These simple models of free trade work fine when discussing commodities or raw materials, but one thing I never see addressed (I'm far from an expert, just an interested layman) is that modern manufacturing involves far more than the raw inputs - there's complicated logistics and an entire holistic knowledge base of the company or companies which produce a thing. A society can forget how to make things, especially if no one in the society makes those things any more. The classic example is that "no individual knows how to make a #2 pencil from scratch". Or, more recently, the USA can't even produce large numbers of N95 masks. So, there can be a short-term benefit to free-trade, but an unknown cost down the line if your trade partner goes away for some reason and you can no longer make things you were trading for.
I'm starting to see a consensus that one of the biggest drawbacks to free trade is the loss of skills. It is great to get cheap steel from China and great for China to sell steel at a profit, but it sucks losing the engineering jobs. But what truly is awful is now there is hardly anyone who knows how to run a steel mill anymore in the US. The US might not always be friends with China, but the US will always need steel.
On the other hand free trade stops wars. If each party is specialized in a needed item that the other side no longer knows how to produce, its much harder to go to war.
The fact that the US will always need steel helps ensure that they _will_ always be friends with China, so long as they also specialize in something that China needs.
Economists were saying that about the interconnected economies of Europe prior to WWII. War is declared by human politicians in an instant. It is not required to be rational any more than human behavior is in general.
The Germans did suffer terribly from shortages, particularly of petroleum, during the war. In fact, one could argue fairly well that the shortage of petroleum ensured their defeat.
Their inability to produce high octane gasoline was also instrumental in the defeat of the Luftwaffe, as it meant their aircraft could not perform up to the level of the Allied aircraft.
The Japanese in WW2 also failed to secure a supply of oil, with similar results.
Yes, there's no doubt it was a major problem for Axis nations. However, it didn't prevent them from going to war. In the case of the Japanese one could argue securing their own source of petroleum and other resources was a major driving factor behind their expansionist policy.
On the other side, the US supplied Britain with all the arms, food and gas they needed. The whole point of the U-Boot campaign was to cut that off, which would have caused the defeat of Britain.
The interesting thing about a future modern war, however, is that modern weapons are too expensive and take too long to produce, so it'll be fought with whatever is in stock and will be over before supply lines matter. I hope we never find out if that is true or not the hard way.
I'm not sure I believe that. War doesn't usually end until one side surrenders in a way the other side is willing to accept.
If all you have left to fight with is improvised weapons, then it continues with that.
I would argue that very expensive, complex machines are the Tiger tank mistake all over again. Mechanically unreliable because of the complexity, but when it worked it was completely unmatched. One Tiger tank defeated 50 Russian tanks in the battle of Kursk, if I remember correctly.
But the cheaper, mass produced tanks of the allies won out because they could be fielded in much greater numbers.
> Insurgents continue to fight, and the usa just cannot completely win.
The US cannot win those because it is unwilling to do what is necessary (indiscriminate killing) to win.
> A war is won on ideology, not weapons.
I don't see much evidence for that in the history of warfare. For example, during WW1, the fortunes of the armies ebbed and flowed with the ebb and flow of who had the technical advantage in the air war.
On the other hand, it's been what... 80 years since a conflict between continental European nations. Has there ever been a gap that long in recorded history?
I think the last 80 years have been the most peaceful in recorded human history in spite of, or perhaps because of the constant threat of nuclear Armageddon.
Globalization is a part of it, but I don't think it's sufficient in itself to keep the peace.
The first 50 years of that peace was Europe being split between two nuclear superpowers. So the “peace” (more like a standoff) isn’t entirely our (European) fault.
Given that China invests gigantic sums of money in the US and has vast segments of industry dedicated to selling goods to the US, it is not very clear to me how you've concluded that.
That's the whole argument of comparative advantage though, even if China is better at everything its still in their best interest to trade because everyone comes out ahead if they specialize in what they're best at.
How long would it take to figure out how to run a steel mill from (more or less) first principles? That is, if you're a country that has zero steel mills and zero people who have worked at one, and for some out-of-game reason (like a global pandemic) you can't travel to one, but you know that they exist, you have access to books, and perhaps you can interview people, how long will it take to build an acceptable-quality mill?
