INDIA-CHINA BILATERAL TRADE & THE THEORY OF COMPARATIVE ADVANTAGE
· WHAT IS THE THEORY OF COMPARATIVE ADVANTAGE?
Comparative advantage is an economic law that refers to the ability of any given economic body to manufacture goods and services at a lower opportunity cost than other economic bodies. The theory of comparative advantage is often associated with English economist David Ricardo. One of the most important concepts in economic theory, comparative advantage lays out the premise that all bodies, at all times, can mutually benefit productively from cooperation and voluntary trade. It is also a foundational principle in the theory of international trade.
Comparative advantage is often compared with absolute advantage. Absolute advantage is the ability to produce better goods and services than someone else. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume.
EXAMPLE: To see the difference, consider an advocate and his assistant. The advocate is better at producing legal services than his assistant and is also a faster typist and organizer. In this case, the advocate has an absolute advantage in both the production of legal services and secretarial work. Nevertheless, they benefit from trade thanks to their comparative advantages and disadvantages. Suppose the advocate produces $200/hr in legal services and $50/hr in secretarial duties. The assistant can produce $0 in legal services and $30 in secretarial duties in an hour. Here, the role of opportunity cost is crucial. To produce $50 in income from secretarial work, the advocate must lose $200 in income by not practicing law. His opportunity cost of secretarial work is very high. He is better off by producing an hour’s worth of legal services and hiring the assistant to type and organize. The assistant is much better off typing and organizing for the attorney; his opportunity cost of doing so is extremely low. It’s where his comparative advantage lies.
· WHAT IS THE SIGNIFICANCE OF THIS THEORY IN INDIA-CHINA BILATERAL TRADE?
When two large manufacturing hubs such as India & China, are engaged in a battle of export and import and striving to be the supreme in gaining investments from various MNCs, this theory of comparative advantage plays an important role and acts as an important parameter for judging which country has the better opportunity cost for which goods.
Secondly, this theory also helps us to determine which goods and services should India import and export from China and vice-versa, from a purely economic aspect. To achieve economic superiority, and assimilate maximum FDI, these two should employ this theory in their economic and fiscal policies. Opportunity cost is a detrimental factor for achieving maximum profits.
The present bilateral trade, is highly unsustainable for India, considering China’s “more exports at any cost” policy. However, taking in point the current situation of China and its foreseeable future, it is highly unlikely that China will be able to sustain this situation for a very long time. The present statistics show that the bilateral trade between these two countries is of 65 billion USD, where China exports a magnanimous 50 billion USD and India the remaining 15. These facts clearly glorify China’s success in the manufacturing department, which brings us to the next part of this research paper.