9 ms·

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 i

by defen 6y ago

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.

blueblisters 6y ago
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.
- s1artibartfast 6y ago
  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"
  - saberdancer 6y ago
    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). It's quite a strange concept.
    - s1artibartfast 6y ago
      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.
jbay808 6y ago
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.
extremeMath 6y ago
>large numbers of N95 masks Certifications take time, masks are simple, testing takes time. This is a government problem, not a manufacturing problem.
- shuntress 6y ago
  "You cant break the unit tests if you don't have unit tests"
bluGill 6y ago
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.
- jgeada 6y ago
  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.
  - randallsquared 6y ago
    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.
  - deleted 6y ago
    [deleted]
  - bluGill 6y ago
    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.
- 6y ago
merpnderp 6y ago
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.
- js2 6y ago
  The trick is convincing customers to pay more for a domestic product. Consumers don't really seem to care in large enough numbers.
  - ralph84 6y ago
    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.
- admax88q 6y ago
  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.
  - walterbell 6y ago
    Changing delta in values is an additional factor in changing the relationship between former partners.
  - eloff 6y ago
    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.
commonturtle 6y ago
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).
frgtpsswrdlame 6y ago
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."

by defen 6y ago

blueblisters 6y ago

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.

s1artibartfast 6y ago
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"
- saberdancer 6y ago
  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). It's quite a strange concept.
  - s1artibartfast 6y ago
    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.

jbay808 6y ago

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.

extremeMath 6y ago

>large numbers of N95 masks Certifications take time, masks are simple, testing takes time. This is a government problem, not a manufacturing problem.

shuntress 6y ago
"You cant break the unit tests if you don't have unit tests"

bluGill 6y ago

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.

jgeada 6y ago
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.
- randallsquared 6y ago
  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.
- deleted 6y ago
  [deleted]
- bluGill 6y ago
  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.
6y ago

merpnderp 6y ago

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.

js2 6y ago
The trick is convincing customers to pay more for a domestic product. Consumers don't really seem to care in large enough numbers.
- ralph84 6y ago
  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.
admax88q 6y ago
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.
- walterbell 6y ago
  Changing delta in values is an additional factor in changing the relationship between former partners.
- eloff 6y ago
  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.

commonturtle 6y ago

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).

frgtpsswrdlame 6y ago

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."