Yuta Watabe: The Origins and Present of International Trade

July 15, 2024

Why does trade occur? Is trade desirable? To answer these questions, international trade researchers like myself return to the model conceived by British economist David Ricardo. Although Ricardo's ideas were the starting point of international trade theory, they remain the core of the field today.

Ricardo considered the circumstances under which trade occurs using a simple model. Let's look at a situation where two countries, England and Portugal, trade cloth and wine. Both countries can produce each good, but productivity differs by country. Which country should produce which good and trade?

Suppose England can produce both cloth and wine more efficiently than Portugal. Ricardo explains that trade still occurs in that case. Since labor is limited, to produce cloth, one must give up wine. In other words, the production of cloth involves the opportunity cost of wine production.

Thus, even if England can produce both goods more efficiently than Portugal, from the perspective of opportunity cost, the production of either wine or cloth will be more expensive than in Portugal. If the opportunity cost of cloth is higher in England than in Portugal, England specializes in wine and Portugal in cloth. Ricardo showed that each country specializes in the good with the lower opportunity cost—called the good with comparative advantage—and exports that good, making this model a landmark in international trade theory.

However, Ricardo's model was difficult to generalize. In fact, with three countries and three goods, comparative advantage is not easily defined, and predicting trade patterns is difficult. After this was demonstrated in the 1960s, comparative advantage was understood to be impractical, and Ricardo's model entered a long winter. It was not until the 2002 paper by Jonathan Eaton and Samuel Kortum that this model would flourish again. They succeeded in extending the Ricardian model to multiple countries and multiple goods, and their model and the concept of comparative advantage came to occupy a central position in international trade theory.

Jonathan Eaton was my supervisor and passed away this year. He led the revival of the Ricardian model and influenced many researchers, including myself. For me, Ricardo is the starting point of my research and symbolizes the memories of my mentor.