08 March 2016

Free Trade - a Simple Thought Experiment

Economists argue a lot but rarely about the benefits of free trade.
Here's a poll result that is typical of economists' opinions about free trade (from here.)
No economist disagreed with the claim that Americans have benefited from major trade deals.

Of course Bernie Sanders and Donald Trump don't have economic degrees. Bernie talks derisively about American workers having to compete with low-paid Mexicans and Chinese. Donald warns that when he is president, Apple will be made to manufacture their iPhones in the US instead of China.

If anyone actually took them seriously, this would be dangerous talk. Fortunately, their worldviews are unlikely to be translated into policy.

There is so much that could be said about this but do this thought experiment.

Imagine that you live in a block of 100 people in a town of 10,000 people in a metropolitan area of a million people in a state of 10 million people in a country of 100 million in a world of 10 billion.

At one extreme, you can only trade with people on your block. The best food will be something someone on your block can raise, harvest or slaughter, and cook. If you can't raise cilantro in your neighborhood, you can't include it. No trading for spice like pepper or cinnamon. Or vegetables that won't grow on your block. Oh, and that's just the food. Clothes are the same thing. Keep in mind, it's not just that you can't trade for clothes. You can't trade for looms or sewing machines. And if we're going to be really strict, you can't even trade ideas because those, too, are a form of intellectual property. You have to figure this all out.

The homes on your block? Well, they are made of whatever materials you have in the vicinity. You might live in a mud hut. Or under branches. Or just out in the open. You can't put up a tarp unless you have the technology to make it.

And on it goes. The odds are infinitesimal that you have enough geniuses on your block to be able to make all the components needed for a radio, much less a TV or computer. Your quality of life is going to be terrible.

At the other extreme, you would have access to the best across the whole world, all ten billion people and their unique talents. The team that came up with the great high-definition googles that let you "walk" through virtual reality spaces real or imagined. And by the way, those googles depend on software from another part of the globe, another team. And the many, many, many pieces of the puzzle that go into such a complex product as the virtual reality experience come from dozens of nations and hundreds of companies and thousands - possibly millions - of people.

With free trade, you have access to the best across the whole world. The music. The food. The ideas, The technology.

At the one extreme, you live a life little different from cave men. At the other extreme, you live a life that offers you the best the world has to offer.

And as the circle enlarges, from your neighborhood block to your town to your country and so on, there are more benefits to enjoy.

Free trade takes you from an isolated, Robinson Crusoe existence to the wonder of the modern world.


Anonymous said...

The local Trane factory used to hire workers at $9 per hour, fifty cents more for the night shift. They were hired on three-month temp contracts, to avoid the insurance and unemployment benefits requirement.

They just lost their jobs to Mexico, where their replacements will earn a little less than $1 per hour.

It's hard to argue that anyone involved (other than the shareholders) is getting the best this world has to offer, or gets to enjoy the wonders of the modern world.

Ron Davison said...

I think we need good safety net and welfare system for people because the economy is going to drive more disruption.
But would there ever be a time when it was okay for you for a Trane to leave the area? If you provide employment to people for one month are you obligated to provide it for a year? If you provide it for a decade are you obligated to provide it for 3? 2 generations mean that you're obligated to provide it for 3? Is it ever okay to move your company or do you become responsible to people for life because you provided for their living for a time?

Lifehiker said...

Well, the market for air conditioners is very competitive, so price is important to manufacturers. If Trane is not competitive on price, it will not sell many and the factory will close anyway. Who else benefits? Just every consumer who pays less for their air conditioner and therefore has more money to spend on something else. Also, every person who has Trane stocks or bonds in their IRA or pension plan and all the Trane employees in its sales, distribution and service departments. That's all.