No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 362 INTRODUCTION In Adam Smith’s classic The Wealth of Nations , chapter 3 of book 1 is entitled, “That the Division of Labour is limited by the extent of the Market.” The opening paragraph says the following: As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. -Adam Smith, “The Wealth of Nations” In Smith’s view, the progress leading to the wealth of nations was the ever increasing division of labor, which naturally led to gains from specialization. But in this section, Smith notes the obvious implication by answering this question: If the division of labor is the source of wealth, what enables the division of labor? Smith’s answer—the increasing division of labor occurs as the market grows larger, and ultimately the size of the market is limited only by the size of the globe. Thus, international trade allows the largest possible market, enabling the greatest division of labor possible, resulting in the most associated gains from specialization, which leads to the highest wealth of the nations! International trade issues have therefore been of great interest since the earliest economists. In this chapter, we’ll explore some of the issues surrounding trade. FREE TRADE OR FAIR TRADE? The American public, already skeptical of free trade, is becoming increasingly hostile to it. This quote was taken from a report based on a Wall Street Journal poll of American attitudes. Unfortunately, this attitude is not new; hostility with “foreign” trade is an intertemporal constant. The latest manifestation of antipathy towards free trade is against China, since many U.S. manufacturers have transferred operations from the U.S. to China. One study recently showed significant negative impact to the workers who lost jobs as well as their communities. Yet, even that study noted, “there is nothing in our results to show that U.S. trade with China overall is negative” in its impacts (according to Mr. Hanson, page 2) . For one thing, their study makes no effort to account for positive impacts on the economy from U.S. exports to China. As with many market activities, there are winners and losers, but on net we all benefit. Since all of us are consumers, everyone benefits from the reduced prices that come with 1