Copyright © HT Digital Streams Limit all rights reserved. Economy Deepa Vasude of 2 min Read 03 Apr 2025, 03:57 IST US President Donald Trump announced his promised reciprocal trading tariffs on almost all countries on Thursday. (Ilustration: Reuters) Summary Donald Trump’s rates challenge a 19th-century economic principle that has formed world trade-nations prosperous by specializing and not doing so alone. Now the US president wants America to produce more and exclude others. On April 2, President Donald Trump not only shocked the world at his reciprocal rates announcement – he also increased 200 years of wisdom. Most of us take free trade and global supply chains as natural and essential, but few realize that these systems stem from the law of comparative advantage, proposed by British political economist David Ricardo in 1817. It is worth reviewing what Ricardo has argued, why it has worked so far, and why it matters now. Read it | Are Trump’s tariff rates made up? Here is how they were simply calculated, and the theory indicates that individuals and nations should specialize in what they do best relative to others. This principle applies to daily life just as on world trade. Take, for example, two flatmates, A and B, who want to justify household tasks. A takes one hour to cook and two hours to clean, while B takes two hours to cook and three to clean. A is faster with both tasks, giving her an absolute benefit. But when deciding who needs to do, comparative advantage comes in the game. B is only 50% slower to clean, but twice as slow to cook, and clean the better task for B, while A focuses on cuisine. Daily decisions often follow these logic. A highly paid executive can rent a manager – not because she can’t drive, but because her time is spent better to read or work during her commute. A homemaker can use domestic assistance to concentrate on childcare, which improves the well -being of the family. The costs associated with renting a manager is not only his salary, but the productivity obtained by the executive. Similarly, the cost of renting domestic assistance is not just wages, but the improved health, education and nutritional outcomes for family members. How it extends to the global trade in the same way. Countries evaluate transactions based on opportunity costs rather than absolute costs. Bangladesh specializes in low-cost, well-designed cotton T-shirts, while the US excels in spacecraft production. Bangladesh has a comparative advantage in T-shirts, and the US in spacecraft. That’s why Bangladesh is carrying out clothing while the US performs advanced technology. Read it | In maps: How is India to Trump’s reciprocal rates? Imagine the US deciding to make its own T-shirts. It blocks imports from Bangladesh with high rates (essentially happening now) and sets up large -scale household factories, using a US supply chain of farmers and mills. With a high degree of automation to reduce the cost of labor, US manufacturers may match the prices of Bangladesh. But at what cost? The resources complaint, land, energy, government grants-which are derived from T-shirt production, could be better used to promote aviation technology. If the US held its strengths and could make Bangladesh T-shirts more efficient, the world productivity would have been higher. This principle of comparative advantage has driven the global trade for decades, enabling poorer countries to integrate into large global supply chains. From Japan in the 1980s to China and the Asian Tigers in the 1990s, followed by Vietnam in the 2000s and India with its export of services – each is proof of how comparative benefit fuel trades. Read also | Andy Mukherjee: Trump’s rates must push India to naturally double the reforms, and not every decision follows this rule. Nations still maintain armies and express their own currencies. But few insist on producing every item they consume domestically. Sometimes it is simply impossible – India, for example, imports most of its crude oil because it has no reserves. Other times, it is more effective to import and assign domestic resources to higher value activities. The author is an independent author in economics and finance. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More topics #trade #donald Trump #Genitstate Mint Specials
Back to Economics 101: How Trump’s rates disrupt 200 years of trade rules
