Lighthouse
(ca. 2nd Century A.D.) Foro
delle Corporazioni (Square of the Guilds) Ostia,
Italy (Ostia was Rome's port city)
WHY INTERNATIONAL TRADE OCCURS
Commenting upon the growth in trade, the New York Times recently wrote, “Two world wars and the Depression dismantled the globalization that had been achieved...By 1913, trade and foreign investment, two key measures of global integration, were roughly at the levels that have been reached through a gradual buildup since the late 1950s." As a rough measure of the large impact of foreign trade on the U.S. economy, both imports and exports totaled 28% of the U.S.'s GDP in 1997.
Unimpeded
by tariff barriers, international trade occurs spontaneously. This trade occurs
for two main reasons:
1)
To transfer general technology. Plutarch (A.D. 46-119) wrote:
"...the sea brought the Greeks the vine from India, from Greece
transmitted the use of grain across the sea, from Phoenicia imported
letters as a memorial against forgetfulness, thus preventing the greater
part of mankind from being wineless, grainless, and unlettered."
(Irwin, 1996)
2)
To enable consumers to purchase abroad commodities more cheaply than they can
be produced domestically.
Foreign
trade occurs due to the diversity of conditions in various regions of the
globe. This diversity of conditions results in different production
efficiencies in different economies. Consider the following example involving
two goods, electronic chips (C) and food (F). In each of the following two
economies, there is a production possibility curve that specifies the possible
combinations of goods that each economy can produce (those who don’t like
equations can skip the following two paragraphs):
Tradeoff Ratio: Food to Chips
U.S. C = -.2F + 30 10:2
Asia C = -.7F + 140 10:7
The
production possibility curves of each economy differ due to different
conditions: To get an additional unit of food, Americans must give up .2 units
of chips (land is plentiful). To get an additional unit of food, Asians must
give up .7 units of chips (land is not plentiful). Within their respective
economies, Americans are more efficient in the production of food; and Asians
are more efficient in the production of chips.
If
there is no foreign trade, the consumption possibilities of both economies are
limited to their respective production possibilities. What can a U.S. farmer do
with ten units of food? He can buy 2 units of chips without foreign trade or
with foreign trade he can obtain 7 units of chips in Asia because the tradeoff
between food and chips is better. An Asian would do the converse in the U.S.
The
United States will specialize in the production of food and Asia in chips. The
international forces of supply and demand will change the overall terms of
trade to somewhere between 10:2, the U.S.'s tradeoff ratio, and 10:7, Asia's
tradeoff ratio. All parties to the transaction benefit from free trade. The
following can furthermore be said about the theory of comparative advantage (costs):
1)
The U.S. may have an absolute advantage in the production of both commodities,
but as long as the relative tradeoffs (between food and chips) differ in
different economies, international trade will occur.
2)
For analytic purposes, there are no other differences between national and
international trade. For the purposes of the theory, Peoria is otherwise the
same as Pototan.
The
following suggests why this is becoming increasingly so:
By
its faith in reason, the Enlightenment created a common ground for humanity,
based upon common ideas of justice, reason, and happiness. By its assumption
that open debate could lead to reasoned compromise, the liberal regime
encouraged open discourse regarding the items of public interest.
This
view of societies can be contrasted with historian Samuel Huntington's (Foreign
Affairs, 1996) assertion that the West, with a tradition stretching from
Socrates to the Magna Carta and beyond, is absolutely unique. Of course, this
assertion is not unheard of in other cultures. All societies are organic
wholes, he seems to suggest, that exclude incompatible influences. Islamic,
Asian, and Western societies are not compatible. Speaking broadly, many of
their traditions are not. What Huntington , however, neglects is the fact that
almost all alternatives to liberalism have been discredited by the extremely
problematic events of the early 20th century. Most nations now accept-at least
in theory, one of the main ideas of the Enlightenment, that societies exist for
the general benefit and should therefore value trade and economic development.
In
this context, the financial crisis in Southeast Asia is caused by the collision
of the open market requirements for transparency and accountability (the
demands of investors seeking efficient financial systems and economies) with
some governments that could benefit from reform.
The
Enlightenment was distinguished by its faith in the power of Reason; it carried
two methods of proceeding with this faculty. The first was deductive. Applied to
social matters, the results were excessively abstract and justified the mass
movement, that abridged the freedoms of the very people that were its object.
The second was empirical. Applied to social matters, it is the means by which a
society discovers what ought to be done by voting: ballots cast within
political markets or dollars cast within commodity markets, the two processes
being normatively separate. It is this method of decisionmaking, within
constitutional limits, that results in the respective evolutions of popular
institutions and free markets.
In
an article on the Enlightenment, the Economist (1996) wrote:
"On
every dimension-health, education, physical security, economic opportunity-the
conditions of life have been utterly transformed, and for the better...the
Enlightenment has served mankind quite well. At a minimum, the burden of proof
lies with anti-liberals...something they have conspicuously failed to do."