After all, a) humankind developed steel mills in the absence of any steel mills at all, and b) multiple countries have developed much more complicated things in secrecy from each other (like atomic weapons and orbital rockets and radar), so it seems like it should be doable.
It's to your advantage to give up your skills if the cost of regaining them if you need to is smaller than the comparative advantage of having China make steel for you in the meantime.
The metal (steel, aluminum, etc) used in new cars didn't exist 10 years ago. From first principles, making steel is easy. Making stainless steel, figuring out when to add additives and what those additives should be, is harder. Doing it at scale, in quantity, cheaply, and safely, taking all aspects into consideration is dramatically harder, and if you dump the expertise now, and then have to restart from first principles 10 years from now, then you're multiple decades behind the competition.
Geopolitical considerations may mean there's a business advantage to having it made in China as opposed to elsewhere, but as we've seen with the US pandemic response, there are sectors where it's just plain stupid to believe that expertise can be summoned up as needed, and that it's somehow cheaper not to pay for it in the interim. Government isn't a household, and you can't restart having expertise like canceling Netflix for a few months.
you'd imagine they, upon acquiring said expertise, would write it down so that it is permanently available to others. What happens to the expertise if the person with it dies in an accident or old age?
Some institutional knowledge is just knowing where it was written down.
Some of it is trade secrets and so when the company is wound down it's sold as IP to another place.
Some expertise is contextual to the actual build of the equipment. Having a manual that said replace this O-ring every week in a blower or you'll suffer failures may not actually be expert knowledge anymore, It could be all that is stopping you from losing a million dollar piece of equipment or it could be what's causing you to lose productivity for an hour every week in a pagan ritual to the sacred maintenance document.
Being an expert and being able to chronicle that expertise are not just separate skills they're separate tasks. They might not know what is worth highlighting or they might prefer to read a book than to take on the extra task of writing it down.
You do write it down for exactly that reason, but it doesn't make it permanently available in the way that you describe - much of generational knowledge transfer happens by living and working side by side, not just reading books that the elders wrote.
It is certainly doable, but it will take time. Any country can probably get some kind of small scale steel mill up in a few months (or a long afternoon if the scale is small enough). But getting producing high quality steel at industrial scale with economy would probably take longer than a decade.
> one of the biggest drawbacks to free trade is the loss of skills.
The Economics jargon is "real option value". When you have engineers making widgets of type A, it's easy to get them to make types B, C, and D should the need arise. This potential to do other things has real value even if in fact you never do them.
Real option value should always be evaluated when choosing a course of action, but since it's about non-existent things, it's usually skipped. (Edit: calling it "real" must be economist humor.)
Ricardo didn't know about, or chose to ignore, real option value. In the classic England = cloth, Portugal = wine trade, Portugal would be better off making cloth because of real option value.
According to Wikipedia, in 2014 the US was the world's third-largest producer of raw steel. The industry's website says that US has produced almost 55 million tons of steel this year through the week ending September 12.
It's not so tricky. Make the imported product more expensive. Tariffs more or less funded the entire US federal government for the first half of its existence.
N95 is not a very good example, but there are many other good examples. I wouldn't want the above important point to be derailed by the choice of a hot-button example. Unfortunately it seems like it has been.
Advantages are not static; they're path-dependent and time-dependent variables, and treating them properly as such can really change the optimum strategy. The path dependence means that sometimes, instead of always maximally exploiting your existing advantages, you can make a short-term sacrifice to gradually create advantages that you didn't originally have.
The reason the US can't produce N95 masks in large numbers is because it made a trade with countries that have comparative advantage in manufacturing commodity items. Commodity items have low margins and low barriers of entry, hence the comparative advantage is usually labor cost, lack of regulations, government subsidies etc.
Even if automation removes the labor cost arbitrage factor, the market distortion due to other factors is unlikely to encourage a spurt in manufacturing unless the US also decides to intervene in markets.
If I understand the terminology correctly, comparative advantage is used within a country (or island) while absolute advantage is used between countries. China has both a comparative advantage and an absolute advantage in manufacturing masks.
