The opportunity cost, or trade-off, that she would make by spending an hour typing is the three hundred dollars that she could earn by performing legal work, which is greater than the opportunity cost of spending that hour on legal work (she has “lost” the lower value of secretarial earnings). Even though the attorney has an absolute advantage, then, in typing—she is faster at typing than anyone she could hire—and thus the typing will be slower, the total value created by the legal office will be greater if the lawyer sticks to her legal work. Translating this concept to international trade means that if each country produces only those goods in which it has a comparative advantage, nations together will create greater world wealth. Trade allows countries to specialize in the goods and services in which they are the most efficient producers. Such specialization will raise the gross domestic products (GDPs) of all trading partners. Consumer standards of living for this reason are higher in an atmosphere of open trade than when government measures artificially restrict trade.
Another example demonstrates that in a world of perfectly competitive markets, trade will be beneficial to countries whenever there are relative differences in costs of production. In Country A, one hour of labor produces six bushels of wheat or four bushels of corn. In Country B, that hour results in one bushel of wheat or two bushels of corn. Using only Adam Smith’s observations, we would conclude that Country A has an absolute advantage as to Country B in the production both of wheat and of corn. Does this mean that trade cannot benefit Country B at all and that it should simply leave production of wheat and corn to Country A? Because of David Ricardo, we know that the answer is no, because Country A’s absolute advantage in wheat production (six bushels to one) is greater than its absolute advantage in corn production (four bushels to two). In other words, Country A has a comparative advantage in wheat as compared with corn.
What may we conclude about Country B? Of course, Country B is at an absolute disadvantage as to both wheat and corn, but its labor force is one-sixth as productive as to wheat and one-half as productive as to corn. That is, Country B has a comparative advantage, in relation to Country A, in the production of corn. According to the principle of comparative advantage, both countries will benefit if Country A trades its wheat for Country B’s corn.
2.3 Four Pillars of GATT
(A) Relevance of Comparative Advantage
We learn first about comparative advantage in our exploration of the basic concepts of international trade because the drafters designed global trade rules to allow countries to make full use of their comparative advantage by removing government impediments to the free movement of goods and services. Thus, comparative advantage is a foundational theoretical assumption, a structural basis, of the trade system. Ministers provided in that first basic instrument of global trade rules, the GATT of 1947, and continued in 1995 in the WTO, that the principle of nondiscrimination should underpin trade. That is, WTO Members must treat goods from all other Members alike.
In basing global trading rules on a principle of equal treatment among all partners, trade powers left behind the mercantilist approach of the 18th century that demanded close state intervention to maintain favorable trade balances.3 Even more significantly, states turned away from a basic principle of sovereignty: that a state is free to treat others in a discriminatory fashion if the state believes that such action serves its best interests.4 Viewed through the lens of sovereignty, abandonment of the state’s ability to choose among its trading partners the ones on which the state would bestow preferences counts as notable recognition of the political as well as economic importance of Ricardo’s theory. This principle of trading relations helps remove state intervention in the trading process.
(B) Most-favored Nation and National Treatment Clauses
The two aspects of the nondiscrimination principle are codified in the first and third articles of the GATT (see Item 7 in the online Documents Annex); they are also the first two basic concepts of trade, or the Four Pillars of GATT—the more colorful phrase often used by GATT experts. Article I, called the Most-favored Nation Clause (MFN), explains how WTO Members must treat imported products originating in the territory of one Member in relation to imported products of other Members. Article III, called the National Treatment Clause, prescribes the manner in which Members must treat imported products in relation to domestic products.
Article I provides that if a WTO Member gives a benefit or privilege to any country, it must automatically and unconditionally grant that same benefit to every other WTO Member. The reference to most-favored, then, means that the importing Member must provide equal treatment for imports of a product from, and exports of that product to, all Members based on the treatment that it gives its most-favored trading partner with respect to that product. The United States might negotiate with Mexico a lower tariff for imports of Mexico’s shrimp in return for Mexico’s granting U.S. exports of computer software a lower import duty. But if a WTO Member not involved in that negotiation—for example, Japan—then exports shrimp to the United States or computer software to Mexico, the United States and Mexico must, without cost or conditions, give Japan the full benefit of the tariff reductions negotiated between Mexico and the United States, despite the fact that those reductions were based on reciprocal concessions only of Mexico and the United States. The MFN nondiscrimination principle results at once, and following but a single negotiation, in reductions in trade barriers by the United States and Mexico on two products for the 150 other WTO Members.
The National Treatment Clause has the same effect. As the name suggests, the requirement of Article III is that once foreign goods have entered the stream of commerce, Members must treat them in the same manner as Members treat “like” domestic products. “Like products” are goods similar in physical characteristics and uses to the imported goods. WTO Members must accord similar treatment only to like domestic goods. Members, for example, need not treat tractors in the same manner as they treat lawnmowers. National treatment means that the national or local government could not require that a wine from Spain, once it has satisfied tariff obligations at the border, be sold only in liquor stores, if the rules allow a like California wine to be sold in grocery stores as well. The Spanish wine also could not be subject to a California alcoholic beverages tax that did not apply equally to the California wine. Officials must regulate the Spanish wine’s sale, distribution, transportation, and use in the same manner as the California wine, and must impose similar taxes on the imported wine.
(C) Third and Fourth Pillars: Tariffs Bound and Quotas Outlawed
Article II of the GATT embodies the Third Pillar. Each WTO Member makes a commitment to charge no more than a certain tariff on a particular import. As in our Mexican shrimp example, countries will continue to negotiate these tariff reductions based on reciprocity. For example, if the United States buys most of its lumber from Canada and sells to Canada most of its computers, U.S. computer makers and Canadian lumber mills still benefit most from the lowered border taxes of lumber and computers, even though the MFN Clause will create “free riders” from other WTO countries.
Article II refers to the thousands of pages of these schedules of concessions on tariffs for hundreds of products. These tariffs are then “bound.” That is, the Member can charge a lower tariff if it wishes (and often does in order to gain the advantage of a lower tariff on a product that the Member wishes to export to a particular market), but the Member cannot charge a higher tariff than that set out in its schedule of concessions.
The Fourth Pillar of the GATT, Article XI, creates a basket of disciplines to address most other barriers to the free reign of Ricardo’s theory with its sweeping general prohibition of all other border restrictions on importation or exportation of products that other GATT articles do not permit. Article XI thus prohibits, for example, quotas or other restrictions on the volume of a product that can be imported or exported, as well as licensing systems that act as barriers to the exportation or importation of products.
Article XI effectively provides that there may be no restrictions on the import or export of a product except those permitted elsewhere in the WTO. Article XI itself lists two exceptions: import duties—tariffs—which