Sunday, 13 February 2011

But will the president listen

to economist N. Gregory Mankiw when he says:
Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense.
My guess is no since the president knows that most voters don't see international trade the way economists do. And the president is more worried about voters than economists. Many voters, and not just in the U.S., see competition with China as a big threat to their country. Economists never trier of telling people that trade makes both parties better-off, but to no avail people still see countries as competing.

But we don't compete with other countries, this is a false analogy that comes from thinking that countries are like firms, they're not. As, even, Paul Krugman has said, A Country Is Not a Company. The point is that Coke and Pepsi, for example, do compete, one gains at the others expense, but New Zealand and Australia, for example, don't, their loss is not our gain. International trade is not a zero-sum game. To see this, note that while Coke may wish to put Pepsi out of business, so that Coke can increase their sales and prices and therefore profits, New Zealand would not gain if we put Australia "out of business".

Why? Well in the Coke/Pepsi case, Coke gain a lot, in terms of sales and profits, from not having Pepsi to complete with and lose little since Pepsi doesn't buy much , if anything, from Coke. Or Coke from Pepsi. This is not true of the New Zealand/Australia example. We may gain some sells if Australia stopped producing, but we would lose much more. Australia is our biggest export market and if they "went out of business", they would stop importing, and that would hurt us a lot. Also they are suppliers of much of our useful imports and that would stop too, which would hurt us even more.

Countries trade, they don't compete. And thus increased prosperity in Australia - or China - does not come at our -or the U.S.'s - expense.


Taran Rampersad said...

I see your point on countries competing, but I think there is also a point related to production, particularly in the present U.S. Granted, I'm not an economist - and I'm open to discussio. There is a need in the present U.S. economy for creating jobs. Therefore ramping up of production must increase since jobs have to be productive - or they would be, as I believe economists put it, consumption.

So countries do compete in a way - they compete for production. Or am I wrong?

Anonymous said...

By the same rationale, countries don't fight wars, since wars destroy markets. (Ok, so the it's the armies that fight wars, not countries.) Unfair currency manipulation can't be the action of countries, nor the stealing and piracy of intellectual property, or the targeted destruction of a leading domestic firm by a foreign firm. What do we need the WTO for, after all. We're all devoted internationalists.