Why Trade Is Not a Zero-Sum Game

Why Trade Is Not a Zero-Sum Game


[MUSIC] There’s an old school of thought
that Adam Smith addressed, going way back when he wrote
The Wealth of Nations in 1776, called mercantilism,
which used trade is a zero-sum game, and that a country can gain by
exporting but loses when it imports. And what Adam Smith showed is that
that’s not correct, that trade is a positive-sum game, both countries can
gain from both exporting and importing. That actually imports are good for
an economy, they help consumers, they lower prices, they increase variety. They provide necessary inputs for firms
in their production process and allow for more specialized inputs that
help their productivity. And so, Adam Smith really changed the
presumption in thinking that countries can specialize in certain types
of goods that they’ll export. And with those exports they can afford
to buy imports that other countries will specialize in. And it’s really just an extension
of the way we run our lives. So we don’t make our own clothing,
we don’t plant our own food. We rely on farmers and other manufacturers
to specialize in certain activities. And then we specialize in
one thing ourself, and use our income across a range of goods
to buy those for our consumption. And we benefit from that
specialization process. Just think about if we didn’t
have washing machines, if we didn’t have grocery stores. Take us back a number of centuries and
life was very difficult and hard. You had to do a lot of things yourself,
and we’re all not good at
doing all those things. So the same thing that applies to
an individual applies to a country. Countries can specialize in certain
activities, export their surplus, and import other things. So for example, we now have winter
vegetables in the United States because we’re relying on countries in the Southern
Hemisphere, or sometimes Mexico, to provide us with broccoli, and asparagus,
and grapes in the middle of winter. That really wasn’t
available a generation ago. So there’s specialization
across geographic locations, time zones, climates, and
it’s really enriched the world. And I guess the best way to show that is
that countries that have deliberately cut themselves off from trade have suffered. Not just in terms of their income,
but in terms of health outcomes, in terms of education. You’re really hurting the poor and the middle class when you
cut yourself off from trade. [MUSIC]

6 Comments

  1. Sal Guod says:

    On the average most agree with these statements but the problem arises at the individual level – the factory worker in Ohio gets fired and now earns nothing but the West Coast investor's stock goes up in price because the product is now being produced in some emerging market with cheaper labour and imported back into the US. The average of the two shows that "Americans" did better by this arrangement (and this is what Dr Irwin says) but at the individual level the impacts are dramatic. Since NAFTA, the midwest has been hollowed out and yet our stock markets have never been stronger and the ultra wealthy stock owners have never had it so good. The fired worker can not afford the cheaper imported good but the stock owner can afford two or three….

  2. Baz McAwesome says:

    externalities
    1.ECONOMICS
    a consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices.
    If one were to add up the cost of climate change, pollution, deforestation, extinction of species, sea level rise, etc.
    Would trade still not be a Zero-Sum Game?

  3. dieselphiend says:

    There is a huge difference between trade and LIFE. It's true, "trade" by its very definition, is not zero sum. You can not exchange something if both parties don't have something to give. It's not trade we're talking about, ITS LIFE, ITS THE WORLD. It is matter itself, and matter, on this planet, is finite. This is especially true for species, and materials. Can everyone on earth have steak and lobster? Can everyone have hardwood floors and two story houses? Of course not. The world is zero sum, trade is exactly that. You can wipe all species out, and trade can still continue..

  4. Xolani Ndaba says:

    It is a zero sum game in terms of most measurable economic indicators…

  5. Markus Domanski says:

    They have to be thankful to Adam Smith for creating a myth that never seems to die. Trading apples for oranges means gaining oranges, but it also means losing apples. Yes, you didn't have the lovely oranges before, but now you have less delicious apples. While the apples may have less subjective value for you, they have lots of value for the person who gave the oranges to you. The best possible scenario is an even trade, where the apples are exactly worth the oranges.

    There are no win-win-situation in 2-player games, there never have been and there never will be, because in economy money is all what counts. Money is the measure of success, not happiness about oranges. You can't open a bank account and save your happiness for bad times and, even worse, you can't sell your happiness to someone either.

    Economy – like a balance sheet – is a zero-sum game. Since something can't be created out of nothing, some factor always has to give. Ideally both partners gain as much in return as they have given up, which we call a fair trade. Arguably the only additional benefit is happiness, but it doesn't show in a balance sheet, and it certainly doesn't matter tomorrow anymore.

  6. ImpactoDelSur Enterprise says:

    Just like the stock market it is a positive sum game, but it tries to act like a zero sum game.

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