Is comparative advantage important to your procurement practices?

October 21st, 2010

It could be if you source off shore and carefully analyze the local culture, skill sets and ease of doing business in that area to your mutual benefit.

Comparative advantage is a theory that advances that in a free marketplace, each entity or country such as the EU or NAFTA or trading countries will ultimately specialize in activities where it has comparative advantage. Examples of such might be technology, natural resources,?? local workers skill sets, agricultural advantages, transportation benefits etc.

Sometimes countries create trade agreements that eliminate the comparative advantage they each may have in favor of benefits that both or multiple countries derive from the agreement where one may have an advantage over the other that creates an imbalance in trade. As an example in the NAFTA agreement, Mexico may have a lower cost labor pool than the United States but the United States may have a transportation advantage that could leverage that low cost of labor. These agreements are called Free Trade Agreements in which both parties agree to lift most or all tariffs, quotas, special fees and taxes, and other barriers to trade between the entities to their mutual benefit.

We look forward to and appreciate your comments.

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