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A Tale of Two Islands – Part I: The Discovery January 14, 2014 7:59 AM | Tagged as Comparative Advantage, free trade

WSJ January 6, 2014 Page A11:  NAFTA at 20: A Model for Trade Policy by Mary Anastasia O’Grady

WSJ January 13, 2014, Page A15:  Leading from the Front on Free Trade by Robert B. Zoellick

[Many thanks to my USC colleague, Janet Suzuki, for the original concept of this great tale. This is the first of a series of five blogs on free trade.]

Economists often have a hard time explaining a few key concepts. Consider this one.  Why is free trade good for BOTH trading parties? Here’s the problem. The average person views most issues as zero sum games, meaning the total of the winnings must always equal the total of the losing. Much of life is indeed a zero sum game. Consider any sports event. One winner (+1) , one loser (-1). It adds to zero. Consider the stock market. One seller, one buyer. If the stock goes up, the buyer wins and the seller loses. The net is zero. It is the same from  poker to pretzel markets. However, applying zero-sum thinking to free trade yields an erroneous conclusion.

In free trade between nations, both parties win. It is NOT a zero sum game.

Consider this simplest of examples, two islands in the ocean.  Neither of the islands knows about the other. One island has one food source: apples. As you can guess from many other staid economic examples, the other island only eats oranges. By happenstance, while in their outriggers one day, the two islands discover each other in the middle of the ocean. Each sees the other’s food in their new neighbor’s outrigger. They taste each other’s food. “IT”S DIFFERENT!” each islander exclaims. They agree to meet in the same place in the ocean on a regular basis and trade apples for oranges.

Question: Who lost?

Answer: Neither lost. Both islands benefitted from trade.

Free trade between nations benefits both nations. In her referenced article above, Mary Anastasia O’Grady of the WSJ chronicled the benefits of the North American Free Trade Agreement (NAFTA) which turned 20 this month. It is worth the read. Bottom line: All three nations benefitted.

So what is the real discovery of Part I? Yes, they discovered each other and also discovered trade benefits both islands.

The Biz Bucks Guy will expand on this example in forthcoming blogs.

[The Biz Bucks Blog is primarily written to former students of Biz Bucks training courses to encourage their daily reading of the three opinion pages of the WSJ. This refreshes principles of Biz Bucks courses and improves business acumen on topics not discussed in Biz Bucks training.]

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