With spring here, it’s nice to get outside and be neighborly. Government policymakers should do the same and encourage more trade with all our neighbors.
The World Trade Organization recently reported that growth in international trade will slow for the second straight year in 2012, after contracting by 12 percent during the recession of 2009.
Trade in goods and services between countries rebounded strongly in 2010 but advanced only 5 percent in 2011. The WTO expects only 3.7 percent growth this year.
WTO Director General Pascal Lamy said recently that the financial crisis of 2007-09 did not lead to widespread “economic nationalism,” where governments impose strict trade barriers. But he said the slow pace of economic recovery for most nations “could gradually undermine the benefits of trade openness.”
The opposite is more likely true: The lack of political will for more open borders is contributing to the slow pace of the global economic recovery.
Politicians often treat international trade as a contest that one side must lose. Supposedly, if we are importing more goods from some other country, we must be losing the game. In fact, the reverse is true. Countries benefit from trade, because it allows for specialization.
To explain this important principle, N. Gregory Mankiw of Harvard University tells the parable of two neighbors likely to be at home in Idaho — a cattle rancher and a potato farmer.
Each of these Idaho residents wants to consume both potatoes and meat. The farmer could raise cattle and grow potatoes, but may not be good with animals. The rancher is free to grow potatoes in addition to raising cattle, but the soil on the ranch may not be well suited for a potato crop.
Clearly, in this case the farmer and rancher should trade.
But let’s suppose for the moment that one neighbor has better conditions for both farming and ranching. Comparative advantage says they should still trade.
Suppose the farmer and rancher both work eight hours a day, splitting their time between growing potatoes and raising cattle. Maximizing their efforts, the farmer produces and consumes 16 ounces of potatoes and 4 ounces of meat, while the rancher produces and consumes 24 ounces of potatoes and 12 ounces of meat.
Notice that the rancher in this story is three times more effective at raising meat, but only 1.5 times more effective growing potatoes. This relative difference is the source of comparative advantage.
If the farmer specializes in the production of potatoes and then trades with the rancher for meat, there will be more for both. The farmer now spends all eight hours of the day growing potatoes and gets 32 ounces. Meanwhile, the rancher puts six hours a day toward producing meat (getting 18 ounces) and two hours for potatoes (12 ounces).
If the rancher trades 5 ounces of meat for 15 ounces of potatoes, he or she has more to consume: 13 ounces of meat and 27 ounces of potatoes. So too for the farmer, who now has 17 ounces of potatoes and 5 ounces of meat.
Both the farmer and the rancher are now consuming above their non-trade levels.
Idahoans should be the model for international trade. Let’s be neighborly and open our borders for more trade.
PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa