Originally published 2/22/2007
The logic of free trade is little more than the extension of logic of the division of labor to an international level. Adam Smith discussed the productivity improvements that can arise by dividing labor into distinct tasks when he wrote about the pin factory. This example may not resonate very well with people today, since most know very little about manufacturing pins. The same idea can be expressed in a slightly different way though.
Suppose tomorrow the US implements a ban on all imported goods and services. Let’s ignore the immediate transition effect of empty shelves and lost jobs for those people dealing with imports and ask a more basic question. Can the US produce on its own all of the goods and services it currently imports? The answer to this is probably (or mostly) yes. The US is a very large country filled with people of all sorts of different skills and expertises. It has considerable untapped resources of oil, gas, minerals. It has a variety of climates stretched across the continent. With time, and if we put our mind to it, the US could surely produce almost everthing we currently import.
Now suppose tomorrow your state implements a ban on imports from every other state (and country). Ask the same question: can your state produce everything the country can produce? Maybe yes if you are from California or Texas, but probably no if you live in Washington DC or Rhode Island.
Now suppose your city or town implements a ban on all imports coming from outside. Can your city produce everything your state could? What about food? How much city land will need to be converted to raise crops and chickens and pigs? How much land is there for that?
Finally suppose tomorrow you implement a self-imposed ban on all “imports” that were not produced by yourself. Simply look around you and ask how many of the things you see you could produce yourself. For me the answer is virtually nothing. I can’t produce anything effectively except information about international economics, and that’s not gonna feed and clothe me in this new world.
The example shows that as we imagine going backwards towards greater and greater self-sufficiency, our abilities to produce the same collection of goods and services that we enjoy on a typical day disappears completely. If I did have to rely on producing everything myself, I would have to move to the country, learn to fish and farm, build a makeshift shelter, who knows what else. I know I would not enjoy anywhere near the standard of living I currently enjoy.
Now let’s run the story in reverse. As I open up to potential trade with more and more people, with my community first, then my region, then my country, and finally the world, my ability to focus my expertise on just one tiny body of knowledge (like international economics) expands. As my specialization becomes finer, so does everyone else’s. The result is a increasing quantity of goods and services produced with the same collection of resources (labor, capital, and land). It also means that virtually everyone can enjoy a much higher standard of living than they would if they were required to engage in subsistence agriculture.
That standard of living improvements arise from the division of labor is NOT simply a quaint theory. It’s obvious that it works in reality too. This is the basic reason why living standards are so much higher now than they were 300 years ago. The theory of comparative advantage is also based on this simple idea. Supporting free trade simply means pushing the principle of the division of labor to its logical extreme.
There are a few notable implications:
1) The story implies that smaller countries (like Jamaica, or Kenya) have more to gain from open trade than larger countries (the US and EU). Large countries can be self-sufficient and produce everything for themselves, however even they will suffer a drop in living standards because resources will not be divided as finely as possible. Small countries are more like the individual trying to be self-sufficient – it is possible, but not without a substantial reduction in living standards.
2) If you are concerned about the the sustainability of the economic system, or about the degredation of the environment, you should support policies that allow us to achieve the highest standard of living with the limited resources we have. Free and open trade helps to achieve that. Restrictions to trade will mean the same standard of living requires more resources, which in today’s energy-driven economy means more oil and gas and coal.
