Friday, July 20, 2012

Global Finance and Comparative Advantage in Trade

. Friday, July 20, 2012

I've blogged repeatedly* that if we are to understand recent developments in the US and global economies pertaining to inequality, stagnation, regulatory capture, and electoral influence we need to do two things at least:

1. Embed the financial system within the broader US economy.

2. Embed the US economy within the broader global economy.

If we do these two things we will likely conclude, as I did in one recent post, that:

The cumulative effect of [opening of capital accounts and trade developments via GATT/WTO] both forced encouraged the US to pursue its comparative advantage in high-skilled service labor (e.g. finance) and increased the market into which the US could sell its comparative advantage. The result is thus entirely predictable: finance becomes a bigger size of the US's economy, while comparatively disadvantaged sectors shrank.
Some people, e.g. a commenter on that post, seem to have difficulty grasping this point. But Emmanuel recently noted something interesting:
the WTO has for the most part ruled in favour of the United States in its case against China over discrimination against international payment card transaction firms in the RMB-denominated arena
I.e., US financial firms -- in this case credit card companies -- want access to the Chinese market. The Chinese blocked them. The US government took China to the WTO and won. This is precisely the behavior we would expect if the US was trying to open up a market for its comparatively-advantaged sector, while China was trying to close off that market to protect its comparatively-disadvantaged sector.

I'm not genius for making this case... it's the simplest materialist explanation of trade politics that we know. But sometimes the simple theories work quite well.

*I am sure there are dozens more posts in a similar vein to the one linked above. Searching the blog for relevant terms should turn them up.

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Global Finance and Comparative Advantage in Trade
 
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