Saturday 23 May 2015

Is trade good?

Suppose you have a bicycle that you don't really want. It's still a goer, still useful, but you now have a better bike.

Suppose I have a computer that I don't really want. It still works fine, but now I have a better computer.

Suppose that I'd rather like your old bike, because I don't have a bike, and you'd rather like my old computer, because that beats having no computer. If we swap my computer for your bike, we're both better off.

Both of us? How can that be? Surely there's a winner and a loser?

No. In a game of chess, there's a winner and a loser. But in trade, there can be two winners.

Now let's broaden this. You live in the Ruritanian Republic, and I live in the Democracy of Giggle. Trading the bike for the computer still benefits us both, although now there's more transport costs. But we know about the transport costs, and if we both decide it's a good trade despite the costs, then we both gain.

And that's international trade.

But. There's the government of Ruritania, and there's the democratically elected Giggle Parliament. And they both want revenue. So they have a tariff. If I import a bike from Ruritania, I have to pay 35% of the value of that bike to my government; Giggle is similar, and you have to pay 30% of the value of the computer to your government. And suddenly, the trade isn't worth doing. So without the tariff, two citizens would both have been better off, with the tariff it doesn't happen. We're both poorer than we would have been.

And it can get worse - there's also quotas. Maybe in any one year, only ten bikes can be imported from Ruritania, and those ten bikes were already shipped. We, no matter how much we'd both gain from the trade, the trade is prohibited.

Well - in today's sophisticated economic systems, barter isn't the usual way of doing business. If I want a bike, I don't need to find someone who wants my surplus computer. Instead, I get money for my computer, and pay money for the bike. The two transactions can be separated, and it's all a lot more convenient for everyone.

So international trade today, is all about swapping goods (or services) for money. But the same is true; both parties are better off, and that's easy to demonstrate, because if they weren't, they wouldn't do the deal.

And the government still inserts itself into the possibility of mutual benefit. Because that's what governments do. And sometimes, this is because of tit-for-tat. The government of Ruritania restricts imports of computers from Giggle, because the Giggle government restricted imports of bikes. Or maybe vice versa. Or maybe Ruritania is hoping to develop a flourishing computer-making industry in Ruritania. Or maybe there's already a bike industry in Giggle, and it's failing because of competing imports from Ruritania and elsewhere.

But the outcome is still a loss for the citizens, because they can't get what they want, at a price they like.

So how to deal with this?

There's three ways. You can have international trade agreements; we won't put tariffs on bikes, if you don't put tariffs on computers. Hurrah! We can do our trade. But bilateral trade agreements like that? There's 196 countries, so you'd need 18,525 bilateral agreements, for each possibly traded good and service.

The second way is multilateral agreements - that's like a bilateral agreement, only you get a whole bunch of countries involved. You can imagine how difficult that is to set up, and there's still an agreement needed for each good or service.

And the third way is free trade areas. You get a whole bunch of countries to agree that between them, there's no barriers to trade. That happened in Germany in 1871, and it led to the economic powerhouse that we see today. It happened again to the separate states of America in 1776, and the United States became an economic superpower.

Free trade is *such* a good idea. It benefits everyone. In a trade, there isn't a winner and a loser, there's two winners.

No losers? What about, for example, the way that the UK wine industry is dominated by imports?

Well, it turns out that England isn't the best place to grow grapes. It doesn't really have the right sort of climate. Sure, you can find places in England where viticulture is possible (and I've been caching in places where there are big vineyards), but the fact is, a lot of countries have a much more suitable climate. And if you banned wine imports to protect the UK wine industry, consumers would be cut off from cheap wines, and good wines, and diverse wines.

Maybe it would be possible to grow coffee in England; you'd need expensive greenhouses, maybe, and heating, and I don't know what else. No-one with any sense would try it on a commercial scale, although it is actually possible. No - we do the things that we can do well in the UK, and trade for the things we can't do.

That's one of the reasons why the EC is such a good idea. 28 countries make a free trade area (although the EC has other good ideas) and everyone benefits.

But isn't this globalisation, which is bad?

Yes, it's globalisation. Which is good. And the reason it's good, is explained above.

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