International Trade

Academics argue that International Trade (IT) is good because comparative advantage makes it possible to produce more of everything with IT than without it, hence can make everybody better off. Here is an example that illustrates the academic argument.

Countries A and B have two-product economies, cars and corn. If country A devotes all of its resources to producing cars, it can produce 1,000 cars. If it devotes all of its resources to producing corn, it can produce 1,000 tons of corn. Alternatively, country A is able to produce a combination of cars and corn, with a tradeoff of 1 car for 1 ton of corn. If country B devotes all of its resources to producing cars, it can produce 2,000 cars. If it devotes all of its resources to producing corn, it can produce 1,000 tons of corn. Alternatively, country B is able to produce a combination of cars and corn, with a tradeoff of 2 cars for 1 ton of corn.

Country B has a comparative advantage with respect to cars. Its cost of an additional car is ½ ton of corn, whereas it is 1 ton of corn for Country A. On the other hand, Country A has a comparative advantage with respect to corn. Its cost of an additional ton of corn is 1 car, whereas it is 2 cars for Country B.

Suppose there is no IT, and Country A is producing 600 cars and 400 tons of corn, and Country B is producing 1000 cars and 500 tons of corn. Then aggregate production is 1,600 cars and 900 tons of corn. Aggregate production of both cars and corn can be increased by having Country A produce only corn and Country B produce only cars. In that case, aggregate production is 2,000 cars and 1,000 tons of corn. Since production of both cars and corn is higher, every citizen of both countries can have more cars and more corn, which is good. However, without IT, this would not happen, because Country A’s citizens want cars in addition to corn, and Country B’s citizens want corn in addition to cars. IT is necessary to achieve the potential benefit, ergo, academics conclude that IT is good.

While IT is necessary to achieve aggregate production efficiency and greater output of everything, it is not sufficient to guarantee that everyone has more than before. In the above example, Country A’s car jobs and Country B’s corn jobs disappear. Academics argue that those who lose car jobs gain corn jobs and those who lose corn jobs gain car jobs. This argument is problematic. First, even if true, there is no guarantee that all of the new car and corn jobs will pay well enough to provide more cars and more corn to all of the displaced workers. Second, if the new jobs do not provide more cars and more corn to all of the displaced workers, there is no arrangement in place to assure a reallocation that does.

IT has the potential to make everyone better off, but, in reality, leaves some workers worse off. Academics argue that this can be avoided by having the winners share some of their winnings with the losers, i.e., give some of their extra cars and corn to those who do not end up with more. Unfortunately, there is no mechanism in place for achieving this, and no likelihood of one soon.

Academics claim that IT is a no-brainer. In reality, IT creates winners and losers. The real argument for IT is that the cost-benefit analysis, particularly in the long-run, favors it.