Comparative Advantage and TNC's

[mckeever <mckeever@xxxxxxxxx>]

(Apologies for cross-postings.)

There was a thread of discussion a few weeks ago about Comparative Advantage
and the decline of the Nation State. It seems to me that this issue is at
the heart of the concept of globalization and the effects of the TNC's on
jobs and incomes everywhere. I'd like it a lot if we all address this issue
- perhaps the discussion will attract some attention from the policy makers.

Here's how I see it: The Law of Comparative Advantage argues that a nation's
industries will tend to specialize in those products which are cheaper to
produce when compared to other products within the same country - even if
those products cost more than the same products from other countries. The
subject country will increase its welfare by trading those relatively low
cost goods on the world market, even though the products cost more than the
world price. (Please forgive the imprecision of this explanation.)

This holds when the subject country's capitalists are prevented from moving
capital and production to another country with an absolute cost advantage;
in that case, the subject country creates more consumer and producer
surplus, or welfare, by specializing in the relatively cheaper products and
trading for other goods.

But, what happens when capital is free to move from country to country? The
obvious answer is that capital moves to the country with an absolute
advantage, produces goods more cheaply than the original country and makes
high profits for the enterprise owners. The result in the original country
is less sanguine, however - that country is left with only products that
have absolute cost disadvantages in the world market. Its exports decline,
its income declines and the living standards of its citizens declines. Of
course, the country's central bankers attempt to reflate the economy with
expansionary policies, but are ultimately unable to stop the decline.

At the moment, the TNC's are able to move capital around the world at will
to take advantage of low cost production. They have this ability apparently
because no sovereign nation has the inclination or will to stop them. I
think that sovereign nations have the duty to examine those capital flows
and to control them for the benefit of the home country. I am not arguing
for eliminating capital flows completely, but I am arguing that a sovereign
govwernment which fails to protect its citizens from harm is failing in its
obligation to protect its subjects. [At this point, some will argue that
consumer welfare will decline when domestic consumers are required to pay
more than the world price for products. The answer is that everyone's living
standards will rise inside the country when there are more jobs and higher
incomes inside the country.]

Fortunately (or unfortunately, depending on your political views) it is very
easy to control these capital movements. It simply requires a new regulation
from a country's treasury department which requires any bank wishing to
transfer funds offshore to obtain a permit before doing so. Enforcement can
be accomplished easily with electronic approvals required. The benefits of
this regulation will be increased employment in the subject country
resulting from the employment at home of capital that otherwise would go
offshore.

Thank you for your attention. I look forward to reading your replies.


Mike P. McKeever
Assistant Professor
Armstrong University, Berkeley, CA
Founder, McKeever Institute of Economic Policy Analysis, Berkeley, CA
Telephone: 510-486-0275
email: mckever@xxxxxxxxx
URL: http://www.mkeever.com/