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International Trade Questions 1. What do you think are the long-term effects on all groups, if competition is made more difficult or even impossible by law? 2. What do you think would be the long-term effects on all groups if individuals are free to compete with established businesses based on new ideas and changing comparative advantages? 3. Do people have a right to force others buy their product? 4. What if some individual or group has traditionally supplied a good and someone else comes up with a cheaper, better version. Does the person who has traditionally supplied a good have a right to stop his or her customers from changing to a new supplier, or should people be free to trade with whomever they choose? Why or why not? Lesson 6 Study Guide: Imports, Exports , and Competition International Trade How does the introduction of more people, new geographical areas, and political borders influence comparative advantage and the benefits of trade? In general, more people mean more opportunities to gain from specialization. As we have seen in previous lessons, a lone person on an island must catch fish, collect firewood and coconuts, make shelter, etc. Scarcity means that if she devotes more time to collecting firewood and coconuts, she has less time to devote to fishing, and vice versa. If a second person arrives on the island, one can specialize in fishing, while the other specializes in collecting firewood and coconuts and making shelter. Because of efficiencies created by comparative advantage, the two together can produce more than the sum of what they could produce in isolation. But the benefits of specialization are far from exhausted. A third person on the island can free up the first two to specialize further, making everyone yet more productive. So can a fourth, a fifth, a sixth. Each additional person increases the extent of the division of labor, enabling the same goods to be produce more cheaply, or entirely new goods to be produced, which couldn't have been produced before. In this episode, Able exports goods from his side of the island in exchange for goods he importsInternational Trade Questions back to his side of the island. By doing so, he connects people with different comparative advantages across the island into a larger, more extended division of labor. The comparative advantage of people on the other side of the island at producing shirts frees up Charlie and her employees to produce new goods (such as Goji Berry Jam) that could not be produced if Charlie and her employees were still tied up in producing shims. A5 a result of trade, consumers on one side of the island can consume more because they have shirts that are not only cheaper but also better than what they had before. And people on the other side of the island can consume more because they now have nets that enable them to catch more sh. Because the people are able to consume more, there are now greater opportunities for entrepreneurs to invent and sell new things - like Charlie's Goji Berry Jam. If the division of labor had remained limited to Able, Baker, and Charlie's side of the island, consumers would only have been able to enjoy poorer quality shirts, and fewer other goods and services. I M An important point to remember is that geographica regions\" and "countries\" do not exchange with one another, only individuals and organizations do. When people say that "Canada" exchanged with "France," they mean that individuals or organizations inside Canada exchanged with individuals or organizations inside France. Imagine two neighbors who can benet from exchange because one is a good gardener and the other a good sherman. Now (because of some distant agreement) an invisible line between their two homes becomes a national border, dividing them into two different countries. Has the interposition of this invisible line changed the economic conditions making trade between them mutually beneficial? Obviously not. So long as the gardener can buy sh with his produce for less than it would cost him to go shing for himself, and so long as the sherman can buy produce with his sh for less that it would cost him to garden for himself, there will continue to be mutual benets from trade. If we think about it, we can see clearly that an invisible boundary separating people on Able, Baker, and Charlie's side of the island from the people on the other side of the island are as equally irrelevant to whether trade is benecial or not as a line separating Able from Baker and Charlie. International Trade Questions Competition and Protectionism The division of labor creates new kinds of conict, however. In a market, every person is both a consumer of other people's products and a producer of products other people consume. This dual nature of people, as consumers and producers, creates a divergence of interests. As consumers, we want many sellers so that we can have the greatest abundance and variety of goods and that competition among the sellers drives the prices of those goods as low as possible. As producers, however, we benefit when we don't face competition. With little competition, we can keep our prices higher. Consequently, as consumers, we all have an interest in general abundance, but we each have a special interest in restricting competition in our own elds of production. Competition forces us to supply our product at the cheapest possible price, however. Suppliers of the goods consumers want must innovate to improve the quality of, and reduce the price of, their products. If they do not, consumers will start to buy from someone else. Though they would like to charge a high price and \"rest on their laurels,\" if suppliers don't keep up with their competition, they will end up eaming nothing instead of something. (We can see from this that market oon'petition implies the attempt to win cooperation with trading partners.) Reciprocally, however, we must all struggle to innovate to improve the quality of the goods and services we produce and to reduce our prices so people will buy from us rather than from our competition. Competition, therefore, demands constant effort and vigilance so we do not lose our customers to someone else who can offer them a better deal. This process, known as creative desh'uction, causes new, more productive, cheaper ways of doing things to displace established, less productive, and more expensive ways of doing things. As a consequence, while consumers enjoy the effects of competition among producers, established producers see such competition as a threat to their well-being and have an incentive to try to limit competition in their eld. As a result of this divergence of interests, many businesses lobby the government for "probation," i.e., special privileges, such as prahcw tarifs and quotes (aka. trade barriers), to shield them from producer competition. Protectionism benets these established industries and their employees by protecting them from creative destruction. At the same time, however, protectionism harms consumers, who would otherwise have enjoyed more and better products at lower prices, unprotected producers, who are prevented from competing against the protected companies, and a third, unseen group of producers who would have emerged to supply new goods to consumers with greater purchasing International Trade Questions power thanks to cheaper prices. If Charlie, for instance, had been able to get the people on her side of the island to create a policy forbidding Able, or anyone else, from bringing shirts from across the island, she could have benefitted, maintaining her shirt making business and protecting herself and her employees from unemployment. Consumers on M33 side of the island would have been harmed, however, no longer being able to buy better shirts. more baskets, and Goji Berry Jam. Shirt exporters on the other side of the island would have been harmed, no longer being able to sell their shirts to Mside of the island. Able and his employees would have been harmed, no longer being able to export his nets, since people on the other side of the island would have less income to buy his nets. And other producers on both sides of the island would have been harmed, no longer being able to sell as many goods, such as baskets, to consumers with more money left over in their pockets. Although the unemployment resulting from creative destruction can be uncomfortable to some, the unemployment resulting from preventing creating destruction is uncomfortable to others. The difference is that creative destruction brings with it new, better, and cheaper products, and a rising level of prosperity over time. Creative destruction has meant tractors and forklifts allow one person to move, in a few minutes, things that used to require dozens of men hours to move. Robots and machines enable a small group of people to produce, in a day, thousands of yards of cloth for clothing that it used to take hundreds of people months to produce. Computer-automated container ships enable skeleton crews to move unimaginable quantities of goods, quickly and securely, which once would have required thousands of slow sailing ships to move. In each case, innovations put people out of work. (Many of them may have had to take work that did not pay as well as their formerjobs.) But the innovations also bring new and better paying work to other people. Yet, the real prices of goods and services in industry after industry have continued to fall, making everyone richer on the whole. Today's generation is the wealthiest generation the world has ever known, and there is less grinding poverty in the world today, in part, thanks to creative destruction. Without competition, established businesses have little incentive to innovate and use their resources according to their comparative advantage, leading to an overall lower level of prosperity. By shielding established business from competition, either from domestic innovators or from intemational competitors, protectionism tends to ossify the productive system and benefit some established producers at the expense of everyone else. Free trade and open competition, on the other hand, spur creative destruction and incent us all to do the best job we can for other people in the marketplace