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

Chapter Fifteen: Issues in International Economics 364 While we don’t usually interfere in home trades, competitors are often more aggressive with market trades that they don’t like. Let’s say that I want to purchase the cheapest product available, and want to buy fromWalmart. There may be a whole host of people who want to restrict my opportunity to purchase fromWalmart. Clearly both I and Walmart think we’ll be better off engaging in trade, but people external to the transaction think they have the right to stop me. Many of the local small businesses may try to restrict Walmart from opening a superstore in my neighborhood, since they are not cost-competitive with Walmart. But let’s leave Walmart aside. If people in Ohio want to grow corn and trade it to people in Maine for lobsters, most people won’t object. Clearly the opportunity cost for people in Ohio to raise lobsters is much higher than in Maine, and vice versa for corn. So Ohio tends to be very good at agricultural production, and Maine tends to be very good at seafood. Both benefit from the gains from trade, and more total output can be obtained by allowing each state to specialize in those areas that it does best. We don’t have protectionist legislation at the state level in part due to the Founding Fathers’ establishment of the Commerce Clause of the U.S. Constitution. This grants power to regulate commerce among the states to the Congress, and is viewed as negating the ability of the individual states to prohibit interstate trade. Each state does what it does best, and we’re all better off—corn in the Midwest, timber in the Pacific Northwest and the South, cattle in Texas, chicken and rice in Arkansas, high technology in California, skiing in Colorado, oranges in Florida, and so on. All this should be more or less obvious, especially after our discussion in chapter 2. But following trade from households-to-localities-to-states, we’ll be able to see that it is not really different as we now take the next step with foreign trade. Even with the hydraulic fracturing revolution (fracking), the U.S. still imports some oil from the Middle East. Saudi Arabia still has a significantly lower opportunity cost of producing oil than we do. The flip side of this equation is that Saudi Arabia doesn’t give us oil for free; they take our dollars and purchase many goods from us, such as cars, engines, and machinery. While many Americans would like the amount of trade with Saudi Arabia to be reduced (so we’re not as dependent upon them for energy), most realize that we benefit from trade with the Saudis. Certainly, those exporting understand the benefits to their firms. Overall, this should make sense—they have cheap access to oil. We have technology and machinery, as well as agricultural goods. When we each specialize in what we have the lowest opportunity cost of producing, the total output is greater and both nations are therefore wealthier. Let’s use a production possibility frontier (PPF) example to once again demonstrate the gains from trade, this time from foreign trade. We introduced this comparative advantage and the PPF in chapter 2; let’s now extend that with an example of Haiti and the U.S. Protectionist legislation: legislation passed to restrict entry into markets by foreign competitors.