Abraham Lincoln once said, “I don’t know much about trade, but what I do know is that if an American buys a coat from an Englishman, the American has the coat and the Englishman has the money, but if an American buys a coat from an American, the American has the coat and another American has the money”. At first, it sounds logical, but he failed to take into account 2 important concepts, opportunity cost and comparative advantage.
Opportunity cost is the value of the best alternative use of a resource. For instance, if you go to college, your opportunity cost is the money you forego from working full time. If you’re a farmer and you grow corn, the opportunity cost is what you’re not growing, such as potatoes.
Comparative advantage occurs when a country is able to produce a good at the lowest opportunity cost. For instance, why don’t we grow bananas in New England? Well, if we did, we would get very small bananas and if we’re growing bananas, we can’t grow a crop that is cheaper to produce and would garner us more revenue, such as corn, apples or potatoes. Hence, we trade our apples for Jamaican bananas. Hence, Ben Franklin’s quote comes to mind, “no nation was ever ruined by trade”.
Opportunity cost is the value of the best alternative use of a resource. For instance, if you go to college, your opportunity cost is the money you forego from working full time. If you’re a farmer and you grow corn, the opportunity cost is what you’re not growing, such as potatoes.
Comparative advantage occurs when a country is able to produce a good at the lowest opportunity cost. For instance, why don’t we grow bananas in New England? Well, if we did, we would get very small bananas and if we’re growing bananas, we can’t grow a crop that is cheaper to produce and would garner us more revenue, such as corn, apples or potatoes. Hence, we trade our apples for Jamaican bananas. Hence, Ben Franklin’s quote comes to mind, “no nation was ever ruined by trade”.
Another quote that comes to mind is “if you don’t learn from history, you are doomed to repeat it.” During the great depression GDP was plummeting. In order to spur the economy, Congress, passed amongst the highest tariffs in history, specifically the Smoot-Hawley tariff. The logic being Americans will buy from other Americans instead of international goods. What Congress didn’t realize was the unintended consequence. At that time, the balance of trade in the US was positive, in other words, we exported more goods than we imported. As a result of the tariffs the US imposed, other countries reciprocated and world trade plunged by 2/3 ‘s making a bad situation for the economy worse. It took 4 years, but the tariffs were eventually removed.
Fast forward to now. President Trump has imposed the largest tariffs since the depression and other countries have reciprocated, and yes, we are in a trade war with China. Plan on seeing world trade falling as well as GDP (Gross Domestic Product, how we measure growth). I think the tariffs are a terribly bad idea, HOWEVER, we have just re-negotiated a trade deal with Mexico that puts us in a better position than we were with NAFTA (North Atlantic Free Trade Agreement), and that most likely will occur with Canada (our largest trading partner) also. In addition, it will be a matter of time before we re-negotiate deals with China and the European Union, AND if we end up in a better trading position, it would appear that Trump would be crazy like a fox.
A note on the European Union:
The EU was formed in 1958 and was based on a famous US document; the US Constitution. There is an article in the Constitution that states that one state can't tax the goods and services of another state. In 1957 (treaty of Rome), initial members of the EU realized that free trade is good and adopted that verbiage. There are currently 28 members in the EU, up from its initial membership of 15 and in addition to free trade, there is also free passage from one country to the next.
The EU should not be confused with the Eurozone. There are 19 countries in the Eurozone (which are also EU members) that have adopted the Eurocurrency.
The EU was formed in 1958 and was based on a famous US document; the US Constitution. There is an article in the Constitution that states that one state can't tax the goods and services of another state. In 1957 (treaty of Rome), initial members of the EU realized that free trade is good and adopted that verbiage. There are currently 28 members in the EU, up from its initial membership of 15 and in addition to free trade, there is also free passage from one country to the next.
The EU should not be confused with the Eurozone. There are 19 countries in the Eurozone (which are also EU members) that have adopted the Eurocurrency.
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