Tuesday, February 7, 2017


You don’t grow bananas or manufacture your own shirts, and Bill Gates doesn’t do his own typing. That’s called the benefits of trade. There was a day when people were mostly self-sufficient. Families grew their own crops, chopped wood, made their own clothing, and so on. But we don’t do that anymore. True, we are all getting fatter as a result. But we are also getting richer too.

The change from self-sufficiency to trade came gradually, and now we don’t think about it. Today is an age of specialization and trade. Most of us are plumbers or accountants or bartenders. We earn incomes at our specializations and use our incomes to buy whatever we need or want. In Tuna’s case, that would mean luxurious vacations for Pat. We don’t think of it this way but what we are doing is benefiting from the activity called trade.

We benefit from trade mostly because of what some whacked out economists call comparative advantage. Bill Gates is really good at what he does for a living. Suppose he is worth $1 million dollars a day in the marketplace. Should he do his own typing? I think not. If he spends a day typing, he loses $1 million and gains the average wage of an administrative assistant. It wouldn’t make sense. And of course, trade doesn’t just help Gates. Some people cannot make business decisions and are not valued at $1 million a day. Some people are really good at being an administrative assistant. Those people are delighted that Mr. Gates needs their services. They happily trade with Bill Gates.

It is true that the administrative assistant might earn $30,000 per year. But that person cannot pawn himself off to a company for more. That person is probably quite happy to find employment for what he is good at. In trade, people willingly enter into agreements, and both parties are advantaged by it. This goes on every day. 

We live at a wonderful time when all we have to do is want something and someone else is there to make it or sell it to us. Of course, we have to uphold our end of the bargain and make sure people value what we do, so we can earn the money to buy all those other things.

That’s pretty simple. But it all goes haywire when we go from talking about Nathan and Christina to similar trade between the US and Mexico. You see, trade is trade, whether it goes across a national boundary or not. The same principles apply. Nations have always traded. Even dinosaurs traded. Trade works because a nation can produce and sell things in which it has an advantage and buy things in which it has no advantage. In doing so, all countries benefit.

Back to benefit. Recall Bill Gates and his administrative assistant. Both of them enter into an agreement willingly and gain from it despite the fact that one is a lot richer than the other. Some people believe that some countries are always harmed by trade. These countries are poor and get taken advantage of. That may sometimes be true but what is also true is a country’s poorness often gives it great advantages in trade. Think of why we richer nations buy things from places like Vietnam. We buy because they have learned production techniques and combined that mastery with employees who are used to living on very low incomes and wages. It might not seem fair to some of us, but if you are from such a country and a new trade deal makes you MORE valuable, you are less inclined to envy the rich and more inclined to take advantage of a higher income and standard of living and perhaps better job security.

Trade is good and makes both parties better off even if it doesn’t make them equal. The problems come when one or more of the parties to trade receive actual benefits that are less than expected. Unintended effects of trade can occur for many reasons. Some reasons are real and can be addressed. Other problems are made up or simply contrived for political purposes.

For example, Bill Gates might suffer business losses because of a new competitor. He might blame his administrative assistant despite the fact that the assistant was not the real problem. So he reduces the wage of his assistant or fires him. Clearly, if the real problem is a new business competitor, firing the assistant accomplishes nothing and sooner or later we find out the truth of the matter.

In the US today, we are rethinking trade. We have trade deficits with the world and with specific countries. We are about to say “You are fired!” to these trading partners. How much of these trade deficits are in fact the direct results of freer or unfair trade? How much are caused by ourselves, or at least things out of control of our biggest trading partners?

I don’t have all the answers but I can offer a few. One answer comes from macroeconomics. We in the US love to spend. We love to buy goods and services. Apparently we can’t make enough to satisfy our love of buying, so we have to import. Maybe if we saved more that would help. Furthermore, we find ourselves in a time when the US economy, despite a lumbering pace, looks stronger than many of our trading partners. We have more ability to buy from them than they from us. None of this has to do with cheating, and none of this argument can be solved by US protectionism.

Another answer has to do with a realistic assessment of economic transformation in developing countries. When we made trade agreements with these countries, we made them with the full knowledge that they were transforming. Transformation is neither easy nor quick. When the Soviet Union collapsed, I recall economists saying that it would take 30-40 years for countries like Poland (not in the Soviet Union) and Latvia to approach rich country status.

What’s the hang-up? The problem is that subjecting a country that was centrally planned for decades to the rigors of competition is rough. You can’t wave a magic wand and privatize very inefficient companies that have little experience with competitive markets. Likewise you can’t overnight liberalize prices of all goods and services when many prices were kept at a very non-economic low.

Rapid privatization of companies can lead to large-scale unemployment and liberalization of prices can cause drastic increases in prices. Any country engaged in these and many other transition policies understands the social/economic upheavals associated with change. Nevertheless, they do it because of the eventual benefits transformation promises.

Richer countries know this, and trade agreements were made with the understanding that many of our important trading partners have government-owned companies and government control over prices, wages, and many other things. To say today that country X unfairly subsidizes its industry Y makes no sense. The word subsidize makes no sense in the context of a transforming nation.

