The principle of comparative advantage has been the very basis of international trade for over a century until after their First World War.
Since then critics have been able only to modify and amplify it. As rightly pointed out by Professor Samuelson, “If theories like girls, could win beauty contests, comparative advantage would certainly rate high in that it is an elegantly logical structure.
But the theory is not free from some defects. In particular, it has been several times criticised by Bertin Ohlin and Frank D. Graham. We discuss some of the important criticism as under:
1. Unrealistic assumption of labour cost:
The most severe criticism of the comparative advantage doctrine is that it is based on the labour theory of value.
In calculating production costs, it takes only labour costs and neglects non-labour costs involved in the production commodities.
This is highly unrealistic because it is money costs and not labour costs that are the basis of national and international transactions of goods.
Further, the labour cost theory is based on the assumption of homogeneous labour. This is again unrealistic because labour is heterogeneous-of different kinds and grades, some specific or specialized, and other non-specific or general.
2. No similar tastes:
The assumptions of similar tastes are unrealistic because tastes differ with different income brackets in a country.
Moreover, they also change with the growth of an economy and with the development of its trade relations with other countries.
3. State assumption of fixed proportions:
The theory of comparative costs is based on the assumption that labour is used in the same fixed proportions in the production of all commodities.
This is essentially a static analysis and hence unrealistic. As a matter of fact, labour is used in varying proportions in the production of commodities.
For instance, less labour is used per unit of capital in the production of steel than in the production of textiles. Moreover, some substitution of labour for capital is always possible in production.
4. Unrealistic assumption of constant costs:
The theory is based on another weak assumption that an increase of output due to international specialization is followed by constant costs.
But the fact is that there are either increasing costs or diminishing costs. If the large scale of production reduces costs, the comparative advantage will be increased.
On the other hand, if increased output is the result of increased cost of production, the comparative advantage will be reduced, and in some cases it may even disappear.
5. Ignores transport costs:
Ricardo ignores transport costs in determining comparative advantage in trade. This is highly unrealistic because transport costs play an important role in determining the pattern of world trade.
Like economics of scale, it is an independent factor of production. For instance, high transport costs may nullify the comparative advantage and the gain from international trade.
6. Factors not fully mobile internally:
The doctrine assumes that factors of production are perfectly mobile internally and wholly immobile internationally.
This is not realistic because even within a country factors do not move freely from one industry to another or from one region to another.
The greater the degree of specialization in an industry, the less is the factor mobility from one industry to another. Thus, factor mobility influences costs and hence the pattern of international trade.
7. Two-country two-commodity model is unrealistic:
The Ricardian model is related to trade between two countries on the basis of two commodities. This is again unrealistic because in actuality, international trade is among countries trading many commodities.
8. Unrealistic assumption of free trade:
Another serious weakness of the dosctrine is that it assumes perfect and free world trade. But in reality, world trade is not free.
Every country applies restrictions on the free movement of goods to and from other countries. Thus, tariffs and other trade restrict ions affect world imports and exports.
Moreover, products are not homogeneous but differentiated. By neglecting these aspects, the Ricardian theory becomes unrealistic.
9. Unrealistic assumptions of full employment:
Like all classical theories, the theory of comparative advantage is based on the assumption of full employment.
This assumption also makes the theory static. Keynes falsified the assumption of full employment and proved the existence of underemployment in an economy. Thus the assumption of full employment makes the theory unrealistic.
10. Self-interest hinders its operation:
The doctrine does not operate if a country having a comparative disadvantage does not wish to import a commodity from the other country due to strategic, military or development considerations. Thus, often self-interest stands in the operation of the theory of comparative costs.
11. Neglects the role of technology:
The theory neglects the role of technological innovations in international trade. This is unrealistic because technological changes help in increasing the supply of goods not only for the domestic market but also for the international market. World trade has gained much from innovations and research and development (R & D).
12. One-sided theory:
The Ricardian theory is one-sided because it considers only the supply side of international trade and neglect the demand side. In the words of Professor Ohlin, “It is indeed nothing more than an abbreviated account of the conditions of supply.”
13. Impossibility of complete specialization:
Professor Frank Graham has pointed out that complete specialization will fie impossible on the basis of comparative advantages in producing commodities entering into international trade.
He explains two cases in support of his argument: one, relating to a big country and a small country, and two, relating to a commodity of high value and low value.
14. A clumsy and dangerous tool:
Professor Ohlin has criticized the classical theory of international trade on the following grounds:
(i) The principle of comparative advantage is not applicable to international trade alone, rather it is applicable to all trade. To Ohlin, “International trade is but a special case of inter-local or interregional trade.” Thus there is little difference between internal trade and international trade.
(ii) Factors are immobile not only internationally but also within different regions. This is proved by the fact the wages and interest rates differ in different regions of the same country. Further labour and capital can also move between countries in a limited way, as they do within a region.
(iii) It is a two-country two- commodity model based on the labour theory of value which is sought to be applied to actual conditions involving many countries and many commodities. He, therefore, regards the theory of comparative advantage as cumbersome, unrealistic, and as a clumsy and dangerous tool of analysis. As an alternative, Ohlin has propounded a new theory which is known as the modern theory of International Trade.
15. Incomplete theory:
It is an incomplete theory. It simply explains how two countries gain from international trade. But it fails to show how the gains from trade are distributed between the two countries.