International Trade - Cars from Corn

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checkout to get your first fourteen days free. It's time
to think like an economist. Did you know that in
America we have two ways of making cars and they're
totally different depending on whether you live in Detroit or Iowa.
This is news to me.
We economists talk about this all the time. You see,
the first way of making a car in the US
involves an assembly line in Detroit. The other way, it's trickier.
It's to grow and harvest cars in Iowa.
So you'd start by planting corn seeds on a farm
in Iowa. You then water and grow these seeds and
harvest the corn. Then you put the corn on a
cargo ship headed to Japan.
This cargo ship then returns from Japan full of Nissans
and Toyotas instead of corn, and Americans can then drive
these cars around. So Hey, presto, You've just harvested a
crop of cars, which he grew from tiny little corn seeds.
Okay, I see. So you're talking about international trade and
how we all benefit from trade, which we call gains
from trade. As we learned in the last episode. In
this example, America is basically exporting corn to Japan and
importing cars from Japan.
Exactly, and both methods of making cars we employ American workers,
either on assembly lines in Detroit or on farms in Iowa.
Of course, there are a lot of concerns that come
up when we start talking about international trade. That's our
topic for today's episode of Think Like an Economy.
I'm just a morphus and I'm Betsy Stephenson. Now it's
trying to have a Collie Farers with us.
We finished the last episode with Betsy Land and Justin Land,
the two tiny mythical countries that exist within your household,
and we learned about how both of your countries benefit
from trading with each other.
Today, we're going to bring together the ideas of gains
from trade and comparative advantage to see what they mean
for trade across real countries like America and China, or
Australia or Europe.
So let's quickly recap last episode, we looked at comparative advantage,
which is when you can do a task at the
lowest opportunity cost. We learned that we should focus on
doing tasks where we have a comparative advantage because that
helps us produce more stuff with our limited resources.
Yeah, and in this episode, we're going to see how
comparative advantage means that people all around the world can
ben fit from international trade.
Yes, and this topic brings out strong opinions and people.
Well. One of the challenges with international trade is that
there are winners and losers. The winners are those who
get to sell more of their goods and services internationally
and those who get to buy things for less. The
losers from trade are those who lose their jobs to
foreign competitors and those who have to pay more for things.
When local businesses prefer to sell their stuff abroad.
Well, everyone loves to export things as that provides jobs
at home and money coming in from abroad when people
buy are exports.
Not everyone. Sellers love exports because they get so many
more potential customers abroad that they can sell more and
sometimes at higher prices. But don't forget that this also
affects buyers. Exports can push up prices for domestic consumers
because those companies now have so many more potential customers
that they can sell to, so they charge higher prices.
I know this from personal experience. I remember when the
world discovered Australian wines. It was great for Australian wineries
who sold a lot more wine to the US and Europe,
but it also pushed up the price of bussy wines,
which wasn't so good for Australian consumers who had to
pay more for their favorite bottle. But when we added
all up, the benefit to sellers was bigger than the
cost of consumers.
Okay, so it's not as simple as I thought. Exports
help some people and hurt others, but the benefits overall
exceed the costs.
Yes. The big idea is that as a country, if
we make use of our comparative advantage, then we can
produce and consume more, so we are richer overall as
a result. But just because we're richer on average doesn't
mean that everyone is better off.
Well, what about imports?
People naturally think about the losers from imports because imports
can lead domestic businesses to clothes the United States used
to have a thriving textile and a pail industry, but
trade now means that, you know, we import most of
our clothes, and that means many of our textile mills
and apparel factories have shut down. That's why some people
don't like imports and think we should make these things ourselves.
Their concern is that by buying imports, we are in
effect paying workers abroad instead of workers in our own countries.
One shortcoming with how people often talk about trade is
they tend to focus only on sellers. But remember buyers
also matter. Consumers benefit because imports make a whole bunch
of things cheaper. Once again, the big idea is that
comparative advantage means that the gains the domestic consumers are
bigger than the loss of sellers.
Okay, so we could still make our clothes primarily in
the United States, but a jacket made in the US
will often be more expensive in part as costs a
higher in the US, including people's wages. So when you
go buy a jacket, you can choose a more expensive
jacket made in the US, or you can get a
cheaper one made in Bangladesh. If you choose the jacket
made in Bangladesh, you benefit as you've been able to
spend less money on the jacket.
You know, in fact, if you look at household spending,
you see that Americans spend a much smaller fraction of
their budget on clothing today than they used to, even
though they're buying more clothes. What we spend on instead
is housing and healthcare. And it's not just prices going up.
People are living in bigger, nicer houses, and they're getting
more healthcare.
So by purchasing the Bangladeshi jacket, which costs the less,
that means we can buy more things in total.
That's right. Imports help us pay less for things because
it empowers consumers to also seek out a better deal
from abroad. So when we open up the economy to imports,
prices go down and consumers benefit. But remember domestic juices
and therefore domestic workers can lose out.
Imports help us to pay less for things, but we
can't lose sight of the fact that there were people
who worked making clothes in the United States that found
it hard to transition to another industry, even if trade
was also helping us create new jobs in other industries.
Economists tend to focus on the fact that trade makes
the pie bigger, but we also have to think about
the size of the slices and who gets them.
I think one of the hardest things for people to
grasp when it comes to trade is that you can
picture the people who are losing jobs, but there are
other people who are gaining jobs or selling more, and
it's hard to picture them exactly.
And one thing that happens as government might try to
limit trade to save jobs. One way to do this
is to put a tariff on imported goods. A tariff
is a tax on an imported good. Remember that whenever
we tax something, we get less of it, so this
means fewer imports.
