There has been a backlash against international trade in developed countries and developing countries alike since the radical trade liberalization policies of the 1990s. Developed countries lost jobs in manufacturing and services to developing countries and the benefits of free trade have not been equitably distributed within countries leading to rising income inequality. Moreover, trade liberalization was not conditioned on sound environmental and labor policies in developing countries resulting in the export of negative externalities to the developing world from the developed countries. Developed economies, in particular United States, became consumers of goods and services produced in developing countries, leading to large trade deficits and government indebtedness in developed economies with the exception of export-oriented countries such as Germany and Japan. China became the hub of global manufacturing, while India turned into an exporter of information technology services.
Free trade has been driven by David Ricardo’s principle of comparative advantage which states that countries export goods and services where they have comparative advantage and import the rest even though they are capable of self-sufficiently producing all goods and services in autarky. The supply chain or value chain has now become global with the introduction of the principle of technological competitive advantage: developed economies are now focused on excelling in innovation while outsourcing all the work that does not require innovation such as low-end manufacturing and parts assembly, and technical programming work in information technology to low wage countries around the world, shifting those jobs from developed countries to developing countries permanently leading to job dislocations and increased pressure on the welfare systems in developed countries. Important development needs such as superior infrastructure, sanitation and beautification which characterize the developed world are not being met in the developing countries. Except in the case of China where the government has made it its objective to climb up the value chain and grow from a low income country to a middle income country, development of developing countries is not happening because of free trade because important sectors such as infrastructure and sanitation continue to remain status quo. Then what should trade policy be to ensure job losses at the lower end of the value chain do not occur in developed countries and developing countries rise up the development value chain? Autarky may provide the answer.
Since the rise of the mercantilist East India Company in 1600, the multinational corporation is now commonplace. Global companies such as the East India Company and imperialism by the governments of countries to which corporations such as East India Company belonged traded in raw materials and finished goods especially after the Industrial Revolution: for example, cotton was imported from India and finished cloth was exported back to India from Britain. India was not efficient in the production of cloth because it lacked the mechanization of the mills of Britain. In a regime of autarky, India could have been self-sufficient in cloth if only it had the British technology of textile mills. Britain could also have been self-sufficient in cloth by importing Indian cotton and both countries could have been better off. Assuming labor productivity in both the countries is the same, abundance of labor in India would produce cloth cheaper than in Britain. There would be a price difference between the two countries for the same cloth, but cloth would not be exported or imported by either country. It is important to reiterate here that the precondition for such a state of autarky in both countries is the initial sharing of textile mill technology by Britain with India. Both British-owned and Indian-owned textile mills would operate in the Indian market and the technology of textile mills could be improved just as likely by Indian companies as by British companies.
Such a model of autarky is, in fact, true in today’s pharmaceutical market where licenses to produce some drugs are given by patent-owning developed country companies to companies in developing countries. Drug prices are lower as a result in developing countries such as India for the same drugs. Both the technology sharing country and the technology receiving country would be better off and, as with cloth, it is just as likely that new drugs could be invented over time by developing countries as by developed countries.
For trade to produce economic development, therefore, it is important that global corporations which innovate must, in a model of autarky, produce for the markets of various countries in those countries by sharing technology and by employing the labor of those countries and importing natural resources which the countries lack for the production. This model does not export jobs but creates jobs locally in the various countries. Same products will have different prices in different countries and there will be more competition in the marketplace both to innovate and to produce leading to robust economies.
Today’s Ricardian model of international trade does not lead to development as efficiently as is necessary. A global-local model of quasi-autarky with open technology transfer and trade in natural resources will lead to more efficient economic development.