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3.5 Three Traders with International Trade

Learning Objective

  1. Learn how international trade with competitor firms affects the distribution of income.

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 reflect trade between countries. Farmer Smith’s trade of oranges for apples with Farmer Kim represents U.S. exports of oranges in exchange for imports of apples from Korea. In the previous week, Farmer Kim 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 United States. 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 trade supporters tend to be affiliated with the export industries. In the United States, it is usually the importing textile, steel, and automobile industries calling for protection, while exporting companies like Boeing and Microsoft and the film industry preach the virtues of free trade.

Key Takeaways

  • Because export industries find more buyers for their products with international trade, export industries benefit from trade.
  • Because trade increases the number of competitors import-competing industries face, trade harms import-competing industries.

Exercise

  1. Choose a country. On the Internet, find the main exports and imports for that country and use this to indicate which industries are the likely winners and losers from trade.