Tuesday, November 24, 2009

Fostering trade with South Korea

Denver Post editorial "Fostering trade with South Korea" (November 23rd, 2009), while citing the "so-called Law of Comparative Advantage", appears to completely misunderstand the principle. In fact, when two nations trade, both benefit in real terms. The relative benefits of trade have nothing whatsoever to do with the question of whether or not a nation should engage in trade: a country should engage in trade when it benefits from doing so. The article does not correct the misunderstanding that relative gains to trade are irrelevant in the decision to engage in trade.

Obama insists that the trade agreement would not benefit Korea more than the U.S., and he seems to have the better case. [Emphasis added]. Still, the anti-trade bias within his party and in Congress will make it difficult for Obama to make good on his promise.

The trade appears to be something positive, or nothing. Even if the people he is trying to convince only care about relative wealth, it would take a herculean feat to think that we would be benefitting South Koreans 140 times what the United States would be gaining, approximately the amount that would be required to oppose the bill on relative wealth grounds.

As a side issue, the article offers no backing for its conclusion that:

Estimates are that the South Korea free-trade pact would boost the $80 billion in annual trade between our countries by as much as $20 billion a year within five years.

What's more, the expectation is that American farmers and automakers would benefit most, because their products face the toughest Korean trade barriers.

The amount of trade depends on each nation's comparative advantage. It is certainly not clear that American companies like General Motors, Ford, or Chrysler have a comparative advantage over Hyundai and Kia.

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