Why do I buy my bread from Wegmans instead of making it myself? Why do I drive a Mercury Sable instead of building my own car? Why did I buy a house that somebody else built instead of building it myself? The answers are actually pretty straight forward. I buy bread from Wegmans because I value the bread more than I value the dollar I use to pay for the bread (or more precisely, I value the bread more than I value the next best alternative I could have purchased with that same dollar). This is because Wegmans has a lower OPPORTUNITY COST of producing bread than I do. The same is true of auto manufacturers and housing contractors. They all have lower opportunity costs than I do. This is why I trade with them rather than trying to produce these goods myself. The bottom line is that when somebody else has something we value more than we value our own stuff (and vice versa) trading makes us better off.
But what if my trading partner lives in Rochester? Will I still gain by trading? Of course! What if my trading partner lives in Pennsylvania? The gains from trade are still there. It doesn't matter where our trading partners live as long as we value what they have more than we value what we have. But, what if my trading partner lives in Quebec? Are there still gains to be made from trade? Again, the gains from trade are the same regardless of where your trading partner lives (though transportation costs may begin to eat into those gains). The economics of trade is the same for intercity trade, interstate trade, and international trade. However, the POLITICS changes when trade becomes international. We get very touchy about goods and jobs crossing international borders (and here in New York, we are a little touchy about state borders, as we watch more and more jobs move south because of our ultra-high taxes)
We are sometimes tempted to place barriers on trade by imposing tariffs and quotas – but we need to be careful. This only serves to reduce the gains from trade and can stifle economic growth. This is why economists are virtually unified in support of trade. Yes, we can make some short-term gains by restricting trade (mostly political, and this is why you often hear politicians railing against trade, especially in an election year) but at the expense of long-term economic benefits.
Economists really don’t debate the merits of trade (at least not with each other) any more than physicists debate gravity or mathematicians debate linear algebra. But observers from all over the political spectrum continue to object in the face of overwhelming evidence. The arguments that trade will destroy jobs, and lead to unemployment and falling incomes are fallacies that history and experience have refuted time and again. For example:
"With America’s high standard of living, we cannot successfully compete against foreign producers because of lower foreign wages and a lower cost of production."
That was Herbert Hoover in 1929! Also, does anybody remember Ross Perot’s giant sucking sound from the 1992 presidential campaign? As one economist stated:
"Free traders are trapped in a public policy version of the movie Ground Hog Day, forced to refute the same fallacious arguments over and over again, decade after decade."
Paul Krugman (Princeton University economist, New York Times columnist, and Nobel Prize winner) sums it up this way:
"The logic that says that tariffs and import quotas almost always reduce real income is deep and has survived a century and a half of often vitriolic criticism nearly intact. And experience teaches that governments that imagine or pretend that their interventionist strategies are a sophisticated improvement on free trade nearly always turn out, on closer examination, to be engaged in largely irrational policies – or worse, in policies that are rational only in the sense that benefit key interest groups at the expense of everyone else."
The bottom line is that unless you make your own clothes, bake your own bread, grow your own wheat, and build your own house, you have bought into the benefits of trade –and in a big way! Jeffrey Sachs (Director of Columbia University's Earth Institute and one of the world's foremost economists) points out in his book The End of Poverty:
“Embracing globalization is a key to ending world poverty”.
Evidence to support the benefits of trade are summarized and documented in the book, Free Trade under Fire by Douglas Irwin if you are interested in exploring this topic further.
We have a powerful incentive to trade. People tend to prefer more to less and trade helps make that happen. By specializing in what we do best and trading with others who are also specializing in what they do best, we raise our standard of living. Specialization and exchange actually allows us to consume beyond our production possibilities (Adam Smith, the father of modern economics, pointed this out way back in 1776 in his revolutionary book An Inquiry into the Nature and Causes of the Wealth of Nations)
The data are very clear on this: In wealthy nations, people are highly specialized with lots of interaction and trade. This results in greater productivity and a higher standard of living. In poor countries, people are much more independent. They make their own clothes and grow their own food and trade much less with each other. This results in lower productivity and a lower standard of living.
Please see the following Paul Solman video:
MM
