How does a company pick an export market to exploit? Since the seller only wants money, the Ricardo model does not apply: the export market does not have to have a comparative advantage in a product the seller wants. Unless one defines “product” in a particularly broad way.
A market can have a comparative advantage in a commodity we might call “import dollars”; it’s more profitable to sell stuff there than somewhere else. Some reasons for this advantage are quantifiable and intuitively obvious: rents may be lower, regulations less stringent, sales help cheaper than elsewhere. But none of these cost advantages needs to be present. Indeed, a higher cost of doing business can translate into more money available for consumption: the costs of doing business are more than offset by the amount of business to be done.
What export markets have is a comparative advantage in consumption itself. A “consumer culture” is a form of specialization. We make it easy to sell to us. Our historically low savings rates, social tendency to ostentation, advertising infrastructure, and credit system all worked to make the US the export market of choice, the place to sell at a low price in order to decrease average cost, because the marginal cost of selling to us is lower than any other.
It’s difficult to see consumption as a “good” in which one has a comparative advantage. Compared to which “good” is consumption cheaper here than elsewhere? Understand that “cost,” the measure of what makes one thing relatively cheaper than another, need not be measured in dollars. Money is, after all, just one thing we value. What about leisure time? Self-esteem? Social status? All of these are things that we “receive” or “spend” when we choose to spend or save. And as a cultural matter, it appears that we attach a higher “cost” to spending dollars vs. saving them than other places. (When the going gets tough, the tough go shopping, but only in America.) So we have a comparative advantage in consumption, which we have exploited by developing a consumption infrastructure to make the financial costs consistent with the psychic costs and allow us to consume as much as we wish to assume.
But the comparative advantage in consumption is not merely cultural. A country cannot develop a consumer culture without first having enough dispersed wealth to consume and enough creditworthiness to trade future wealth for current goods. What’s interesting is that the two things emerge together. A consumer culture helps domestic business, too. Henry Ford raised wages, and because the raises enabled his employees to afford his products, he is, perhaps apocryphally, credited with having intended that result. But the fact remains that our expanding middle class’s spending contributed to our middle class’s expanding.
The creditworthiness point cannot be overemphasized. A country cannot run a trade deficit – i.e., cannot specialize in being an export market - unless its trading partners will accept its paper. The domestic economy has to grow as fast as the cumulative trade debt. So long as the growth continues and the paper remains credible, the annual trade balance can be negative. But if the growth slows, or the trade imbalance becomes too great, the music stops and everyone tries to find a chair.
The specific mechanism by which the mismatch between imports and creditworthiness plays out depends on the financial system and regulatory framework in which borrowing takes place. In our specific case, we assigned bogus values to real estate, and our ratings agencies prostituted their AAA ratings. And the credit default swap market, with its insurance contracts issued without insurable interest, exacerbated the financial pain of the discovery that we were out of credit. But all of that is detail. What matters is that we are out of credit, and so we no longer have a comparative advantage in consumption. Economic recovery, therefore, must depend on exports, so that we can return to the same level of imports without having to return to the same level of borrowing.