Trade never fails

By Tim Worstall | 14 June 2005

One of the questions that people ask about free trade is what happens if it doesn't work for us? What if, say, the other people are better than us at everything so we have nothing to sell to them? That the very question shows an unfortunate misunderstanding of the difference between absolute and comparative advantage means that those who ask it might want to read their Ricardo again. Or, if one were to be rather less snide about the subject, one might point to this excellent point made by Brad DeLong:

One - accurate - path through the swamp is to distinguish between (i) productivity improvements abroad that make foreigners more efficient at producing what we import and (ii) productivity improvements abroad that make foreigners more efficient at producting what we export.

The first set of productivity improvements is a boon for us: the prices of goods we import fall as foreigners become more efficient at producing them, and our standards of living rise. The second set of productivity improvements is a bane for us: as our exports face more competition, the prices we can charge for our exports fall, and so our exports buy less in the way of imports, and our standards of living fall. How bad can this second force be? Well, in the limit - in which foreigners become so good at making stuff that there's nothing we make they want to buy at a price at which we are willing to sell - we are as badly off as if there were no international trade at all. The worst thing that engagement with the international economy can yield is the same as... the no-trade autarky outcome. What's at stake isn't our absolute impoverishment: it's the loss of some (or most?) of what had been our gains from international trade.

That both Professors DeLong and Krugman are of the left is well known as is the fact that they are both ardent free traders. The little example above helps to point out why, that the worst result possible from engaging in international trade is the same as the default position, of not engaging in any trade at all. We simply can't lose.