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Free Trade is Not a Zero Sum Game! October 18, 2012 11:00 AM | Tagged as Globalization Trade
WSJ 10/15/12 A17 The Retreat of Globalization by Warsh and Davis
Consider two fictitious islands in the Pacific. They are unaware of each other’s existence. On one island, all they eat are apples. On the other, all they eat are oranges. They have no other foods. Pretty boring existence, huh?.
One day, while riding the ocean in their outriggers, they discover each other. They discover that each island has another type of food to eat. They make a commitment to meet at the same place in the ocean every day and trade apples for oranges. Now both islands have both apples and oranges to eat. The quality of their life is dramatically improved. So here’s the question:
“Which island lost?”
The informed answer is neither island lost. Both are better off. Trade helped both islands.
In our society, we tend to fall into a mind trap. We tend to see interactions between parties as win-lose propositions. In the stock market, the buyer of a stock wins if the price goes up and the seller loses the exact same amount. In a baseball game, there is one winner and one loser. In zero-sum games, the winnings must equal the losses.
However, in economics, not all transactions are win-lose. As our island example shows, both parties can benefit. Such is the case with many free trade agreements between nations. As Warsh and Davis wrote,
“After all, globalization—connecting capital and labor, producers and consumers, emerging economies and their more mature counterparts—has led the world-wide surge in economic activity for the last three decades. It brought hundreds of millions out of poverty. It created hundreds of billions in shareholder value. Productivity and aggregate standards of living rose markedly.”
However, as Warsh and Davis recount, the trend toward a more global economy -- wherein sovereign nations do what is in their best interest and voluntarily trade with each other -- is slowing down. This will have a deleterious effect on the well being of people throughout the advanced world.
And of equal importance, nations that trade don’t war with each other. Free trade is a peace proposition.
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