Trade: Competition or cooperation? | Chapter 11
Published October 3, 2022
You would be poorer if you tried to produce everything you needed and wanted. And that applies to countries as well. Trade allows us to specialize in the goods and services we can produce at the lowest cost, and then trade with those that have goods that they can’t produce as easily themselves. See how it works on a mysterious deserted island.
- If trade benefits all parties involved, why are some people opposed to free trade?
You want independence, but that doesn’t mean you want to by yourself. Life is more fulfilling—and more prosperous—with other people around.
Imagine you’re on a desert island. Welcome!
As the sole inhabitant of this island, you’re in charge now. With great power comes great responsibility. Time to figure out how you’ll manage all the different elements of your life—your food, your clothes, your shelter, your entertainment.
Capable as you are, you simply don’t have all the necessary skills to produce everything you need or want. Even if you’re the world’s greatest hunter-gatherer, you might struggle to construct a shelter. Maybe you easily befriend the local wildlife, but you can’t start a fire and neither can your new furry pal.
And even if you happen to have all the necessary skills, there are only so many hours in a day. It might seem like that coconut is free, but the time you spend climbing trees is time you don’t have to start—or restart—your fire.
Now imagine someone else washes ashore. Hello, new best friend! The newcomer isn’t any better at building a shelter or starting a fire. But that doesn’t matter because it still means you have more time to focus on producing the goods and services where your more productive than your new friend. You don’t have to pick between coconuts and fire anymore.
By specializing, you and your fellow castaway end up with more goods than if you each tried to produce everything by yourself. You both become more prosperous than you would on your own.
As the waves deposit more people on the shores of the island, you begin to question what mysterious force keeps bringing them here. But let’s focus on your island’s burgeoning micro-economy instead.
Each new resident focuses on their most productive activity and trades with other islanders to obtain other things they need. You don’t have to waste time transitioning back and forth from one activity to another. And, as you spend more time picking coconuts, you become better at it, leaving more time to lounge on the beach. With enough people to contribute, your desert island becomes a tropical paradise.
Let’s bring that concept back to the real world. Through trade, countries specialize in the goods and services that they can produce at the lowest cost and trade for items that other nations can produce more cost-effectively. Both nations involved in the trade end up wealthier than if they tried to produce everything themselves.
But what happens if we buy more stuff from other countries than they buy from us? That’s called a trade deficit. It might sound bad, but a trade deficit doesn’t make a country poorer. It leads to a higher standard of living, since residents are able access a wider range of goods for lower prices and our trade partners get more dollars to buy or invest in things produced in our country
While trade does keep prices competitive, it isn’t really about competition. It’s about cooperation. That cooperation helps make societies more prosperous, from the nations of the world to a little island in the sea.