Classical economist David Ricardo’s theory of comparative advantage has long been regarded as a powerful weapon to defend free trade. In Ricardo’s example, there are two countries whose production factors are merely labor; they both produce two identical goods but with different production rates. In this case, each of the two needs only produce the goods for which it has a higher productivity and trade the produced goods with the other, and in doing so, the total benefits and income for both countries will increase. British political economist John Stuart Mill’s free markets philosophy was later added to Ricardo’s theory, and people refer to the combination as the Ricardo-Mill model.

The model, however, was challenged by Paul Samuelson in 2004. The US economist proposed that the Ricardo-Mill model is true only if taking no account of technological progress.

Using US-China trade as an example, Paul Samuelson illustrated that technological progress in China could wipe out all potential gains for the United States, since their respective comparative advantages would no longer exist, which would mean that they would return to prior-to-trade self-sufficiency.

In this scenario, China’s per capita income would rise thanks to technological advances, while personal incomes in the United States would suffer lasting damage. In the end, Samuelson stated, the more advanced of the two countries would maintain sustained growth, but its growth rate would slow down due to its less advanced competitor's lower wages and technology imitation.

This logically unassailable Samuelson scenario emerged a few years after China accessed into the WTO and started to pick up its growth rate. In recent years, as the gap between China and the United States narrowed, rhetoric about China taking huge advantage of the United States became rampant, with many of the critics citing the Samuelson scenario.

Many economists have criticized, from an academic perspective, the Samuelson scenario, but they have failed to realize that it is the theory that provides a basis for the above-mentioned rhetoric and the Trump administration’s unilateral, protectionist policy.

Therefore, refuting the protectionist policies that have prevailed lately requires identifying the flaws and conditionality of the Samuelson scenario.

First, the market size will maintain an expansion with constantly deepening international division of labor and inter-country exchanges, the benefits of which could offset the negative impact induced by the Samuelson scenario on certain goods, or could at least drastically reduce its possibility.

Second, the Samuelson scenario could produce a negative impact for the United States and any other countries. For example, the productivity of exporters such as India and Vietnam is catching up with China.

Third, the Samuelson scenario could be induced by an external factor, such as China’s increasing productivity, but also by an internal factor, such as declining US productivity.

Forth, the majority of the current industrialized countries all started the industrialization process 200 years ago, and over that long time span, the number of countries that manage to catch up by means of late-mover advantages is few.

Fifth, the Samuelson scenario is grounded in the virtual condition of zero transaction costs. But in the real world, transaction costs are always larger than zero.

Policies without the backing of theories will prove unconvincing. But if the theoretical backing is not strong enough, the polices will still cast doubts in people’s mind. The real situation is always much more complicated than theory.

Zhang Yuyan is director of Institute of World Economics and Politics at Chinese Academy of Social Sciences. 

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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