Are we all wrong and are they all right? No. Maybe we do need to reopen some trade agreements. After all, some of them are old, and times have changed. But in doing this we need to remember a few things. First, some of these problems we bring on ourselves because we probably won’t ever produce enough to satisfy our appetite for goods and services. Second, some of the problems will go away when economic growth in other countries returns to something more normal. Third, developing countries are still developing. They have very low incomes. They are in transition. 
Putting unrealistic pressures on them only weakens them. We don’t gain by weakening the people who we want to buy our goods.

Trade is good. Trade agreements can be reopened. But there are clear limits to what can be accomplished without changes in our own domestic policies. 


  1. Dear LSD. In 1978 I took Pat on a luxurious vacation to Acapulco staying at the Acapulco Princess on the beach. We upgraded to an ocean view room on the top floor for $75/night. One day a local boy on the beach sold her an authentic sombrero strung with prairie oysters. That night she danced the Mexican hat dance barefoot on the beach, guzzling guacamole-infused tequila, snapping her castanets above her head and shouting “Arriba! Arriba! Vámonos, toro, vámonos!” The hat, tequila, and castanets set me back about $4.37—Alka Seltzer the next a.m. was extra. The local boy was happy with his $4.37 (worth 126,232 pesos at the time)—I was happy ‘cuz Pat was happy (until the a.m.). The international trade conducted that day on the beach made all happy. Ricardo—had he been there—would have been happy, too.

    Today, that local boy, after assembling cars destined for the U.S. starting in 1994, is retired and living in his gated hacienda. His U.S. counterpart who at the same time was assembling cars in Detroit for sale in the U.S. has received re-training and is now working for an Indian telemarketing call center trying to get seniors to buy Medicare-sponsored back braces and warning them they are being sued by the IRS for failure to pay income taxes. I don’t think Ricardo anticipated this change fortune among trading partners—he thought both would benefit. I don’t think he envisioned that trade would effectively transfer the buyer’s better standard of living to the seller—thus reducing the former’s and improving the latter’s. Maybe a caveat to comparative advantage is that as partners’ fortunes change it should not only be reasonable to modify existing trade agreements but incumbent on the partners.

    Pat still has her authentic Mexican sombrero but the prairie oysters shriveled up years ago and are no longer recognizable. Trader Joes and Whole Paycheck Foods tell her they don’t carry them—but think they’re available on-line from a little side-street shop in Acapulco. She still enjoys an occasional guacamole-infused tequila, dancing with her castanets and shouting “Arriba! Arriba! Vámonos, toro, vámonos!”—but gets really annoyed when former U.S. car assemblers call her at 9a.m. hawking back braces and threatening jail time.

    1. Dear Tuna, I am thinking that you have been into the Tequila and should appreciate its availability and lovely price. Keep up the good work!

    2. Dear LSD. As I wrote and am writing there is no agave involved. I do appreciate its availability/price and also as an ingredient in good tequila but am more content that its inclusion in good T is a miniscule factor in inter-country trade—and as such certainly doesn’t effect the diminution of domestic standard of living relative to trading partners. When NAFTA et al are renegotiated maybe the partners should toast with good agave/tequila and do the Mexican hat dance with castanets celebrating an amendment that portends a possible equanimous leveling of standard-of-living betwixt the partners . . . . ah-h-h-h-h, the missing F in NAFTA . . . and swill a couple of prairie oysters from that little off-street shop in Acapulco . . . ah-h-h-h-h, the freshness of imported culinary delectables.

      Question: If trade results in the transfer of standard of living/wealth of the buying partner to the selling partner at what point does the buying partner reach the tipping point—that point at which it can’t pay for its purchases but has lots of goodies/Assets (e.g. Netflix and Facebook?) to enjoy? Accounting 101 says Assets = Liabilities (debt?) + Capital (negative/decreasing standard-of-living?). If the buying partner’s L+C exceed A then poo-poo happens. Seems to me the U.S. is approaching that poo-poo tipping point.

      No agave or T here. How dry I am.

    3. Dearest and most eloquent Tuna, This isn't really about accounting. It is about escaping the zero-sum game. As you know from Coach Kotys, competition generally makes us better. Maybe Gables did beat Southwest, but the competition made us all better. It is in that spirit that trade does not have to be a zero sum game. Of course, it isn't always true but it is worth thinking about. Second, most analyses before and after the passage of NAFTA admitted that the economic benefits were not going to be huge but all three countries should be better off in the long-run. In fact in some cases we just redirected trade or investments away from Asia toward Mexico. We gained a smidge and Mexico gained more. If that is true then some politicians have hung their reputations on a false image. If NAFTA wasn't expected to have big impacts then they surely exaggerate when they say they will make great improvements by changing NAFTA now. Truth is we might see very small improvements from a good renegotiation. Given our challenges with robots, labor participation, and training/education I think you get my drift.

  2. I heard that the Arlington Cowboys want to trade Tony Romo to the Guadalajara Sombreros, but they're afraid the trade will be intercepted.