The liberal theory of free trade based mainly on the theory of comparative advantage is regarded as a win-win situation without any limitations. During the 1950s, however, development theorists presented a challenge to this well-established neoclassical theory. The theory of unequal exchange is a reaction to the naïve theory of comparative advantage. It provides a Marxist notion of the exploitation that is embedded in the comparative advantage theory.
The development of the theory of unequal exchange has followed several directions. First, some writers, including Andre Gunder Frank in Capitalism and Underdevelopment in Latin America (1967), argued that comparative advantage is not a natural endowment; rather, it is created by historical power relations through the exploitation of nations.
Second, some researchers examined the distributional inequalities of trade. Thus, the Prebisch-Singer thesis reveals that the terms of trade work against developing countries. This well-known issue of dependency theory was systematically developed in the 1950s (Ghosh 2001).
Third, on the basis of assumptions of the restricted mobility of labor and the perfect mobility of capital, Arghiri Emmanuel (1969) formally developed the theory of unequal exchange. He argued that under a situation of perfect competition, trade between developed and developing countries involves a transfer of surplus from the latter countries. In a situation of equal productivity in developed countries (DCs) and less developed countries (LDCs), but lower wages in the LDCs, high-priced products of the DCs are exchanged for low-priced products of the LDCs. Hence, the exchange is unequal. Emmanuel noted that since wages are institutionally determined, they are exogenous to the model. However, in DCs, trade unions have a critical role in raising wages. But this is not the case in LDCs. In the process of unequal exchange, there is a transfer of value from a country with low capital intensity (often a developing country) to a country with high capital intensity in production (as in a typical developed country).
Emmanuel, an Italian Marxist, has used the Marxian theory of transformation of value into prices to show that LDCs are compelled to sell their goods at prices below their value and to purchase goods from DCs at prices above their value. In the process, the advanced countries appropriate more labor time than they generate in production. In other words, DCs can get commodities from LDCs at lower prices than would have been available in their own countries. In this process of exchange, LDCs stand as losers, and DCs as gainers.
Emmanuel’s analysis has been subjected to severe criticism by many scholars, including Paul Samuelson, who tried to demonstrate that the argument developed by Emmanuel is preposterous. According to Samuelson, Emmanuel concentrated simply on the circulation sphere and failed to recognize the productivity differentials between core and peripheral countries. Emmanuel is also criticized on the grounds that he treated wages as an exogenous variable.
Samir Amin (1970) presented a new version of unequal exchange by considering wages as an endogenous variable, and he showed that unequal exchange allowed capitalist countries to protect profits. To him, the dominance of foreign capital in LDCs means distorted export activity and the hypertrophy of the tertiary sector. Peripheral countries thus incur heavy debts to core countries, become necessarily dependent on them, and become linked with the world capitalist system.
In the new world order, trade is organized largely by powerful multinational companies without any regard for small peasants and poor workers. The social cost of trade in terms of damage to the environment and human rights is much greater in LDCs. Even in a situation of trade based on comparative advantage, the gains from trade are not equally distributed. Because of the many structural differences between the LDCs and the DCs, factor price equalization is not possible. Domestic wages are falling in LDCs due to the race to the bottom and the informalization of labor markets (Ghosh and Guven 2006). The advantage of productivity gains through higher wages has never trickled down to LDCs through the channel of trade. Unequal competition and dissimilar bargaining powers between these two groups of countries make the theory of unequal exchange still relevant.
SEE ALSO Amin, Samir; Marx, Karl; Prebisch, Raúl; Prebisch-Singer Hypothesis; Samuelson, Paul A.; Singer, Hans; Terms of Trade; Trade
Amin, Samir. 1974. Accumulation on a World Scale: A Critique of the Theory of Underdevelopment. Trans. by Brian Pearce. New York: Monthly Review Press.
Emmanuel, Arghiri. 1972. Unequal Exchange: A Study of the Imperialism of Trade. Trans. by Brian Pearce. New York: Monthly Review Press.
Frank, Andre Gunder. 1967. Capitalism and Underdevelopment in Latin America: Historical Studies of Chile and Brazil. New York: Monthly Review Press.
Ghosh, B. N. 2001. Dependency Theory Revisited. Aldershot, U.K.: Ashgate.
Ghosh, B. N., and H. Guven, eds. 2006. Globalisation and the Third World. London: Palgrave-Macmillan.
B. N. Ghosh