What are the various reasons why many developing nations are skeptical about the comparative advantage principle and free trade?
The reasons, of course, will vary depending on the country. But there are at least a couple of reasons that are typically given:
- Many developing nations believe that free trade will keep them in what you could call a colonial relationship with the developed world. They believe that they will not be able to create their own advanced industries because their infant industries will be outcompeted by firms from the developed world.
- They often argue that developed countries subsidize their exports. This is, for example, often said of US farmers. Farmers in the Caribbean argue that they cannot compete with US farm products because these products are made artificially cheap by government subsidies.
The principle of comparative advantage is the belief that the economic interest of a nation is best served by producing and exporting those commodities which it can produce at relatively lower cost, and it should import other commodities which it can produce at relatively higher cost. This belief or recommendation is based on the fact that given a set of relative advantages and disadvantages possessed by different countries, the practice of free trade will result in maximization of economic benefit of each and every country.
However, this logic is misleading, because it holds true only when we assume that the relative advantages and disadvantages of the different countries are unchanging. But this assumption does not hold true in reality. Reality is that the developed nations have become developed by improving their economic capabilities in the past. They were able to do so under condition where they faced limited competition.
For the developing countries to develop by improving upon their present capabilities and improving relative advantage over other countries, they need to protect domestic production from free trade. Thus, some selective restriction on free trade is helpful and even necessary for improving the economic condition of the developing countries. This is why, it is justified for the developing nations to be skeptical about the principle of comparative advantage.