Incite -- (v) 1: give an incentive; 2: provoke or stir up; "incite a riot"; 3: urge on; cause to act
Saturday, March 20, 2004

Answering the Answerman on trade...
Written by: Beck

The hardest part about writing this is preventing it from turning into a five page long dissertation. I apologize in advance in case it happens anyway.

Paul Craig Roberts has an amazing resume. It amazes me, then, that he made an elementary mistake in his column which Answerman draws from. Comparative advantage will exist between two countries even if absolute advantage works as well. Let's take a very simple scenario: say two countries make two products, A & B, and let's say further that the first country makes both A & B more efficiently than the second country. These two countries will still both benefit from unencumbered trade. The first country can focus entirely on what they're the most productive at, say A, and leave B to the second country, which even though less productive at that than the first country, still allows the first country to benefit by freeing up more of their ultra-productive resources for additional A production. This will always hold so long as the principle of decreasing marginal utility holds (i.e. each additional unit of a thing which you have is of slightly less value to you than the previous unit). Anyone who would like a mathematical example complete with production functions and utility curves, feel free to email me (follow the link at the bottom of the post). I'm not going to burden anyone else with intro macrotheory.

Paul Craig Roberts' second point is correct, that countries must have different relative costs of producing different goods in order for them to benefit from trade. I disagree with Answerman's conclusion that this may no longer obtain in the modern economy. It absolutely holds, and always will. On a small level, the cost of raw materials will differ in small amounts due to shipping costs. On a larger scale, labor costs will always be different, largely due to differing government labor regulations from nation to nation. Third, building plant & property assets will always differ by location. Fourth, while one WOULD expect to see leveling in the production of certain products (say steel, where both the production inputs and end product are relatively uniform no matter where it's produced and by whom), benefits to trade only erode when goods production costs are uniform across the board. To apply our earlier example, if any nation can produce product B at the same cost, but product A is something complex and requires an advanced, industrialized, educated nation to produce, advantages to trade will still hold. Advantages to trade only disappear when both nations have identical production functions for both A & B (in which case you have neither comparative advantage NOR absolute advantage between nations).

Answerman brings up another issue--the impact of trade on national security--as well. To put the argument in simple terms, if one nation relies on another to supply it with vital goods and services, then that nation is at the mercy of the supplier. This is a strong argument, and for the most part, I agree with it. The real question, then, is a matter of asking to what magnitude one should intervene to prevent this loss of control of vital resources. Do we want to rely on others to supply us with fighter jets, precision missile weaponry, and sensitive computing and communications systems? Obviously not. What about guns and bullets then, they're simpler to make and easier to acquire from alternate sources? What about production of steel? You need steel, after all, to make fighters, missiles, and guns.

I think the United States government should absolutely intervene to protect Boeing in any way, shape or form. This includes more subtle measures (like trying to force Europe to stop financially supporting Airbus, Boeing's biggest competitor, for the simple reason that it means more profits for Boeing, and as such, makes for a healthier company), to more overt and obvious things (like physically preventing them from moving manufacturing facilities over seas). Boeing's capabilities and capacity are far too important to our national security, and it is definitely worthwhile to take any minor economic hits to avoid losing them.

So how about steel? This country would be seriously harmed should our capacity to import steel be cut-off, assuming we didn't have the ability to replace the lost supply from domestic production in a timely manner. Given unfettered free trade and another twenty years of economic development, it's entirely possible that the United States could completely get out of the steel production business. Logically, then, the US should move to protect this industry UNLESS we can count on a relatively secure alternate supply from friendly trading partners (such as Japan).

In the case of steel, and of the vast majority of other products, I feel quite confident in relying upon other nations to make those low value-added products while our own workers move further up the value chain to more productive jobs producing higher profit-margin goods and services. For my confidence to be betrayed, a significant number of our trade partners would have to completely cut us off simultaneously. I have a hard time imagining a realistic scenario where something so extreme could actually happen, and I think the economic damage we would have to sustain to insulate ourselves against such a scenario would be both extreme and unecessary.

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John Beck

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