Additionally, mask making in the US has very low comparative value. Us workers and business have much better products they to produce.
Dave Chappelle hit the nail on the head in one of his standup routines "I wanna wear Nikes, I don’t wanna make those things. Stop trying to give us Chinese jobs"
I'm not an economist but I think that comparative advantage is a different thing.
Absolute advantage is when you are best/cheapest at producing something.
Comparative advantage is when you have the lowest opportunity cost to produce something. Others may be able to produce it cheaper but they have something more profitable to produce.
Example might be steel mills, USA probably can produce steel, but it is much more profitable to produce end products (machines, tools, cars). So USA could be the best at producing steel and machines, but it ends up producing machines giving China comparative advantage to produce steel (let's imagine they do not know how to produce machines in a cheap way).
yeah, I think that it a more nuanced and accurate description. It is about having the lowest opportunity costs. I guess an individual or country could have both an absolute and comparative advantage if you can only do one thing and do it well.
This is a very important point, often overlooked. It's worth building and maintaining essential capabilities, even if you're not the most efficient at them. E.g., a large nation (> 50m people) should be able to feed itself (fine import oranges from somewhere else if you have to, but grow your own wheat and potatoes).
The US can produce large numbers of N95 masks. What we cannot do is produce large numbers tomorrow. If you are willing to bankroll me I'll setup a factory and in 2 years I'll produce any arbitrary number of N95 masks you care.
There are two obvious problems above. First, 2 years, will we even need N95 masks in two years? Second, I said I'd make them, but I cannot promise I can make them cheaper than China can.
You are severely underestimating the necessary level of manufacturing "culture", logistics and processes that were lost when we outsourced manufacturing.
For many things, including probably making N95 masks, we can no longer just decide to make them now without reconstructing that entire logistical tail, all the myriad of small manufacturers, and train people with specialized know-how and the years of experience that only exist in the presence of a vibrant and active manufacturing ecosystem.
The reason N95 masks aren't a good example is that there are manufacturers in the US, and were, already. Prestige Ameritech is one, and it could easily have scaled up very quickly, but couldn't afford to do so and then scale back down within a few months (they've been through this). So, they needed someone to guarantee that they'd be able to sell enough to be worth the investment of building out capability. There were a bunch of stories about this company back in the beginning of the pandemic.
All of that can be regained for a price. Remember I'm being supplied with an arbitrary large budget. There are a lot of manufacturing experts in the US working for the likes of GM who still make things here, if I hire half of them away (for a nice pay raise) I can make all the pieces of the puzzle I need.
Swiss. It's been months since I was following this story, but the machines were chinese (air freighted in, along with copious supplies of masks for the interim, by our flag carrier airline, which had plenty of spare capacity at the time) and I believe the textile source is german. Our virus response the last two months has been pitiful, but we were doing well in our first wave.
Depends on where I start. If I can buy machines from china I can ramp up much faster than if I have to design and make the machines myself. I also need to develop supply chains.
Note too that I have no expertise in either building a business or designing mask making machines, so I'll need to hire people as experts in both of those which will take time. Probably my mask making machine experts will be experts in designing machines (engineers), but not masks and so they will have to learn what works and doesn't.
Yes, the unhelpful part of these simplistic examples is that they show Comparative Advantage as a property that arises from the ether. It just happens to be that my island has easily accessible bananas and yours has easily accessible coconuts or whatever. But modern trade is more often about complex products where comparative advantage isn't a byproduct of the natural world but a created situation. So we're left with the question: Where does comparative advantage come from? And the answer is that it comes from lots of different factors but sometimes, in some cases, one of those factors is protectionism. And that complicates the whole thing. It could be that your island has a CA in computer chips and mine has a CA in McDonald's toys. It could also be that the inhabitants of my island don't like that scenario and think they might be happier if they had the CA in computer chips and yours had the CA in McDonald's toys. So what can I do to make that the case?
These toy examples are useful as an introduction but basically irrelevant to modern political debates around economics, we need to move past discussing trade like we do in "Econ 101."
