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| INTRO TO LIBERTARIAN ECONOMICS |
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INTERNATIONAL TRADE |
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International Free Trade is one of the most important issues in Libertarian economics. This is also the issue in which the differences between the Conservative view that the producer is of primary importance and the Libertarian view that the consumer is the most important person in economic theory are most clearly defined. International Trade is based on two closely related concepts: (1) the economic benefits of mutual interdependence and (2) comparative advantage.
The most basic benefit of free trade is that each of two or more nations has something the others want. If, for example, one nation has a climate in which dates can be grown but rice cannot and another supports a rice agriculture but cannot produce dates, then it would be in the interest of the nation which produces more dates than it can consume to sell them to the rice growning nation in return for rice. Thus, both nations benefit from trade. Further, another nation might exist which, due to a high level of technology, smelters, and an abundant resource of raw metals, wants to buy dates, but doesn't need or want rice. Whether or not the rice-producing nation wants dates, if it doesn't have anything the technology-producing nation wants, then the former is unlikely to give it rice-harvesting equipment, for example, in exchange for unwanted goods. However, since the technological nation wants dates, it is willing to sell such equipment for the dates. In return, the date-producing nation can sell the equipment to the rice-producer in return for rice. Negotiable instruments and currency are, of course, much easier to exchange than the goods themselves and save on transport and storage costs, as well as transportation time. Once these convenient stand-ins for the values of the goods is used, it becomes an easy matter for several such nations to engage in ever more complex variations on this model. Of course this can occur even where trade is not free. However, if one nation charges a fee on goods being brought within its territory, this hurts its own consumers, who have to pay higher prices for those goods, and the other nation(s), by decreasing the demand for the goods, since the higher costs will place the goods outside the purchasing ability of many consumers. This will also have the likely effect of the other nations placing import charges on the first nation's exports. Similarly, charges on goods being exported result in higher prices to importing consumers and reduces demand with similar results. Therefore, free trade is beneficial to both the exporting and importing nations.
Comparative Advantage was a concept developed by David Riccardo in THE PRINCIPLES OF POLITICAL ECONOMY AND TAXATION. At its core are two closely related concepts (1) each nation can produce certain goods more efficiently than can other nations [absolute advantage] and (2) it can produce a number of goods more efficiently than it can produce others. The result is that when the global market, based on consumer demand and supply efficiency, is allowed to operate, the goods produced most cost-efficiently will be cheaper overall, and therefore more affordable to all consumers even though wages remain the same. The simplest example is of three nations, each of which produces three types of goods: wheat, iron, and rubber. Our imaginary cost for producing these goods is as follows: wheat - Nation A: $5.00/bushel, Nation B: $6.00/bushel, Nation C: $6.50/bushel; iron - Nation A: $4.00/pound, Nation B: $3.50/pound, Nation C: $2.00/pound; rubber - Nation A: $3.00/pound, Nation B: $4.50/pound, and Nation C: $2.50/pound. |
Therefore, Nation A's cost of production are: $3.00/pound for rubber, $4.00/pound for iron, and $5.00/bushel for wheat; Nation B's costs of production are: $4.50/pound for rubber; $3.50/pound for iron, and $6.00/bushel for wheat; and Nation C's costs of production are: $2.00/pound for iron, $2.50/pound for rubber, and $6.50/bushel for wheat. In this situation, Nation A has an absolute advantage in the production of wheat and Nation C in rubber and iron. Assuming the entire demand for the 3 products cannot be met by Nation C without an increase in cost-production and Nation C has a quota limition on the number of each product that can be imported, demand will outstrip supply and prices will rise due to scarcity. Either many of the people of Nation C must be able to survive without the other two goods, with the remainder paying higher prices and both groups facing a decrease in their standard of living [the former due to inability to get the product and the latter because of the increased oportunity cost requiring them to forgo or decrease the number of other products they would otherwise consume], or the people must split production to provide both goods [due to a quota limits or extremely high tariffs]. In such a case, the new prices will soon reach the level where the profits from new production make it feasible for an increase thereof (e.g., $3.50/pound for iron and $3.00/pound for rubber. At these prices, everyone in Nation C would have to pay $6.50 to possess one of each of these products, plus $6.50/bushel for wheat since the other producers would be able to charge the same amount as the producers in Nation C due to scarcity therein [after all, due to the quota limitations there would be no need to compete for market share]. Thus the price would be $13.00. Similarly, if a tariff of 5% were put on new goods arriving into the country in order to protect the nation's industries, then the costs of each good would also rise because production would be exactly like under a quota or ban until prices for national production rise to the level where they are equal to the foreign price plus the tariff - thus rubber would cost $3.15/pound (or $3.00 plus 5% thereof); iron would cost $3.76 (or $3.50 plus 5%), totalling $6.91 for one of each of the two products. Wheat prices would also be $6.50 for a three-product total of $13.41. Where no quotas or tariffs exist, Nation C has a comparative advantage in the production of iron and will produce that product since it returns the greatest profit-per-dollar of production. Therefore, even though Nation C can also produce rubber cheaper than either Nation A or Nation B, because it has a comparative advantage in iron it will produce the latter product. Nation A will produce rubber even though it also has an absolute advantage in wheat, because the rubber production is cheaper than wheat production and Nation C is using all its resources to produce iron. That means that Nation B will produce wheat. The cost to the consumer in Nation C (as well as in Nation A and Nation B!)would then be $2.50 for a pound of iron; $3.00 for a pound of rubber; and $6.00 for a bushel of wheat, or $11.50 in Nation C for one of each, as opposed to $13.00 under the quota-system and $13.41 under the tariff-system. A similar situation would exist in Nations A & B; however, utilizing the full production capacity in all three nations, prices are lower! Thus all consumers benefit by an increased efficiency of production. In reality, it is improbable that a single product will utilize a nation's entire production capabilities. Each nation will produce a multitude of products (Nation A might produce wheat, iron, copper, etc..., while Nation B produces gold, corn, coal, etc... and Nation C produces natural gas, pharmaceuticals, platinum, etc...). Further, due to demand outstripping the available supply from any one country, several nations will produce the same good. Also, even though a nation might not be able to compete with another nation in exporting a good, it might produce that good locally at a price equal to, or less than, the main producing nation due to transportation and storage costs. Yet, due to the efficiency of the system, the various people's of the world will have a higher standard of living than they would have with higher wages [and, therefore, higher costs], whereas quotas and tariffs stifle the system. |