Wednesday, June 6, 2007

Terrible Ironies: The Case for Trade

One of the terrible ironies of our time is that well meaning people often fight against the very things that could help make life better for the millions who live in poverty. There is probably no better example of this then the case of trade.

There are two main reasons that people object to trade. The grim reality is that there are huge differences in working conditions and wages between the rich world and the poor. Many people feel that there is something fundamentally unfair when people who make $40,000 dollars a year buy goods made by people who earn $1000.00 a year. Other people fear that they won't be able to compete with people who earn so much less. Both arguments are wrong.

Assume that in Fruitville, for every year of labor a farmer can create 2 tons of corn, or 10 tons of fruit. Assume that in Cornville, a farmer can produce 20 tons of corn or 4 tons of fruit every year.

Fruitville: 2 tons of corn per farmer, 10 tons of fruit per farmer
Cornville: 20 tons of corn per farmer, 4 tons of fruit per farmer

Imagine that the towns require 100 tons each of corn and fruit. Here is how many farmers are needed.

Fruitville: 50 corn farmers, 10 fruit farmers = 100 tons
Cornville: 5 corn farmers, 25 fruit farmers = 100 tons

Clearly Cornville is a little richer then Fruitville since it has only half as many people working in agriculture. But look at what happens when we open up trade between the two.

Fruitville 20 fruit farmers = 200 fruit
Cornville 10 corn farmers = 200 corn

There is still enough food to go around, but there are much fewer people needed to create it.

But what about the case of Poorville vs Richville? Poorville is a bunch of substance farmers. They grow 1 ton of corn and 2 tons of fruit per year. Richville is a big industrialized area, and grows 50 tons of corn and 25 tons of fruit per year. If Poorville is worse at everything, won't it be bad for them to trade with Richville?

Poorville 1 ton of corn per farmer, 2 tons of fruit per farmer
Richville 50 tons of corn per farmer, 25 tons of fruit per farmer

Poorville 100 corn farmers, 50 fruit farmers
Richville 2 corn farmers, 4 fruit farmers

Again, lets see what happens when we open up trade.

Poorville 0 corn farmers, 100 fruit farmers = 200 fruit
Richville 4 corn farmers, 0 fruit farmers =200 corn

Once more we can produce the same amount of food with much less labor. As an added benefit we also protect the environment since the likely reason that Poorville produces so little corn is that they are growing it on marginal lands that are destroyed quickly by agriculture.

But what about all the unemployed farmers? It's a good point and one of the biggest reasons why people fear trade. The corn farmers in Fruitville and the fruit farmers in Cornville can see what is going to happen to them, and social activists can see what is going to happen to the corn farmers in Poorville. The reality is that the adjustment will be hard for many people. But that doesn't change the fact that for society as a whole the adjustment is a good thing.

The reason is that farming isn't the only job that exists. The number of possible jobs is limited only by our imaginations. When we find a more efficient way of doing something it frees up people to work in new areas. Sewing machines, cars, computers, and email all cost people their jobs. But by allowing us to do more for less these technologies created new jobs that could never have been imagined. How many web designers were there in 1990?

In a healthy economy there will always be some unemployement as people move from old inefficient industries to newer, more efficient ones. Nowhere is this more visible then in agriculture. Yet this movement is what makes the economy bigger and makes us richer.

If everyone is working in agriculture there is no hope of progress because everyone is tied to the land. In many countries children can't complete school because they are needed on the fields to help feed their families. Trade give countries the opportunity to free resources to do other things. People migrate from the farms into jobs in teaching, road building, truck driving, and eventually information technology.

We lament the jobs lost to trade and new technologies because it is so hard to see the gains in other areas. We see the farmer who is now unemployed and too old to learn new skills, but we don't see his kids who left the farm to get a teaching diploma. The reality of it is that trade is the fastest way to create growth, because it allows everyone to do what they are best at. There will be jobs lost to trade, and it will be hard on some people, but the alternative is a continuation of the status quo. If we are really worried about the people who will be effected, we should offer them support and training instead of trying to hold back entire economies to protect dead-end jobs.

For thousands of years trade has created wealth. If we really care about the poor, we should make it as easy as possible for them to sell their goods to us. It is immoral to do otherwise. It is so terribly sad that the people who protest trade agreements do not know the harm they cause.

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