"What's a Comparative Advantage?"

Generations of graduate students have studied a concept called “revealed comparative advantage”—basically, the idea that what a country exports shows what it is most efficient at producing. It is hard to find an idea that is more widely accepted among experts. When value chains began to spread around the globe in the late 1980s, they were presumed to be organized on the basis of comparative advantage: the role each country played in producing raw materials, intermediate goods, finished products, and related services such as research and marketing was assumed to reflect the skills of its workforce, the sophistication of its companies, and the depth of its capital markets. The shift of manufacturing out of high-wage countries was said to reflect the comparative advantage of lower-wage countries in labor-intensive activities, while the high-wage countries specialized in what are now referred to as “headquarters activities” in which their highly skilled workers gave them a competitive edge.
This paper will argue that the global value chains that undergirded globalization starting in the late 1980s were not mere reflections of comparative advantage. Directly and indirectly, governments aggressively shaped economic geography, providing land and low-cost financing to build factories and distribution centers, offering tax breaks and trade preferences tailored to the desires of specific corporations, and subsidizing transportation and warehousing to hold down the cost of both importing and exporting. These subsidies were critical in determining trade flows and investment patterns. The logical consequence, which economists have been slow to acknowledge, is that globalization reached excessive levels that were not efficient in any economic sense.