You would think that 200 years since David Ricardo, we’d have a little thing like the effects of international trade all sorted out already. However, it still generates much controversy and disagreement. For example, Tyler Cowen argues that food shortages could be reduced to a large extent by freer trade in food. Trade in food suffers from a lot of restrictions, which leads to inefficient production and distribution. It sounds like a valid argument to me.

However, in response Dani Rodrick points out that in freeing up trade, the relative price of food must rise in those countries that become net food exporters. Of course, the relative price of other things falls in these countries, but (Dani doesn’t say this, so I’m guessing) poor people in the food exporting countries could become worse off if they consume mostly food. On the other hand, food producers will be better off, and the country as a whole will be richer. The problem though is that the gains from trade are unevenly distributed. Ricardo tells us that the net result is positive, but trade doesn’t make every individual instantly better off.

Anyway, the funny thing is that this is controversial. What is it about trade that makes it such a difficult topic? What haven’t we learned in the past 200 years that means we can’t accurately predict the results of freer trade? Why haven’t we got a set of policies all worked out to ensure that everyone benefits from the bigger pie created by trade? Why is this so hard?

The shortage of butter in Japan continues: it is still virtually impossible to obtain butter for love or money.

Via a comment over at MR, I found an interesting interview (translated to English) with a Japanese dairy farmer that attempts to explain the situation:

The cause of the shortage, as reported already, is said to be the shortage of milk.

I’m confused by this, because there is no shortage of milk for drinking at supermarkets, and the price of it hasn’t gone up a lot. Is milk used for butter somehow different from milk for drinking?

The consumption of milk has been stagnant, and in 2006 milk was seen being disposed of in Hokkaido. Also, a large number of cows were slaughtered.

The shortage has only occurred in the past 2 or 3 months. Why are events from 2006 relevant?

… because skim milk is produced when butter is made, if powdered skim milk cannot be sold then stockpiles build up, creating a situation in which the quantity of butter produced cannot be increased all at once.

This is interesting. But why not export the excess skim milk powder? I heard there’s a big demand for it in China. Or just incorporate the cost of disposing the excess skim milk powder into the price of butter.

Nowhere does the article mention the massive tariffs on imported butter in Japan. If I am reading the complex WTO tariff database correctly, the tariff is 29.8% on value plus 1,203 yen per kg for butter imports to Japan. Whatever the underlying domestic cause of the shortage, this is surely not helping things.

Here in Japan it has been virtually impossible to buy butter at the supermarket for the past month or so. There is some sort of shortage and the newspaper blames increasing feed prices, China and substitution of milk for cheese production instead of butter. First of all, I don’t know why supermarkets don’t just put the price up instead of allowing stocks to sell out so fast. I guess consumers would complain about getting creamed (sorry) but I think they’d quickly realise that being able to buy butter at a higher price is better than not being able to buy butter at all.

Actually I’m a bit confused about how this situation has arisen, since the supposed causes sound like relatively long-term things, and it was perfectly easy to buy butter earlier this year. The newspaper says that milk producers have reduced production because milk consumption dropped suddenly, which left them with an excess supply. But if they could cut production so quickly, surely they can increase it just as quickly again too. Unfortunately not, says the newspaper, it will take up to two years to breed more cows to increase production.

Adding to my confusion, as far as I know, there is also no butter shortage in any other country. Now I know nothing about about Japan’s trade policy towards butter, but I’ve never seen imported butter on sale. So I wonder if protectionism is causing consumer suffering in this case while domestic dairy farmers are milking it (sorry, couldn’t resist).

