturing capacity, labor-intensive industries cannot possibly have a so-called comparative advantage. It is equally untenable for this type of literature to conclude that capital-intensive industries, i.e., catching-up industries established in line with a catching-up strategy that violates the principle of comparative advantage, do not have a self-generating capacity. The fact is that these industries, as the material and technological basis of China’s national economy, have long been supporting the country’s economic growth. Through the demand generated by that growth, they have been expanding reproduction and realizing technological progress, thus guaranteeing the international competitive advantage of China’s export-oriented industries on the basis of absolute cost. It has been proved that these catching-up industries, which were established in violation of the principle of comparative advantage, not only have a self-generating capacity, but have also gradually developed a cost advantage that enables them to participate in international competition. The establishment of this advantage is not, as some literature says, due to a decline in comparative advantage of the labor-intensive industries that previously enjoyed this comparative advantage. On the contrary, it is the result of the continuous development of these capital-intensive industries, whose establishment the theory of comparative advantage would have excluded and that should not have been established, according to that theory. We may imagine the outcomes if the new China in its early years had refused to establish those capital-intensive catching-up industries, reasoning that they violated the principle of comparative advantage. How could those industries, which would not exist at all, have enjoyed a comparative advantage today? How is it possible for people to envision the formation of a full range of industries and a transition from backward agriculture to industrial manufacturing without this deliberate catching-up strategy (Lin and Wang 2018)? It is groundless to assert that the strategy was doomed to failure.

The analysis in the present article leads to the following conclusions. First, the objective basis for the international division of labor and international trade, as determined by the law of value, can only be absolute advantage. It is still absolute advantage as demonstrated by the Ricardian $2\times 2\times 1$ physical model and the theory of comparative advantage developed on this basis and restated in modern times. In this regard, the theory of comparative advantage amounts to nothing more than the determining of absolute advantage in physical trade by means of a comparative cost analysis.

Second, the Ricardian $2\times 2\times 1$ monetary model, ignored by the theory of comparative advantage, is a model of absolute advantage affirming that exogenous technological progress can help industries that do not possess absolute advantage to acquire it. At the same time, the model also affirms the circumstances and conditions under which international trade will not occur. Together, these postulates can be seen as constituting Ricardo’s theory of dynamic absolute advantage incorporating technological progress. This theory affirms the dynamic nature of the role of technological progress, making it policy-relevant. By contrast, the theory of comparative advantage, which is based on Ricardo’s physical model and its modern restatement, emphasizes the industrial structure and its comparative advantage formed by spontaneous market regulation under a given distribution of resources. If the comparative advantage across industries changes, this is also the result of spontaneous market adjustment. Thus, this theory is essentially opposed to policy intervention or is paradoxical in its treatment of the relationship between comparative advantage and policy intervention. This shows that there is a clear difference between the prevailing theory of comparative advantage and Ricardo’s theory of international trade.

It is important to note that because Ricardo confused the value of commodities with the price of production and mistakenly believed that the law of value no longer regulated international trade, he had no concept of international value. Therefore, Ricardo’s theory of international trade and his understanding of the role of exogenous technological progress had no basis in the labor theory of value. Marx pointed out Ricardo’s mistake, analyzed the role of the law of value in regulating international trade, and created the international theory of value. According to Marxian economics, technological progress is the result of the regulating role of the laws of value and surplus value in general. The role of technological progress is to make national values lower than international values in order to create an absolute advantage in intra-sectoral cross-border competition. Obviously, to maintain an advantageous position in international competition, it is necessary to continuously promote technological progress. At the same time, Marx clearly pointed out that the theory of comparative advantage is a theory of developed capitalist countries, devised in pursuit of their interests and aimed at establishing an international division of labor in their favor. It follows that in conducting research on international trade, one should follow Marxian economics and study international production relations in depth.

Notes

1.

R. Torrens was arguably the first to formulate the principle of comparative advantage, in 1815 (see Chipman 1965).

2.

The literature on this proposition is vast, and readers are invited to consult it for themselves.

3.

See Lin (2000). Wu (2018) even considers that the slogan of developing the chip industry at all costs is dangerous. This is puzzling, since the chip industries in South Korea and in the Taiwan region of China started essentially from scratch. Is it not the case that these chip industries were developed without enjoying any so-called comparative advantage?

4.

For the deduction of this model, see Zhang (2023).

5.

Ricardo had no concept of the price of production, which is an important reason why he confused value with the price of production.

6.

Ricardo also emphasized the role of taxes, transportation, and import and export subsidies.

7.

This is one of the scenarios. Other scenarios can be deduced for different combinations of commodities in the two countries but will not be discussed here.

8.

In fact, Ricardo emphasized the role of transportation (Ricardo 1981, 121, 122).

9.

Here, $p_k+\epsilon$ is infinitely close to $p_{ij}$ . However, if $\epsilon =0$ , $p_{kj}<p_{ij}$ , then $m\to 0$ , and country $i$ will probably quit.

10.

Here, $m$ is a decreasing series with a maximum value of 0.5.

11.

Calculated using the US Trade Statistics Database (https://usatrade.census.gov) and data from the US tax list on China.

12.

Calculated using the US Trade Statistics Database (https://usatrade.census.gov) and data from the US tax list on China.

13.

Calculated from the US Trade Statistics Database (https://usatrade.census.gov) and data from the US tax list on China. Tax coverage = China imports from US of goods subject to tariffs under that category / China imports from US of all goods under that category.

14.

See https://baijiahao.baidu.com/s?id=1556638221583783&wfr=spider&for=pc.

15.

See https://baijiahao.baidu.com/s?id=1641013456276391332&wfr=spider&for=pc.

16.

The cost of imports is obtained using the following formula: [(CBOT future price + FOB premium) × unit conversion factor + ocean freight] × (1 + VAT) × (1 + tariff) × RMB exchange rate + port charges. CBOT is the abbreviation of “Chicago Board of Trade,” and FOB is the abbreviation of “Free on Board.”

17.

See http://www.dce.com.cn/dalianshangpinmobile/pzzx90/dce_2364135/dce_2364141/6110878/index.html.

18.

See http://www.dce.com.cn/dalianshangpinmobile/pzzx90/dce_2364135/dce_2364141/6111350/index.html.

19.

Calculated using data from the US Department of Agriculture (https://www.usda.gov/) and UN Comtrade databases (https://comtrade.un.org/).

20.

Calculated using data from the UN Comtrade database (https://comtrade.un.org/).

21.

See http://www.dce.com.cn/dalianshangpinmobile/pzzx90/dce_2364135/dce_2364141/6110878/index.html and http://www.dce.com.cn/dalianshangpinmobile/pzzx90/dce_2364135/dce_2364141/6111350/index.html.

22.

Calculated using data from the UN Comtrade database (https://comtrade.un.org/).

23.

There is a view that in the early stages of their development, economically backward countries have a comparative advantage in the production of agricultural commodities. But how can traditional agriculture, based on hand tools and animal power, be more competitive than modern agriculture, which has at least realized mechanization? It is a simple observable fact that the agricultural productivity in developing countries is much lower than that in developed countries. In this respect, the theory of comparative advantage is a blackboard theory that is divorced from reality. See Lin (1988).

Acknowledgements

This article was translated from Chinese by Dr. Dongyun Han at the Academy of Marxism, Chinese Academy of Social Sciences, China.

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