Does free capital mobility invalidate the basic comparative advantage argument for free trade in goods? In Herman Daly's article "Economics for a Full World", Daly states that international trade must be regulated because free capital mobility would invalidate the principle of comparative advantage (Daly, 2015, p.12). As a reference, he cites John Stuart Mill's "Principles of Political Economy" IV.VII.I. However, there doesn't seem to be a chapter 7 in book 4, so I cannot check what he is referring to. 

I would greatly appreciate your help in understanding the argument made by Daly here!

References

Daly, H. (2015). Economics for a Full World. Great Transition Initiative.
Daly actually does explain further what he means by that in footnote 7 of his paper:


  Capitalists are interested in maximizing absolute profits and therefore seek to minimize absolute costs. If capital is mobile between nations, it will move to the nation with lowest absolute costs. Only if capital is internationally immobile will capitalists bother to compare internal cost ratios of countries and choose to specialize in the domestic products having the lowest relative cost compared to other nations, and to trade that good (in which they have a comparative advantage) for other goods. In other words, comparative advantage is a second-best policy that capitalists will follow only when the first-best policy of following absolute advantage is blocked by international capital immobility. For more on this, see Chapter 18 in Herman Daly and Joshua Farley, Ecological Economics (Washington, DC: Island Press, 2004).


But IMHO, the absolute conclusion that  international trade must be regulated as following from that seems silly. After all, one can regulate capital flows too negating that first-best policy (argument). In fact there are plenty of barriers to capital flow, some implicit and some explicit.

Having said that, I cannot quite find the ultimate conclusion stated in those absolute terms by Daly, although he does say (we should) "Move from free trade and free capital mobility to balanced and regulated international trade." Which is frankly pretty vague. I mean doesn't the WTO do at least some of the latter?

The whole writeup of Daly smacks of a certain social agenda. Later he says


  Restore the US Full Employment Act of 1945 and its equivalent in other nations in order to make full employment once again the end, and economic growth the temporary means.


I think Bernie Sanders also said he wants something like that. Daly also says


  Un/under-employment is the price we pay for growth from automation, off-shoring, deregulated trade, and a cheap-labor immigration policy. 


And finally, Dally says (we should)


  strengthen the original Bretton Woods vision of interdependent national economies, and resist the WTO vision of a single integrated global economy


That's basically a slogan in disguise, to put it diplomatically. You could just as well phrase it as "take back control of our economy/tariffs/borders/immigration". So his conclusions are more or less socio-political goals; it's hard to take them at face value as pure economic arguments. So there will undoubtedly be disagreement on such statements.

Perhaps to save his "ecological economics" creds Daly does say that in contrast


  climate change and arms control require global institutions


To use a political science neologism, that's an ambivalox with demanding no world-wide regulatory institutions for any other economic issues, like trade.



But to come back to the more serious economic topic, glossing over Daly's black-and-white approach, capital mobility as partially substituting for goods exchange is hardly a new discovery. See Nadel (1971) for example.


  It has long been recognized that commodity movements and factor movements [e.g. capital, my note] are, to a degree, substitutes for each other in international exchange [...] Yet, until recently, the dominant theory of international trade, the Heckscher-Ohlin model, had been rather thoroughly recognized under the rigid assumption of the immobility of factors. Only in 1957, with the publication of Robert Mundell's important article, was capital mobility in the H-O model explored.


(That important article being: Mundell, Robert, “International Trade and Factor Mobility,” American Economic Review 67
(1957):321–35. It has around 2800 citations in Google Scholar.)

What is somewhat novel (in ecology-related economics) is that under some models of pollution, capital movement is preferable to goods movement:


  Using a Heckscher–Ohlin model, this paper re-examines Robert Mundell’s famous thesis that free trade and
  unimpeded capital mobility are perfect substitutes. Under very general conditions which, according to many
  economists, have caused international convergence of factor rewards,we show that in a polluted environment
  free trade is inferior to free international investment.This happens even though commodity prices and factor
  rewards are the same with both policies.The practical side of our thesis is that the world will be better off by
  reducing the volume of trade while removing all barriers to foreign direct investment that at present hamper
  the service industries.


That paper Batra and Belladi (2012) does also say that


  Daly (1996), Batra (1992), and Batra
  et al. (1998) argue that transportation is highly pollution intensive, specially relative to production


That seems to be a cornerstone assumption of the model. It is [to me at least] an interesting separate question if economists outside of this narrow field of "ecological economics" agree with these premises.