Saturday, 17 November 2012

Effects of "local" trade

An idea that comes up every now and then when talking about trade is that we should only trade "locally". Somehow local trade is more virtuous than non-local trade. Leaving aside the obvious problem of defining the "local" in local trade trade there is still the problem of the actual effects of such a restriction. One issue to keep in mind is that restricting trade to the local region means you limit the size of the market and thus you are limited in your ability to take advantage of specialisation and the division of labour. As George Stigler put it “The Division of Labor is Limited by the Extent of the Market”. In short you make yourself poorer than you would otherwise be.

Matt Ridley offers a nice example of the problem in his book "The Rational Optimist":
In the same vein, Kelly Cobb of Drexel University set out to make a man's suit entirely from materials produced within 100 miles of her home. It took twenty artisans a total of 500 man-hours to achieve it and even then they had to get 8 percent of the materials from outside the 100-mile radius. If they worked for another year, they could get it all from within the limit, argued Cobb. To put it plainly, local sourcing multiplied the cost of a cheap suit roughly a hundred-fold.
So local production is possible but only at a high price.

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