 |
But we're getting a bit ahead of ourselves: what is trade? It is the exchange of goods or services for goods or services. We give things that we're especially good at making in exchange for things that other people are good at making. Now, at this point you might want to ask, "What about exchanging things for money? That's how we normally do it. Isn't that trade as well?" No, in a macro-economic sense, it is not -- because money, nice as it is to have in your pocket, does not satisfy human desires. Therefore, exchanging a good or service for money is really only half of a trade. When the money is exchanged for another good or service, then the trade is complete. The only wrinkle that makes international trade different from any other kind of trade is the fact that nations have different currencies: when we buy good from manufacturers in Japan, we must pay for them in Japanese Yen.
Suppose widget-makers in a foreign country do not have the nice advantages we enjoy at home. These foreign workers work for much longer hours for much lower wages, and the widgets they make will sell for less than the widgets that we make here. Our widget-makers are worried; demand for domestic widgets is slipping and widgetrons are being laid off. Pretty soon our entire widget industry will be uncompetitive! Lobbyists are dispatched, and pretty soon the government decides to levy a tax -- called a tariff -- on imported widgets.
The stockholders of Widgetcor are happy. But, pretty soon, the gadget industry is also facing foreign competition, and to save gadget-making jobs, protective tariffs are also slapped on imported gadgets. Then, the exciting new dinktronic semitrambulator industry is trying to establish itself in a market dominated by the advanced German dinktronists. To give our "infant" dinktronics industry a chance, shouldn't we slap a tariff on imported semitrambulators? Before long, we will have a lot of tariffs, costing our consumers a lot in higher prices.
It's clear to see that tariffs make us undergo more exertion in order to satisfy our desires; in other words, they retard economic growth. They benefit workers in the protected industries at the expense of the general welfare. And that means that protective tariffs can't even benefit workers in the protected industries, in the long run, because as they increase prices, they decrease demand for the goods we would be buying, if we didn't have to spend so much on these goods. We just can't seem to find any good argument for protective tariffs.
Perhaps free trade is good for big, strong economies like the United States -- but what about struggling, developing countries? Consider, the island of Dulcinia, whose climate and soil are just right for growing sugar cane. Dulcinians have better natural resources for sugar-growing than farmers in the United States. However, US farmers have other advantages. They have huge, corporate farms that can take advantage of every advantage of scale. They have the latest high-tech fertilizers, and they have the finest large-scale processing equipment. So, US sugar growers can produce lower-priced sugar than the Dulcinians! In fact, since sugar is the most profitable thing that Dulcinia has to sell on the world market, it is evident that Dulcinia cannot produce any product more cheaply than it can be produced in the US of A. Nevertheless, people in the US eagerly import sugar from Dulcinia. Why?
To solve this mystery, let's return to the basic idea of opportunity cost. What is the opportunity cost of Diggemupp Corporation growing sugar on its 600-acre Texas mega-farm? It turns out that on this farm, in this market, it's more profitable to grow soybeans than sugar. In Dulcinia they can barely even get soybeans to grow at all. Therefore, even though The United States has an absolute advantage in producing all goods, Dulcinia has a comparative advantage in producing sugar -- so everyone benefits from trade.
The thing about trade is that it is never forced. People trade willingly for their mutual benefit. And really, we talk about "international trade" as though it is something that governments do with each other at top levels, but that is almost never how it actually works. International trade is really a huge number of individual transactions: widgetmakers seeking widget-buyers wherever they are.
So if all that is true, and international trade benefits people who do it (and nations that allow it), then why do nations go to such trouble to restrict it? Protective tariffs have been a big part of national policy, in almost all nations, for a long time. The full schedule of tariffs imposed by the United States on various kinds of imported goods makes up a huge and tedious book -- what's up with that?
Background Questions
- What is trade?
- What is the overall effect of tariffs on the economy?
- Why would US consumers want to buy sugar from Dulcinia, when US growers could produce sugar more cheaply?
- Why would be the opportunity cost of Diggemupp Corporation growing sugar in the US?
- Why are there so many tariffs in effect?
| Activities for this lesson | Back to Economics lessons | Discussions | Home |