International Trading | What Is the Advantages And Disadvantages Of International Trading - My Thoughts
This is in response to the article on International Trade by @ahsansharif. My views on this topic were shaped around forty years ago when I studied Agriculture, Business, Economics and International Food Policy. In an ideal world, International Trade is a good thing. Canada doesn't grow a lot of coconuts and other countries don't produce much Maple Syrup. We have seen in recent years that putting the production of face masks in the hands of a single country was a mistake (I still shudder when I think of the evidence of Chinese workers spitting into masks slated for export).
Economies of Scale
Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable.
Let me relate this to Agriculture. If a person has a single cow, it requires a large amount of effort to feed and maintain that cow, and it only provides one family. It only requires a little extra effort when you have a second cow, but you can feed two families. If you have one hundred cows, it requires more effort but less than a hundred farmers with one cow. This is why you have 10,000 cow herds in the US with only a couple dozen people milking them. Economies of Scale happen when production increases. International Trade creates larger markets allowing producers to achieve larger Economies of Scale.
Economies of Scale prevent growing economies from flourishing.
At one point some of the countries of the EU had supply management for dairy products. Supply management limits the revenue that you can make by limiting the supply that you offer. This puts pressure on the producers to reduce costs. This means growing better bloodlines that produce more milk per cow. It also means culling the herd to keep the numbers down. Then the EU cancelled supply management. The farmers stopped culling their cows and within they had a milk surplus. Their Economies of Scale allowed them to have more cows with very little extra cost and effort. Faced with a surplus, the EU sold the excess on the world market.
Meanwhile, a farmer with two cows in Africa could not sell his surplus because the price of milk at the local store was half of what he could charge. While I am overstating it a little, International Food Policymakers need to be cognizant that good intentions (providing cheap food) are a mixed blessing. It can end up stifling the local industry. Even though consumers pay a little more there is a multiplier effect at the local level with additional jobs. The velocity of money increases locally.
Sometimes Efficiency is not the best option
Sometimes it is better to limit International Trade. For it to work most efficiently, it requires free trade. This means that tariffs are not allowed, but also it means that no form of subsidy or supply management is permitted. Returning to the dairy industry, the average Ontario (a province in Canada) has herd sizes of less than 100 cows. This is due to Canada having supply management in the dairy industry. A quota system means the farmers must limit their production to a set amount per month. In return, they are guaranteed an income predetermined to cover their costs plus enough for a reasonable profit.
In comparison, Michigan (a state in the USA) borders and runs parallel to Ontario (so same climate). Their average dairy herd size is 300 cows. Their system does not have supply management but instead receives subsidies.
In Canada, milk is more expensive at the grocery store, but the US prices are deceptive because taxes pay the subsidies. Larger producers receive these subsidies, so the US system is less equitable. Subsidies are a hidden danger in International trade. Countries can bury subsidies in many ways.
There is also one other hidden aspect of "free trade." That is the rate of suicide in farmers. US farmers have a suicide rate 3.5 times the rate of the general population.
I cannot tell the suicide rate in Canada because all searches lead to articles describing how American farmers want to implement Canada's Supply Management System.
I have added the following 10 percent beneficiaries:
@ahsansharif for inspiring me to write this and
for their ongoing support.