This is “Three Traders with International Trade”, section 3.5 from the book Policy and Theory of International Trade (v. 1.0).
This book is licensed under a Creative Commons by-nc-sa 3.0 license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms.
This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book.
Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page.
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (19 MB) or just this chapter (2 MB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).
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.