Prescription for less wealth

Maytag recently announced that it’s moving its Galesburg, Ill., production facility to Mexico. A group called Americans Against NAFTA has protested Maytag’s decision. Spokesman Russ Anderson said, “We want to spread the word of what we believe Maytag is doing and the destructive effects it will have on Galesburg and the surrounding area. We want to tell everyone that we don’t think it’s right to put 1,600-plus people out of work for the sake of corporate greed.” This is a typical plea against more liberalized international trade agreements, and if we followed it our nation would have less wealth. Let’s demonstrate this with a simplified example that demonstrates the foolhardiness of trade restrictions. Suppose a U.S. worker’s productivity is such that one worker can produce 10 computer chips each day or one bushel of tomatoes. In Mexico, a worker can produce one computer chip or one bushel of tomatoes each day. One might think there’s no basis for specialization and trade, since the U.S. worker outproduces the Mexican worker in chips and is equally productive in tomatoes, but that’s where you’d be wrong. The Mexican worker can produce tomatoes far more cheaply than the American worker, but to see this you must take opportunity cost into account. In the United States, the opportunity cost of a worker producing tomatoes is the number of computer chips that could have been produced had he been producing chips instead. Thus, the opportunity cost of a bushel of tomatoes is 10 computer chips. In Mexico, the opportunity cost of a bushel of tomatoes is the one computer chip that must be sacrificed. Given these cost differences, it’s cheaper for the United States to specialize in computer chips and Mexico in tomatoes – or, said another way, the United States has a comparative advantage in computer chips and Mexico in tomatoes. Let’s look at the outcome if both countries specialize – and, to keep the numbers simple, assume each country has two workers. The two U.S. workers would specialize by producing 20 computer chips per day and no tomatoes, and the two Mexican workers would specialize and produce two bushels of tomatoes and no computer chips. Mexican workers might trade one bushel of tomatoes with the U.S. workers for five computer chips. As a result of specialization and trade, both U.S. and Mexican workers are richer. The U.S. workers now have 15 computer chips and one bushel of tomatoes. The Mexican workers have 5 computer chips and one bushel of tomatoes. If international trade is denied, there’d be no reason to specialize and, hence, both countries would be poorer. International – and, for that matter, any kind of trade – makes people better off than being self-sufficient. Unequal endowments, whether they’re in the forms of natural resources, labor or capital, make for comparative advantages in production. For example, Alaskan citizens can produce oranges just as Floridians can produce king crab legs. It’s simple. Alaskans could build greenhouses that simulate Florida’s weather conditions and Floridians could build aquariums that simulate Alaska’s water conditions. Both would be self-sufficient in both products, but Alaskans would pay through the nose for oranges and Floridians for king crab. Probably most of us would agree that preventing trade between Floridians and Alaskans would be stupid and costly. That conclusion would change not one iota if Alaska happened to be another country, instead of another state. Preventing international trade does benefit some people. In my Mexico/U.S. example, Mexican computer chip manufacturers and U.S. tomato producers would benefit from outlawing trade. It would enable Mexican computer chip manufacturers and U.S. tomato producers to charge their customers higher prices, thereby making for higher profits and wages. Trade barriers are an excellent means to higher wealth for the few but lower wealth for the many.