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A Tale of Two Islands – Part V: Some Important Principles February 10, 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

This tale of two islands teaches some important principles.

1.       Free trade among nations is not a zero sum game.

2.       In some products, nations have an absolute advantage. They make things more efficiently than another nation.

3.       In some products, nations have a comparative advantage in which their trading partner cannot afford to produce a product because it takes away production of other, more lucrative products. The first nation enjoys a comparative advantage.

4.       Protectionists are really special interest groups. They may frame their messages that protectionism is good for everybody.

5.       Unless one nation is a welfare state, unfettered immigration is good. Immigrants tend to be younger. These young immigrants tend to be more innovative than older citizens. Innovation leads to additional economic well-being.

6.       When goods, services, money and labor are free to cross borders, armies don’t.

The history of nations provides many examples of both the benefits of free trade and the serious problems from protectionism.  One need only see the depth and the length of the Great Depression to see how protectionism – no matter how well intended -- led to economic woe.  The Smoot-Hawley Tariff Act   that added import taxes (tariffs) to over 20,000 products coming into the US to protect our own jobs) may be the worst legislation in the American 20th century.  Former Fed Chair Ben Bernanke says, "Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression." [1]  For more on Smoot-Hawley, read Amity Shlaes’ insightful history of the depression, The Forgotten Man.

On the positive side, NAFTA is now twenty years old. None of the widely promoted horrors originally advertised by the protectionists (joblessness and poverty) have come to pass. Much credit goes to a Democratic president (Bill Clinton) and a Republican congress. Both political parties have influential wings that promote trade. It was much more complicated than two islands, but the negotiators from the three respective countries got it done. As O’Grady mourns in the reference article, it’s too bad energy was not part of the deal. Many problems would be solved today…think Keystone Pipeline.

Read the Zoellick article to gain insights into the negotiations that happen to pass trade agreements. Such work is noble in the estimation of The Biz Bucks Guy. As noted above, when trade crosses borders, armies don’t.

[End of the series on Free Trade and the Tale of Two Islands.]

[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.]


[1]1  Monetary Policy and the Global EconomyBen S. Bernanke as read in Wikipedia (Smoot-Hawley Tariff Act)


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