International Trade - Cars from Corn

[MUSIC] Himalaya. [MUSIC] You're listening to Think Like An Economist, a Himalaya Learning Production. For exclusive content like bonus episodes and supplemental materials for this podcast and others like it, go to Himalaya.com/econ and enter promo code "Econ ECON-ON" a checkout to get your first 14 days free. It's time to think like an economist. [MUSIC] 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 you 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 learnt 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 Economist. I'm Justin Malthus. And I'm Betsy Stevenson, Nasstra and Tavikoli Faras 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 learnt 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 learnt 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 benefit from international trade. Yes, and this topic brings out strong opinions in 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, is that provides jobs at home and money coming in from abroad when people buy our 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 Aussie 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 close. The United States used to have a thriving textile and apparel industry. But trade now means that 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 aren't 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 that domestic consumers are bigger than the loss to 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 are 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 Bangladesh jacket, which costs less, that means we can buy more things in total. That's right. Import's 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 producers and therefore domestic workers can lose out. Import's 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 is 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. Viewer sales mean fewer jobs. So steel tariffs help protect steel worker jobs, but they cost other Americans jobs in industries that use steel. This is a particularly strong example because jobs and steel using industries at number those in steel production play about 80 to 1. So Americans paid for those tariffs in terms of higher prices and they may even have been a net 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 in working 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. [Music] 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 factor way yet to talk about. There can be big costs to trade in 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 of Follin, international travel became cheaper with big container ships and 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. We agree as a nation that we're willing to pay a price for certain things. Like having certain minimum standards, 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 are there 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 weapon 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 hurt along the way. And we might have national interests 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, it's going 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 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? Betsy Justin, thank you. Naz, it's always a pleasure to talk with you. Naz, 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, check out our bonus episodes and supplemental materials, available only on the Himalaya Learning Platform. Himalaya Learning provides bite-sized courses from world-class thinkers and industry experts, such as Ariana Huffington, Malcolm Gladwell, Tim Ferris, and more, for you to enjoy in the app on the go. Go to Himalaya.com/econ and enter promo code "econ" e-c-o-n at checkout for your first 14 days free. It's time to think like an economist.