The WTO talks collapse. I am generally an optimist on matters of economics, but this news sent a shiver up my spine.
One of the central causes of the Great Depression was the spiral into trade protectionism that occurred in the early 1930s. Countries believed in Mercantilist theories, that trade was a type of war one waged with other countries. If you export you win if you import you lose. Unfortunately, they didn’t realise they were wrong and everyone lost.
It would give me pause should this event spark similar reactions between coutries.
A brief note on trade, because this is one of the areas where very well established thinking in the field of economics has failed to reach the overwhelming majority of the population, who remain mercantilist in their attitudes.
Ask 100 people and more than 90 would probably instinctively tell you that exports are good and imports are bad. However, economists see exports good and imports good. The reason is that trade is a positive sum game. Two economies/countries generate more income/output between them by trading than they do on their own. Each of the countries generates more income/ouput by trading than it does by not trading.
In short, it is a win-win game.
How does it work? It comes down to relative comparative advantage, which is not what most people think it means. It is nothing to do with the “competitiveness” that you hear people rabbit on about all the time. It is about doing what you do best - specialisation. It means that even if one country, say the US, produces everything more efficiently and cheaply than in another country, say Ireland, it is still in Ireland’s interests to trade. Ireland will be better off trading, than trying to keep out the cheaper imports - which in this case is everything. Sounds strange doesn’t it. At first glance it is counter intuitive, but after a while it becomes self evident.
Imagine there are only two goods produced, say computers and cars. Say the US can produce a car in 10 man hours and a computer in 5 man hours. Ireland can produce the identical car in 15 man hours and the identical computer in 10 man hours.
It looks as if trade would leave Ireland with 100% unemployment. Who will buy a computer or a car made in Ireland. US cars are 33% cheaper and US computers are 50% cheaper. Surely Ireland needs trade barriers to block out these imports to protect jobs. Well no. Think a bit more deeply. The trick is of course that there is a limited amount of labour available. Production will naturally gravitate to the most efficient allocation of that resource, because that will provide the greatest reward.
US workers can produce 2 computers for every car.
Irish workers can only produce 1.5 computers for every car.
Ireland’s has a ***relative ******advantage in producing cars compared ***to the US. Irish. US cars cost 2 computers, while Irish cars cost only 1.5 computers. Ireland will be better off by making cars, because the US will be willing to buy them for anything less than 2 computers (the alternative is to give up 2 computers if they are prduced in America). Ireland of course will be more than happy to take computers from the US for anything less than 2/3 of a car. So they will trade cars and computers at a price somewhere between 1.5 and 2 computers per car. Each will be at full employment and each will have more computers and cars than if it didn’t trade.
So even though the US can produce everything more efficiently (cheaply) than Ireland, it makes sense for Ireland to trade. Ireland benefits from the trade and so does the US. They get more computers and cars between them ***and ***each because they specialise in what they do best and then swap. Win-win.
So much for the famed “race to the bottom”. What actually happens is that every country can find its niche and use trade to make itself better off. Even in this extreme case, which by design hints at the great threat of low wage economies. Of course it isn;t a threat at all, these are countries waiting to trad ewith Ireland to allow increased opportunities for specialisation through trade and higher income for all.
Als, note that imports are good. The imports are the way by which your trading partners can buy things from you and excecise this specialisation. Another way to think aobut it is that there is no such thing as imports, only exports from a different side.
So that is why trade is good. That is why imports are good. Go tell your friends. Go tell those bloody farmers dancing in the street tonight at the failure of a process that improves prosperity for all.