Free LOSING CONTROL by Stephen D. King Page B

world.
    Škoda’s profits now go to the shareholders of Volkswagen AG who, in turn, are based in Frankfurt, London, New York and countless other locations. While Škoda’s geographical location says something about trading relationships – Czech car exports may be higher as a result – the idea that the Czech Republic and its people are somehow the sole beneficiaries of Škoda’s revitalization is untrue. There are winners spread all over the world. There are also losers. Trabant production didn’t survive but nor did Britain’s Rover Group. America’s Big Three didn’t do too well either. With the competitive pressures unleashed by globalization, unprofitable, poorly managed companies have no place to hide.
COMPARATIVE ADVANTAGE AND ECONOMIC DISADVANTAGE
    Political arrangements can get in the way of economic opportunity and preserve economic rents for the lucky few. They create barriers to free trade, migration and capital flows. Since the 1980s, those barriers have slowly come down. The developed world is now trading with countries that, only a few years ago, were treated as strange lands. In analysing these new patterns of trade, economistsroutinely resort to the principles of comparative advantage famously described by David Ricardo in On the Principles of Political Economy and Taxation, published in 1817. Today’s trade patterns, however, are much more a story about outsourcing, off-shoring, upscaling and downsizing. The developed world has increasingly been exporting its factories to the emerging economies. I’m not sure we’ve understood the full implications.
    Ricardo was, rightly, keen to extol the advantages of trade. He had a brilliant argument to do so. Both England and Portugal could produce wine and cloth, but Portugal was better at producing both goods. Portugal therefore had an absolute advantage in the production of both wine and cloth. Trade between the two countries therefore did not seem to be promising; certainly, there appeared to be little benefit for Portugal.
    Ricardo was not put off. If the cost of producing cloth in Portugal was relatively high, in terms of the reduced production of bottles of Portuguese wine, and wasn’t so high in England, it would make sense for Portugal to devote more of its resources to the production of wine, which could then be traded for cloth produced in England. The net result would be higher output and higher consumption in both Portugal and England.
    Ricardo’s argument is in effect an international extension of the economic principles established by Adam Smith and others fifty years earlier. Each of us should specialize in the things we are relatively good at. A dentist might be better as a dental nurse than the dental nurse she employs, but if she spent all her time being a dental nurse, she wouldn’t be able to practise dentistry to the best of her ability and her patients would be left with toothache. Similarly, if Portuguese wine is particularly good and English cloth just about passes muster, it benefits everyone if the Portuguese spend their time tending their vines. I’ve drunk English wine and, with perhaps one or two exceptions, I’d rather leave viticulture to the Portuguese.
    If all trade were the result of Ricardo’s comparative advantage, then we’d all be potentially better off. Yet comparative advantage is not the only reason for trade. Ricardo’s arguments work only under specific assumptions which do not always hold true. Of these, perhaps the most important are, first, that capital and labour are immobile across nations and, second, that capital and labour are very mobile within nations.
    Neither of these assumptions typically holds. If, for example, the opening up of trade between England and Portugal leaves lots of wine producers in England threatened with unemployment, comparative advantage works best only when those workers can easily get new jobs making cloth. Let’s imagine that wages in cloth making are much lower than wages