New Zealand (where I am from) is mainly an agricultural economy and the big news right now is high prices for dairy products, boosted by increased demand due to economic growth in Asia. As people get richer, it seems they like to eat cheese and drink milk. Naturally this is making consumers in New Zealand unhappy, as the domestic price for these products pretty much equals the world price. As this news story relates, people are responding by buying less dairy products. Demand slopes down …

I also heard from my spies in rural New Zeland that farmers are responding to these higher prices and sheep are disappearing from vast areas of land and being replaced by cows. Some big new dairy processing plants are being constructed too. Supply slopes up …

As an economist, I feel a warm fuzzy glow to hear this news … people respond to prices, which affects both consumption patterns and resource allocation, and this ensures efficient use of scarce resources. It doesn’t always make everyone happy (consumers are unhappy; farmers are happy), but a price’s job isn’t to make you happy, it’s to give you information.

I’ve been reading The Armchair Economist by Steven Landsburg. I think it’s the original “pop econ” book, published more than 10 years before the Freakonomists et al got in on the act. If you liked the other pop econ books and haven’t read Landsburg’s yet, I recommend it. I like this book because it really made me think more deeply than, say, Freakonomics did.

One idea that Landsburg tackles is the conventional wisdom of many journalists and politicians that exports are good and imports are bad. In only three pages, Landsburg argues why this is exactly backwards. In fact, exports are bad and imports are good. Let me try to explain … I don’t know much about trade, so I’m interested in what you think.

First imagine you are living on a deserted island and you have to provide everything for yourself (this is like a country with no trade). You can only eat fish that you catch. You’re doing ok by yourself, when one day a helicopter flies overhead and drops you a fish, and then flies off again. This is imports, and it makes you happy. You got a free fish that you didn’t have to catch yourself, so you can either spend the same amount of time catching fish as you usually do and have an extra fish to eat, or you can spend less time fishing and have the same amount of fish as usual. Either way, you’re better off. Then the next day a bunch of pirates show up in a boat and demand some of the fish that you caught, but give you nothing in return. This is exports and it makes you unhappy because you spent time catching those fish and now you can’t eat them yourself, so you either have to go hungry, or spend more time fishing. Either way, you’re worse off.

The same idea applies to countries as a whole. The only good thing about exporting is that it allows us to pay for imports. There’s nothing good about exports per se, as exports without imports would be just like the pirates above. As every first-year econ student knows, every country has some quantity of scarce resources (land, labour, capital, etc). Exports involves sending these scarce resources on ships and airplanes to other countries. Why the heck do you want to do that?! These are the precious resources that your country has to produce things for itself! It’s only good to send these scarce resources elsewhere if it allows you to get some other country’s resources in return as imports. Then the theory of comparative advantage tells us that countries can specialise in producing what they are relatively more efficient at, and both sides can gain.

As Landsburg alludes to, the common belief that exports are good and imports are bad comes from focussing on output-based measures of economic activity and success, such as GDP. In GDP calculations, exports are added and imports are subtracted, so more exports and/or less imports makes GDP go up, which some people thing is a good thing. However, return to the deserted island example. Suppose you like to eat three fish per day and it takes you three hours to catch them. Your GDP is three fish per day. Now suppose the pirates come every day and demand two fish. Since you don’t want to starve, you spend five hours per day fishing and catch five fish, so you can still keep eating three fish per day, and “export” the other two. Your GDP went up to five fish per day, but you’re less happy than before — you’re eating the same amount of fish but working harder. So an economy can “grow” by increasing exports while keeping imports unchanged, but this isn’t going to make anyone happier.

This argument has interesting implications. Think about countries with large trade surpluses, like Japan and China. Suppose these countries were somehow able to cut their exports to equal the level of their imports. Then GDP would drop a lot, and headlines would scream “Massive Recession!”, but as a whole the people in Japan or China would be better off. They could consume exactly the same as they did before but work less, since they don’t have to spend so much time producing stuff for people in other countries.

Don’t get me wrong, I’m not saying international trade is bad. Trade is good because it allows countries to specialise in whatever they have a comparative advantage in producing. All I’m saying is that, in terms of people’s welfare or happiness, exports are the bad part of trade, while imports are the good part, no matter what this means for GDP. Do you have any counter-arguments?