And remember, when it comes to taxes, the government doesn't
determine who ends up bearing the burden. That's determined by
the forces of supply and demand. The government might say
that foreign businesses pay for tariffs, but that's only part
of the story. Tariffs add to the marginal cost of
production and that will push the price of imported goods up,
meaning it's ultimately American consumers who pay much of the
tariffs on imported goods. For example, a big debate in
the US has been around steel tariffs. President Trump raised
steel tariffs to protect the jobs of US steel producers.
It worked, but it also came at a cost to Americans.
The price of steel went up. Because the price of
steel went up, companies that used steel had to pay more,
and so they had to raise their prices. This in
turn led to higher prices for consumers for all sorts
of things, and that means a lower quantity demanded for
those goods and so fewer sales. Fewer sales mean fewer jobs.
So steel tariffs helped protect steelworker jobs, but they cost
other Americans jobs in industries that you steal.
This is a particularly strong example because jobs and steel
using industries at number those in steel production about eighty
to one. So Americans paid for those tariffs in terms
of higher prices, and there may even have been a
nit job loss.
That sounds kind of bleak, you know, It all comes
down to the fact that we can produce more whenever
the people with the lowest opportunity costs do a task.
And remember we all have a comparative advantage, so it's
not bleak, and it's not really about competition with other countries.
It's about cooperation to find our comparative advantage. And when
we do that, we can afford things which may have
been out of reach before and work in industries that
may be able to pay us more. And if we
compensate people who worked in industries in which other countries
have a comparative advantage, well then we can all be
better off.
So the world is becoming more global and there seems
to be more trade.
What's driving that beyond comparative advantage, there's a key fact
a way yet to talk about. There can be big
costs to trading with folks on the other side of
the world.
Shipping costs are a big one. You have to actually
get goods from one country to the next. There are
also hassles with working across language barriers, time zones, and
cultural differences. And then there are government rules and regulations
and things like tariffs that governments put in place to
limit trade, or maybe there's just a lot of red
tape involved in being allowed to do business in another country.
All of these things can add to your marginal cost.
These trade costs have declined over time, and that's a
big part of the story of growing trade. Tariffs have fallen.
International travel became cheaper with big container ships. In the
birth of flight, more people speak English, Our banks now
talk to each other, making it easier to zap money
around the world. Technology allows us to talk with people
in other countries all the time, to share documents and
participate in virtual meetings. As a result, trade and services
has also been thriving.
This is all well and good, but there are a
lot of really detailed arguments against the problems of international trade.
We've already talked about how imports can make us lose
certain jobs at home, so there are some losers. What
are other arguments against international trade.
One of the most important issues is about ethics. If
we've decided that we want certain rules, trade shouldn't be
a way to get around those rules. So if we
don't want children in factories, then that shouldn't really change
just because the children are working in a factory in
another country.
You know, we agree as a nation that we're willing
to pay price for certain things, like having certain minimum standards,
like workers being kept safe through safety regulations or maybe
environmental standards. We don't want to ban our farmers from
using certain pesticides, for example, and then end up importing
produce that was grown using those very pesticides.
But hang on, I think that's happened.
Yeah, it has, And then you wonder why people get
so annoyed at trade. But at the same time, countries
sometimes pass rules that are simply done to limit trade,
and sometimes it can be hard to tell the difference.
You know, for example, an American manufacturer of space heaters
once helped convince Congress to increase safety standards on space heaters.
Why would they want to face more regulation because it
limited imports and kept prices higher for American consumers. But
it also did keep Americans a bit safer.
And that other reasons. Countries try to protect their domestic industries.
You'll often hear people say that we need a strong
domestic industry and something for national security reasons. Sometimes it's
about strategically important goods like weapons systems, or sometimes it's
things like medical equipment in case there's a global pandemic
and therefore a big increase in demand for medical supplies
or pharmaceuticals. If you make it domestically, you can allocate
it to your citizens.
Okay, so let me see if I've got it. Trade
lets us both make more and buy more, so it
means more output and lower prices. But some people might
get hurts along the way, and we might have national
interest like the rules we want people to play by,
or national security concerns that may lead us to want
to put rules around trade.
That's right. It's important to remember that it's people that
ultimately trade, not countries. So if you want to think
about the gains, think about the people. If you buy
a shirt made abroad to be cheaper for you and
more money for the seller. If you sell your iPhone
app overseas, it's going to mean more sales for you
and a better deal for the foreign buyer. That's why
people trade. People only trade when their benefits from the
trade exceed the costs.
People often think about businesses when it comes to trade,
but we also have to think about consumers. As a consumer,
I pay less for so many things because of international trade,
and that frees me up to spend more on other things.
Trade is an opportunity, an opportunity to sell into new
markets for businesses, but also an opportunity for consumers to
get a better deal.
But we should admit trade causes disruptions, particularly in the
short run, and is a real threat to some workers.
Economists ignored this threat for too long, which is why
we've seen so much backlash to international trade. To really
reap the benefits of trade and continue to have public
support for it, we have to figure out how to
make sure that everyone can actually benefit.
And is there anything you want our listeners to think
about over the next few days.
You know, as you go about your life, look at
the labels on things on your shirt, on your food,
on anything you buy, and see where it's made. You'll
come to appreciate how important international trade is in our
day to day lives.
And as you do so, think about both the folks
who gained from that trade, perhaps you've got a better price,
or someone got to sell a little more, and also
think about those who lost. What could we do to
ensure that you can both enjoy your gains and we
can share them more broadly with those who might otherwise
be hurt.
Let's see justin Thank you, Nas, It's always a pleasure
to talk with you.
Nas. I've just got one for you. An American, an
Australian and a brit walk into a podcast. No, it's
not a joke. It's the story of international trade. And
think like an economist.
I was actually thinking about that. I'm like, are we
not going to acknowledge the fact that we are a
three country team. To get the most out of this show,
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