I’m sorry that I can’t find the original article, but it’s not that simple. Who’s our largest trading partner? Canada. Now, honestly, what does Canada produce that a) we can’t make here for the same or lower cost and b) is worth 224 billion dollars? It is vastly more likely that the trade happens simply because shipping is cheap and profit margins outweigh it by enough that Canadian companies will sell inside the U.S.. Ricardian exchange does not represent how we trade, and so arguments from it without deeper analysis, like the one Krugman uses for trade with countries with cheap labor, will not assuredly apply to the real world.
Who’s our largest trading partner? Canada. Now, honestly, what does Canada produce that a) we can’t make here for the same or lower cost and b) is worth 224 billion dollars?
Often things are made somewhere simply because that’s where they were made in the past, and, as you said, it’s easier to ship the goods than to set up shop somewhere else. In the case of trade between the United States and Canada, most of the relevant comparative advantages occur on the level of firms and individuals, not nations.
I agree, but I don’t see how that supports free trade in quite the way Krugman used it. When the countries are outwardly similar, the partner’s “comparative advantage” is then often an economy of scale, which is a good reason to centralize, or a capital investment, which isn’t necessarily. Then free trade is made a bit more transparent and we can start arguing about what we want to maximize—efficiency or [insert metric here].
But sadly, I’m pretty sure that sometimes there’s no comparative advantage at all. Sometimes trade is profitable even if you don’t have any advantage, so long as the cost of shipping is less than the profit margin at the market price. People are irrational, and squeezing even a little extra profit out of this fact would allow for all sorts of semi-useless trade.
Note that I agree that there is still “ordinary” comparative advantage out there, among this other stuff. But I think that this other stuff, while fairly indifferent to efficiency, can be harmful to [metric of choice] (say, assign negative value to burning fossil fuels).
Sometimes trade is profitable even if you don’t have any advantage, so long as the cost of shipping is less than the profit margin at the market price.
If the cost of shipping is less than the profit margin, that means that someone is willing to buy something from you for more than it costs you to make it—which, in an ideal market, is pretty much equivalent to having a comparative advantage. (I think.)
Sometimes. The existing competitors might lose more profit by dropping price to drive out the newcomer than they would by just allowing the competition. This should become more common as the cost of shipping becomes smaller relative to the profit margin.
If by competitive you mean “competition drives down prices as far as they will go,” I would disagree that that’s how the world works.
A bit of recommended reading:
Ricardo’s Difficult Idea by Paul Krugman
I’m sorry that I can’t find the original article, but it’s not that simple. Who’s our largest trading partner? Canada. Now, honestly, what does Canada produce that a) we can’t make here for the same or lower cost and b) is worth 224 billion dollars? It is vastly more likely that the trade happens simply because shipping is cheap and profit margins outweigh it by enough that Canadian companies will sell inside the U.S.. Ricardian exchange does not represent how we trade, and so arguments from it without deeper analysis, like the one Krugman uses for trade with countries with cheap labor, will not assuredly apply to the real world.
You’re not entirely wrong about that…
Often things are made somewhere simply because that’s where they were made in the past, and, as you said, it’s easier to ship the goods than to set up shop somewhere else. In the case of trade between the United States and Canada, most of the relevant comparative advantages occur on the level of firms and individuals, not nations.
I agree, but I don’t see how that supports free trade in quite the way Krugman used it. When the countries are outwardly similar, the partner’s “comparative advantage” is then often an economy of scale, which is a good reason to centralize, or a capital investment, which isn’t necessarily. Then free trade is made a bit more transparent and we can start arguing about what we want to maximize—efficiency or [insert metric here].
But sadly, I’m pretty sure that sometimes there’s no comparative advantage at all. Sometimes trade is profitable even if you don’t have any advantage, so long as the cost of shipping is less than the profit margin at the market price. People are irrational, and squeezing even a little extra profit out of this fact would allow for all sorts of semi-useless trade.
Note that I agree that there is still “ordinary” comparative advantage out there, among this other stuff. But I think that this other stuff, while fairly indifferent to efficiency, can be harmful to [metric of choice] (say, assign negative value to burning fossil fuels).
If the cost of shipping is less than the profit margin, that means that someone is willing to buy something from you for more than it costs you to make it—which, in an ideal market, is pretty much equivalent to having a comparative advantage. (I think.)
You’re correct. Simple example here. Transportation costs are added to other costs, and the same analysis follows from there.
Transaction costs are not really different from other costs, economists just like to highlight them because they’re often forgotten.
Sometimes. The existing competitors might lose more profit by dropping price to drive out the newcomer than they would by just allowing the competition. This should become more common as the cost of shipping becomes smaller relative to the profit margin.
If by competitive you mean “competition drives down prices as far as they will go,” I would disagree that that’s how the world works.