Comparative Advantage Based on High /Low Productivity
The Ricardian model implicitly specified two kinds of comparative advantage: those based on high versus on low productivity. In the original model of cloth and wine produced by England and Portugal, Ricardo claimed Portugal won absolute advantages in both cloth and wine, yet England was the winner of comparative advantage in cloth — not because it required fewer labor hours for cloth than Portugal but long hours for wine. Here, a lower labor productivity for wine played the key role in lowering the opportunity cost, and thus raising the comparative advantage for cloth, a breakthrough idea that helped place Ricardo above Smith.
How the Two Types Differ
For one thing, advantages based on high productivity are intuitive but not the low productivity derived advantages, where an entity or agent possesses comparative advantage not because it has superior productivity but exactly the opposite. These entities often rely heavily on naturally endowed resources and/or on a weak base
of production. Low productivity generates comparative advantage because in the Ricardian ratios of labor hours, lower productivity for the best alternative acts as the denominator to deflate the ratio.
More generally, two ways to make a ratio of labor hours smaller (i.e., comparative advantage larger) are Deflating the numerator (e.g., from $latex \frac{3}{5}$ to $latex \frac{2}{5}$, where the denominator for wine is kept intact but the numerator for cloth is reduced from 3 to 2 labor hours) and inflating the denominator (e.g., from $latex \frac{3}{5}$ to $latex \frac{3}{6}$, where the numerator for cloth is unchanged but the denominator for wine increases from 5 to 6 labor hours). Of course, if one can have shorter marginal labor hours for the chosen option and longer hours for the best alternative option (e.g., from $latex \frac{3}{5}$ to $latex \frac{1}{6}$, that is, 1 hour for cloth and 6 hours for wine, the smallest numerator and largest denominator so far), it would be even better as one has the best of two worlds.
Problems with Low Productivity
While low productivity indeed helps create comparative advantage as Ricardo suggested, its risks and vulnerabilities have been little discussed — risks that we normally do not see with high productivity. They are why many (in fact, most) developing economies have failed to leap out of the poverty or middle income traps. Entities with low productivity are indeed in a disadvantageous position for getting triple advantages, for the same macroeconomic reasons as discussed in Agenor (2017) for entities trapped in middle income, including diminishing returns to such things as physical capital, cheap labors, imitation gains, low human capital, weak institutions and infrastructures. These vulnerabilities weaken capabilities in accumulating, growing and turning elementary advantages into packaged absolute advantages. To be sure, they have had and will continuously have comparative advantage, yet theirs tend to be transitive or temporary — unless entities reinvest themselves for climbing up the global ladder of productivity and making better use of endowed resources and cheap labors.
Low Productivity and Trade War
Low productivity based comparative advantage also contributes to the trade war, thanks
to the myth that those with little to lose in their foregone options stand to gain more comparative advantage than those with much to lose. To be sure, this is a misconception that is easy to arise. After all, the low wine productivity in England indeed made the key difference in shaping up the comparative advantage for its cloth production. To read it as a case against developed countries would be an overstretch, however. The classic example was meant to show that everyone can have comparative advantage, if not by oneself then by comparing with others.
If comparative advantage truly goes more to places with fewer options, developed countries would have a “comparative disadvantage.” Politicians in developed economies have leveraged this misperception to justify backward moves against globalization. But the Ricardian model holds no inherently bias against high income agents. One easy way to prove the case is to note that only entities with high productivity were capable of leveraging low labor cost in low income countries, turning unattractive options in other countries into trade related global advantage.