The previous blog posts have discussed how trade benefits the traders. We began with the observation that people act purposefully. Then, we developed that observation to answer the question “why do people trade” and found that people trade because such a transaction is mutually beneficial. That led us to a graphical representation of the question: the supply and demand diagram. Finally, we were able to show the gains of trade that occurred. At the end of this blog post, we touched on the claim that these gains from trade do not depend on the geographic or political location of these actors (gains from trade do not change whether the trade is inter-neighborhood, inter-town, inter-state, or inter-national). I will now expand on that point.
Trade occurs because both parties benefit and thus gains from trade are realized. The gains may not always be exactly perfectly realized the way they are depicted in the supply and demand model, but it is a very accurate representation of the economic gains. Given the sheer repetition of human action and competition of buyers with buyers and sellers with sellers, gains will tend to be maximized. If Joe values apples more highly than Sally, Jow can bid away Sally’s apples; he can offer her some kind of compensation to part with her apples. Likewise, if Sally is competing with Brian to sell Joe apples, and Brian values his apples less than Sally (ie, he charges a lower price), then Brian can bid away Joe from Sally. Brian views what Joe offers as more valuable than both apples, and more valuable than the value Sally puts on her apples, so there are gains from trade (apples moved from their least valued use to their more valued use).
Gains from trade hold in an international setting, too. One of the chief objections put forth by
protectionists scarcityists is that international trade is one-sided and that all the benefits accrue to just domestic consumers and foreign sellers. Therefore, it is only the foreigners who pay the price for tariffs, and tariffs can result in a higher net benefit. Absent some heroic assumptions, this cannot hold true. Why? Because of gains from trade! If the gains to domestic producers were able to offset losses to domestic consumers, then domestic producers could simply bid away the domestic consumers from the foreign competitors. Consider Joe, Sally, and Brian again. Joe and Sally are both citizens of Motonia and Brian is from Hogeland. If Joe buys apples from Brian, then Brian offers him the best deal. However, if Sally can offer Joe a better deal, then she can simply bid away Joe’s business from Brian by willing to charge Joe a lower price. You would get a higher net benefit by this action. If Sally is unwilling to bid away business, then we can conclude her gains would not offset Joe’s losses, and the total surplus would shrink compared to trade with Brian. From a net benefit perspective, international trade does not matter (nota bene: this same logic holds if we adjust the scarcityist claim and they try to make it an externality argument, that Sally’s job loss makes things a net benefit. See the Coase Theorem).
There are other scarcityist arguments against free trade that I will not address here; they tend to be political or legal in nature, and that is beyond the scope of these blog posts.
Here ends the substance of this series on trade. The next post will discuss trade and GDP, highlighting some of the flaws of GDP and why how it is currently understood by most non-economists is incorrect. The following post will be a recap of all I have written.