Regional integration in the emerging global economy: the case of NAFTA. (North American Free Trade Agreement)

The concept of free international trade was developed as the nation state emerged as the dominant institutional form governing economic relations. It is instructive that Adam Smith inquired about the causes of the wealth of nations rather than of individuals, families or the world. Smith assumed that the wealth of these other entities would be improved through the proper development of the national institutions. Smith and his followers worked to explain that rewards ought to go to those who increased production rather to those who simply owned scarce means of production. Landlords owned resources they did not produce and to the extent that income from production was distributed to land rent, capital accumulation would be stifled which would harm labor as well as the emerging business class. The separation of capitalists and labor was not as distinct as now and the separation of ownership and management lay in the unseen future. Classical economists were not anti-labor, instead they reasoned that both capitalists and workers would be harmed by the privileged class of landlords. This reasoning led them to conclude that the deleterious effects could be eroded by abolition of the Corn Laws in pursuit of free trade rather than a social revolution which would be required to dismantle the feudal land practices of primogeniture and entail (Fite and Reese, 1965, pp. 33, 120).

Unfortunately, neoclassical economists ignored the social basis inherent in classical economics and reduced all behavior to the level of the individual, and the nation became an aggregation of individuals. Instead of continuing to explore the institutional basis of domestic and international economic life, modern economic theory holds to the myth that an individual Canadian trades with an individual Mexican without the aid of mediating institutions. Moreover, the received axioms of economic theory lead to the conclusion that institutions can only harm welfare, they can never do good. Another myth needing examination is that free trade existed in the nineteenth century, despite the fact that "nations" outside Europe and North America were generally colonial subjects. The field of economic development was created to deal with the process of decolonization in the post World War II period as these nations tried to modernize according to political science and industrialize according to economics literature. The distinction made between economic growth and development was that development required institutional change. As development literature has become more technical over the decades, the institutional development proposed by economists seems to have been reduced mainly to those institutions necessary for the operation of free markets.

COMPARATIVE ADVANTAGE IN A GlOBAl ECONOMY

The concept of comparative advantage is the foundation for the advocacy of free international trade. Comparative advantage rests on all of the assumptions required of free domestic markets except for the assumption of mobile resources. In fact, comparative advantage assumes that resources are immobile across national borders. Comparative advantage demonstrates that each country should specialize in production and if each country specializes in production, then each country must trade to receive the other goods needed. Specialization is the opposite of self-sufficiency. The classical economist, David Ricardo, introduced the concept of specialization based on comparative advantage. Ricardo predicted that each country would export the commodity it produces relatively cheaply in the absence of trade. However, the classical statement fails to explain why production costs vary among countries in the first place (Neary, 1985, p. 411). The modern, or neoclassical, version of comparative advantage rests on the work of Heckscher and Ohlin who argued that production costs vary because each good uses a different mix of resources and each country has a different endowment of resources (Neary, 1985, p. 411). Thus land rich countries will produce goods which use a lot of land and trade for goods which use a lot of labor in production. Comparative advantage is based on an uneven endowment of resources around the globe and these resources are assumed to be owned by resident nationals. Since resources are immobile, a nation's wealth is dependent on how well it is endowed and how effectively it uses the resource base. Specialization, skilled labor and accumulated capital equipment could enhance the natural endowment. However, all resources are considered to be immobile; hence free trade in goods would be necessary to make the most of the planet's limited resource base.

It follows that if resources were perfectly mobile, trade in goods would be unnecessary. That is because particular resources would flow to countries …