Why Trade Is Not a Zero-Sum Game

Trade lowers prices and increases product variety. That’s a win-win for both importers and exporters, says Douglas Irwin, author of “Free Trade Under Fire.”

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There’s an old school of though that Adam Smith addressed, going way back when he wrote “The Wealth of Nations” in 1776, called mercantilism, which views trade as a zero-sum game: 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.

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 specializes inputs that help their productivity.

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.

It’s really just an extension of the way we run our lives. 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. We benefit from that specialization process.

Just think about if we didn’t have washing machines or grocery stores. That takes us back a number of centuries. Life was hard. You had to do a lot of things yourself, and we’re not all good at doing all those things.

The same thing that applies to an individual applies to a country. Countries can specialize in certain activities and export their surplus. So, for example, we now have winter vegetables in the United States because we’re lying in countries in the southern hemisphere, or sometimes Mexico, to provide us with broccoli, asparagus, and grapes. That wasn’t available a generation ago.

There’s specialization across geographic locations, time zones, climates, and it has really enriched the world. One of the best ways to show this 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 and education. You’re really hurting the poor and the middle class when you cut yourself off from trade.

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