Three Traders with International Trade
by Steven Suranovic ©1997-2004
The farmer story can be placed in an international trade context with a
simple adjustment. If we
assume that Farmer Kim is from Korea then the exchanges that take place in the second week
trade between countries. Farmer Smith's trade of oranges for apples with Farmer Kim represents
exports of oranges in exchange for imports of apples from Korea. In the previous week Farmer
was not present, thus all trade took place domestically. The change from week one to week two
corresponds to a country moving from autarky to free trade.
Now consider the effects of trade in the US. International trade makes Farmer Smith better-off and Farmer Jones worse-off compared to autarky. The critical point here is that free trade does not improve the well-being of everyone in the economy. Some individuals lose from trade.
We can characterize the winners and losers in a trade context by noting the relationship of the farmers to the trade pattern. Farmer Smith is an exporter of oranges. Farmer Jones must compete with imports on sales to Smith, thus we call Jones an import competitor. Our conclusion then is that export industries will benefit from free trade while import competing industries will suffer losses from free trade.
This result corresponds nicely with observations in the world. Generally, the most outspoken advocates of protection are the import competing industries, while the avid free traders tend to be the export industries. In the US it is usually the importing textile, steel, and automobile industries calling for protection while exporting companies like Boeing and Microsoft preach the virtues of free trade.
International Trade Theory and Policy
Lecture Notes: ©1997-2004 Steven M. Suranovic