Mercantilism Theory: Comparative Disadvantages And Absolute Advantage

Introduction

Many countries followed the mercantilism theory trying to become self-sufficient. However, economists believe that if countries who engage in international trade can benefit more under that environment. There are two main theories supporting free trade: absolute advantage and comparative advantage. (Daniels et al, 2015). Absolute advantage was a theory created by Adam Smith suggesting that different countries produce some goods better than others and that unrestricted trade would allow these countries to specialize in the products that give them a competitive advantage. (Daniels et al, 2015)
David’s Ricardo theory, on the other hand, suggests that global efficiency gains may still result from trade if a country specializes in what it can produce more efficiently. (Daniels et al, 2015)
On the basis of comparative advantage, free trade agreements were promoted (GBF, 2013) along with the World Trade Organization (WTO), which ensured the opening of new markets.
FTAs, are considered as an important tool, adopted by governments, to

Low tariffs on import increases jobs outsourcing which will negatively affect the employment opportunities in developed countries. The RTA signed between US, Mexico and Canada (NAFTA) reduced tariffs on imports allowing foreign companies to expand and outsource their production. (EPI, 2003) As a result, the bargaining power of American workers was undercut. (Faux, 2013) NAFTA caused the loss of 700,000 jobs as the production moved to Mexico. The jobs lost were mainly from California, Texas and Michigan, where the majority of US manufacturing relies. Besides that, the majority of the workers who lost their jobs suffered a permanent loss of income. (Faux, 2013) Moreover, NAFTA enabled the US employers to force workers to accept lower wages and benefits and blackmail local governments into giving tax reductions for their corporations and other subsidies. (Faux,