Economics is funny
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?
3 Comments
I’d say the reason we haven’t come up with some good policies is that one good policy in one nation might not work well in another nation. The issue is controversial because both sides can probably call up examples of when free trade might have benefited a society or was detrimental to it, depending on the conditions in that nation.
Gotta love economics :)
Just fyi: Rodrik.
To restate what you know: The d/e/l/u/s/i/o/n/ idea of “free trade” is based on Competitive Advantage. If I can produce 75 pineapples to your 70, and you can produce 60 bananas to my 50, then it is worthwhile if I produce pineapples, you produce bananas, and we trade them between ourselves.
There are several catches: I need to value your ten extra bananas equally with my five extra pineapples, for instance. And both our productions need to be more than either of us, individually, needs.
Cowen notes that rice is 93-95% retained domestically, and then somehow comes to the, er, conclusion that it’s not going to those who most need it.
Clearly, there isn’t much excess capacity–or, at least, no one is paying enough for the rice to make it worth exporting (more utility to the producers in eating rice than buying a substitute).
Cowen is just outright wrong; this is “free trade” at its purest—not selling when there isn’t a price in the market that clears for both parties.
“Why haven’t we got a set of policies all worked out to ensure that everyone benefits from the bigger pie created by trade?”
Because the people who control the pie don’t care to slice it fairly…