Trade Wars and the Law of Most Bests

What a British economist knew about Trump's tariffs 200 years ago

In the early 2000s, a lot of people and politicians in the U.S. had a major issue with software jobs getting off-shored, particularly to India. Companies rushed to get rid of expensive American coders, and either set up offices in India to employ relatively cheap coders there, or hire the work out to Indian companies such as Infosys or Wipro.

Horror stories emerged of American workers being told to train the Indian workers who were going to take their jobs, or lose severance packages if they refused. (I even recorded a satirical song back then about a guy who falls in love with the woman who is about to make him redundant, titled “I Dream of Bangalore.”)

As the tech columnist at USA Today at the time, I was looking for interesting ways to write about that trend. I ended up talking to Marc Andreessen – in his pre-Andreessen Horowitz days – who waxed eloquently to me about the economic concept of comparative advantage.

It’s a concept that helps explain why tariffs and economic isolationism are the opposite of what you’d do if you want to raise the standard of living for the widest range of people.

In other words, comparative advantage describes why a system of free trade is highly beneficial. “The system works so amazingly well that it’s a wonder anyone doubts it, and, yet, of course people do,” I quoted Marc as telling me then. I added the note that Marc was “one of the few who will forthrightly say that the outsourcing trend should be cheered.”

Based on the public stances by Marc over the past six months, it may be that he’s done a U-turn on that position. News outlets have noted that he’s been silent since Trump rolled out his tariffs. In fact, Trump re-posted a chart Andreessen put on social media that showed diving federal revenue from tariffs over the past century. Trump used it to bolster his position on tariffs.

Anyway, let’s get into the idea of comparative advantage and the way Marc and another recent Trump fan, Oracle’s Larry Ellison, thought about it then.

First of all, the theory was not made up to justify early-2000s job displacement. It was first described by an economist and British member of Parliament named David Ricardo, who died in 1823. So he was around when international trade relied mostly on sailing ships and horse-drawn carriages.

You can read my longer explanation of Ricardo’s concept in the original column below. But a quickie version goes like this: Every nation benefits when every nation focuses on making and selling what it is “most best” at, and buys everything else from other “most bests.”

One way to see how that works is to look at it from a personal level.

My most best has something to do with writing. Because I do that better than most, and can be more productive at it than most, I can get paid pretty well to write. But I can’t make much, or anything at all, for my baking, or carpentry, or accounting, or a lot of other things I might do. Other people do those things way better than me, and do it more efficiently.

The way for me to have my highest standard of living would be to focus on writing, and buy everything else from other most bests.

If everyone else is also focusing on their most bests, and then trading for everything else, we all enjoy a higher standard of living. We each make more money by doing what we’re good at, and buying whatever else we need from others who can supply those things at a higher level of quality and lower cost than we ever could do ourselves.

Comparative advantage tells me that it would be dumb for me to put up a personal trade barrier, and try to make everything I need in-house. I’d spend less time and resources on the thing that makes me the most money, so my income would go down – and I’d spend more time and resources making stuff I’m not good at, which means that stuff becomes expensive and lower-quality to me.

“A free movement of labor allows us to become more efficient, produce better products at lower costs, grow more profitable, pay more taxes to the government, which, in turn, looks after the people who are displaced,” Ellison said at the time.

This isn’t a political argument. Ricardo’s concept of comparative advantage has been studied, repeated and updated by economists over the past 200 years. The overall consensus is that it is correct.

Yet there’s also a recognition that comparative advantage does cause pain for some people. When trade is free around the world, it’s important for individuals to be a part of a most best – or they get screwed.

So, if you’re working in an American factory and China or Mexico becomes the most best at making that same thing, you’ve got a problem. That factory is going to close. On the other hand, if you’re starting a tech company in Europe, and Silicon Valley is the most best at starting and scaling tech companies, your European company’s chances of success are limited. The U.S. techies will win.

In that way, it’s not hard to see why people left out of a most best might be supportive of Trump and his trade war. Even if comparative advantage is making the whole U.S. wealthier, individuals left out of most-best sectors are watching their jobs disappear or wages stagnate.

Yet protecting those jobs comes with a risk. As Ricardo might predict, trade isolationism would likely mean that instead of being most best at a lot of things and buying everything else from other countries, America may eventually produce all it needs for itself – but then it will become just OK at everything and most best at nothing.

—

This is my column as it ran in USA Today on February 4, 2004. It’s available through Newspapers.com.