Why Trade?


International trade results in increased economic growth and improved standards of living. As the political process debates the Doha Round of WTO negotiations and extension of Trade Promotion Authority to negotiate trade agreements and have Congress vote on them without amendments, it is important to keep in mind why producers and consumers trade.

The current Chairman of the Federal Reserve Board Ben Bernanke in March of 2004 in a speech at Duke University said, “The economist`s argument for free trade is disarmingly simple. Trade is beneficial because it facilitates the division of labor, allowing each person to specialize in the type of production at which he or she is relatively most efficient. At the most basic level, a world in which each person produced everything that he or she consumed would be primitive indeed, as no single person or family in isolation could produce more than a few rudimentary goods and services.”

To understand that point we need to look no further than the half of the world’s 6.5 billion inhabitants who live on less than $2 per day. To improve their standard of living they need to spend less time producing goods they directly consume and more time producing goods and services they can trade with other people for items they cannot efficiently produce themselves. That is why the Doha Round of WTO talks is labeled as the “development round.” Consumers’ purchasing power increases with trade as does incomes for producers who use imported capital goods and/or raw materials to produce more output at lower per unit costs.

Bernanke continued in his remarks, “In contrast, if each person concentrates on just a few activities, economies of scale and the development of specialized skills allow production to become much more efficient. Thus, if each of us focuses our efforts on just a few types of production and then trades our output with others, we can enjoy a far more varied and abundant supply of goods and services than we could if each person remained an isolated economic unit. Moreover, specialization tends to encourage innovation and hence promotes dynamism and growth as well as efficiency.” Workers in high income countries produce goods and services they do not consume and trade in the marketplace for other products they value.

Trade creates competition that causes producers to continually seek out ways to further increase efficiency. Soybean farmers in the U.S. are constantly innovating because they want to stay a step ahead of the Brazilian and Argentine producers who compete with them in the Chinese market for 34 million metric ton of imported soybeans and products. The same is true for U.S. wine producers who competed with the French by selling $470 million of wine in the EU market in 2006, while competing in the U.S. market with $761 millions of wine from Australia.

This increased competition from international trade leaves some firms and workers less financially secure than they would be without the increased competition. But, that is true of any domestic market where competition is allowed to operate. According to Robert Thompson, Professor of Agricultural Economics at the University of Illinois writing in the March 2007 Chicago Federal Reserve newsletter, “Every three months about 7 million Americans change jobs, and over 400,000 new jobs are created in the United States.” A new food store in town makes all existing stores and workers in those stores less secure as does a new trucking firm or a new meat processing plant.

Workers are also consumers who benefit from lower prices for the goods and services they purchase. They are better off when the cost of underwear decreases by 10 percent because of increased trade or when the quality of cars goes up while the price remains unchanged. If all goods and services cost the same in all countries, there would be no opportunities for trade. Prices vary because of the availability of natural resources, the degree of economic development in a country and the amount of investment in specific industries.

A country’s competitive position changes as economic development occurs. As Professor Thompson pointed out, “As the labor-intensive sectors move to take advantage of cheaper labor elsewhere, they leave behind a significant reduction in poverty in each country they depart.” Over the last 50 years labor intensive low wage jobs that were in Japan in the 1950s and 1960s went to Taiwan and Korea in the 1970s and 1980s and have since moved onto other lower wage countries in Asia. Those jobs left those countries because higher paying jobs were spawned by economic development.

The arguments against increased international trade are more appropriately characterized as argument against innovation and marketplace change. If innovation is bad because it causes change and financial insecurity, then we should shut down all research and development efforts within the U.S.

Because trade is a positive sum relationship, making the adjustments caused by freer trade leads to a better outcome for everyone, including those temporarily losing jobs. As Professor Thompson puts it, “Economic theory tells us that when trade liberalization occurs, the gains of the gainers exceed the losses of the losers, and the country as a whole ends up better off. It does not say there are no losers, but it does say that because the gains of the gainers exceed the losses of the losers, it should be possible to compensate the losers for their losses and still end up with a net gain to society as a whole.” Increased international trade is an opportunity to improve current economic outcomes of workers and consumers and foster innovation and market growth for years to come.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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