Do you want a mathematical explanation of why specialization and trade
make us better off? Or are you satisfied with a basic explanation such
as the above answers?
The answers thus far are by and large correct. The basic idea is that
by specializing in a particular export product market, producers
invest as many resources as possible into an activity that gives
maximum gains.
But we needn't limit ourselves to economic transactions aross borders.
Imagine, for example, that you have a lot of talent in writing but not
as much talent in math. You have two possibilities here: you can
invest money and time into becoming a very good novel writer, or you
can try your hands at a mathematically demanding field such as
engineering. Where is your money best spent? Where do you get the most
'bang' for your bucks?
Clearly, if you invest your money in a field like engineering, you
will, at best, become a mediocre engineer. If you invest your money
into sharpening your writing skills, you may become an excellent
writer and make lots of money. The basic idea is the same for
international trade. You want to invest as much money and resources in
a market where you have a comparative advantage and where the
opportunity cost is as low as possible (that is, you are not wasting a
wonderful opportunity to make lots of money by investing in something
that makes little money). The classic example is trade between
Portugal and England: although both countries make port wine as well
as wool,it would be a waste of time for Portugal (which has a
comparative advantage in port wine) to invest heavily in the
production of wool, where England has a comparative advantage (but not
in port wine). By trading, each country can reap the economic benefits
of trade (i.e. they make a profit) while also obtaining the goods that
they each want.
In the last few decades, specialization has allowed many countries
that did not have many natural resources to become wealthy. Japan is
a great example. Japan has few natural resources. In the 'classical'
economic view, Japan should not be wealthy because its lack of natural
resources limits what it can produce. But Japan has significant
comparative advantage in its highly educated workforce and its
technological advancements. Using this comparative advantage, Japan
can trade some of its technology (such as computer hardware and
software) with a nation like Brazil, which lacks in technology but is
one of the world's largest producers of food items. Japan reaps
economic benefits while importing food items it cannot produce itself
(even so, it still costs significantly more money in Japan to buy
perishable food items than in most places around the world).
Specialization, in fact, has made a number of countries that have
neither significant natural resources nor a strong manufacturing
sector competitive internationally. It is likely that, overall, the
trend towards specialization has allowed many more countries to raise
their standard of living, especially the Southeast Asian economies.
The reduction in tarriffs as well as barriers to capital have
increased their profitability.
But some economists criticize the benefits of this and cite the fact
that decreasing barriers to trade often create lopsided benefits. For
example, many economists here at home point out that while the North
American Free Trade Agreement (NAFTA) has made it cheaper to buy
certain items and has, indeed, helped the export sector, it has also
created economic costs. With a relaxation of trade barriers, for
example, many companies in the United States find it cheaper to
produce items for the export market abroad, resulting in the layoff of
thousands of American workers. A second criticism is that many of the
countries that participate in organizations that promote free trade,
such as the WTO, do not really play by the rules. While promising to
reduce their barriers to trade, these countries actually maintain
so-called non-tarriff barriers like subsidies which make their
products cheaper abroad and thus unfairly more competitive. Most
economists view the liberalization of trade as a good thing so long as
those who trade fulfill their promises to play by the rules.
Finally, it is worthwhile to note that economic liberalization is not
necessarily without its costs. Thousands of Americans who worked in
the manufacturing sector have lost their jobs as other economies have
become more competitive. South Korea- which has few natural resources-
is one of the world's biggest ship builders, and its own steel
industry has surpassed that of the United States- even though the
United States still has more iron and raw materials than South Korea.
Although economists have argued that the US will only remain
competitive if it transitions towards a service economy that is based
on "intellectual" rather than "material" capital, few have offered a
short term solution. It is clear that many who are well educated
still cannot find jobs, and the outsourcing trend has hit many
traditionally white collar sectors, such as the informatics sector.
While some politicians argue Americans need "more education", the
reality is that a solution to the problem does not hinge only on what
workers do to adapt, but on a more broadly encompassing economic
policy. Unfortunately, unlike many countries like China and South
Korea, the United States maintains a hands-off, 'laissez-faire'
attitude towards business. (I realize that some of you will disagree
with my commentary but I challenge anyone to argue that all that is
needed is an improvement in the educational level of Americans). |
