Bill Strong and Stephen Rahl on comparative advantage, trade deficits and reserve currency status

“The reality... is that the international trade system is designed to cheat us... every country around the world cheats us.” 

~ Peter Navarro, Counselor to the President of the United States 

“Navarro is dumber than a sack of bricks... Navarro is truly a moron.  What he says is demonstrably false.”

~ Elon Musk, Senior Advisor to the President of the United States

David Ricardo was not “dumber than a sack of bricks.”  Rather, the brilliant, early 19th-century British economist developed the theory of comparative advantage, in opposition to the then, widely accepted, mercantilism.  In his “Principles of Political Economy and Taxation” (1817) he proves that countries running trade surpluses are not “cheating” their trade partners and that free trade benefits both parties, regardless of which runs a surplus/deficit. 

Since Ricardo’s era, in the modern globalized trading world the country that has the world reserve currency must, by necessity, sustain a current account deficit.  This is because the extra demand for its “international” money must overvalue its currency.  This ensures that said country sustains more imports than exports, penalizing its net trade balance into long-term deficit.

Hence, the American dollar’s global trade dominance status provides the US with an “exorbitant privilege”—permitting only Americans to enjoy a permanent trade deficit and allowing us to live better than we otherwise would.  The idea that eliminating our current account deficit would “make America wealthy again” is exactly backwards. 

Rhetoric surrounding the radical “Liberation Day” tariff regime ignores Ricardo and harkens back to the good-old-days of tail fins and American manufacturing dominance.  We remember Dad’s made-in-Detroit 1957 Chrysler Windsor, and “good” as those days seemed at the time (real GDP per capita was about one quarter of today’s), they pale in comparison to the 21st century—partly because consumer goods were inferior and much more expensive then.  The idea that Trump’s (now paused) drastic tariff regime would improve Americans’ standard of living is a complete fantasy.

~ Bill Strong and Stephen Rahl, Eschaton Opportunities Fund Quarterly Letter Q1 2025

1957 Chrysler Windsor

Our World in Data on comparative advantage

To see the difference between comparative and absolute advantage, consider a commercial aviation pilot and a baker.  Suppose the pilot is an excellent chef, and she can bake just as well, or even better than the baker.  In this case, the pilot has an absolute advantage in both tasks.  Yet the baker probably has a comparative advantage in baking, because the opportunity cost of baking is much higher for the pilot.

At the individual level, comparative advantage explains why you might want to delegate tasks to someone else, even if you can do those tasks better and faster than them.  This may sound counterintuitive, but it is not: If you are good at many things, it means that investing time in one task has a high opportunity cost, because you are not doing the other amazing things you could be doing with your time and resources.  So, at least from an efficiency point of view, you should specialize on what you are best at, and delegate the rest. 

The same logic applies to countries.  Broadly speaking, the principle of comparative advantage postulates that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, and imports the rest: “do what you do best, import the rest.” 

~ "Trade and Globalization," Our World in Data, 2014

(Look under subtitle, "Theory: What is 'comparative advantage' and why does it matter to understand trade?.")

Paul Samuelson on comparative advantage

Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician Stanislaw Ulam: "Name me one proposition in all of the social sciences which is both true and non-trivial."  

It was several years later than he thought of the correct response: comparative advantage.  "That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

~ Paul Samuelson

Boris Johnson makes the case for global free trade

This country is leaving its chrysalis.  We are reemerging after decades of hibernation as a campaigner for global free trade.  And frankly it is not a moment too soon.  Because the argument for this fundamental liberty is now not being made.  We in the global community are in danger of forgetting the insights of those great Scottish thinkers: the invisible hand of Adam Smith, and of course David Ricardo's more subtle, but indispensable, principle of comparative advantage, which teaches that if countries learn to specialize and exchange, then overall wealth will increase and productivity will increase, leading [Richard] Cobden to conclude that,

free trade is God's diplomacy, the only certain way of uniting people in the bonds of peace, since the more freely goods borders, the less likely it is that troops will ever cross borders.

And since these notions were born here in this country, it has been free trade that has done more than any other single economic idea to raise billions out of poverty and incredibly fast.

~ Boris Johnson, U.K. prime minister, "Boris Johnson threatens to collapse Brexit trade talks if EU insist we stick by their rules," 3:00 mark, YouTube, February 3, 2020

Chinese entrepreneur Zhang Xin on diversification

When it comes to business and relationships, I don't buy this idea of diversification. It neglects comparative advantage. The best way to lower risk is to specialize: Put the things you love into one portfolio.

Zhang Xin, co-founder and CEO, Soho China, "'The Best Advice I Ever Got'," Fortune, May 12, 2008

(Zhang, a woman, is one of Beijing's most successful property developers and a product of Western training - Cambridge, Goldman Sachs. Her husband, Pay Shiyi, focuses on sales while she handles construction.)