Why efficient countries still benefit from trade

HostMost of us think that being self-sufficient is the goal. If you can grow your own food, fix your own car, and build your own house, it feels like you're winning at life.

HostBut when it comes to whole countries, even the ones that are the absolute best at making almost everything still spend a huge amount of money buying stuff from neighbors who might not be as good at it. Why would a country that can do it all bother to trade with anyone else?

GuestIt feels like a mistake when you first look at it. If your country is the fastest at making cars and the fastest at growing corn, why would you ever buy corn from a neighbor who's much slower at farming than you are? But it comes down to a simple truth: you can't do everything at once. Even a country has a limit on its time, its workers, and its land. There's a name for this called comparative advantage. It basically means you should look at what you're best at compared to all the other things you could be doing, not just whether you're better than your neighbor.

HostBut if I'm better and faster at both things, I'm still saving time and money by doing them both myself, right?

GuestNot really. Think about a world-class surgeon who also happens to be the fastest house painter in town. She can paint her own house in ten hours, while a professional painter would take twenty hours. Even though she's twice as fast, it would be a huge waste for her to paint her own house. If she spends those ten hours painting, she isn't in the operating room. She might save a few hundred dollars on a painter, but she loses thousands of dollars in surgical fees. By hiring the slower painter, she actually ends up with more money in her pocket and a house that still gets painted. The same thing happens with trade between countries.

HostSo it's not about being better than the other guy, it's about being better than yourself at something else?

GuestThat's the big leap. Most people think trade is a race between two countries to see who's better. But it's more like a person deciding how to spend their day. If a country is amazing at making high-end computer chips but only okay at making shirts, every hour they spend on shirts is a chip they didn't make. Even if they can make shirts better and faster than a poorer country can, they shouldn't. They should let the other country make the shirts. That way, the first country gets more chips to sell, and the shirts still show up in the stores.

HostBut if you don't make your own shirts, aren't you stuck if the other country stops selling to you? That seems like you're giving up your safety just to make a few more chips.

GuestThat's a real worry, and it's why some countries keep making things they aren't the best at, just to be safe. But the trade-off is that everything becomes much more expensive. If you try to make everything yourself, you end up using your best engineers to build basic things like chairs and spoons. You're basically taking a brain surgeon and making her paint houses. You might be safer, but you'll be much poorer. The wealth of a country comes from how well it uses its best people for its best work. When we trade, we're basically saying we want the whole world to be as wealthy as it can be by letting everyone focus on their best skill.

HostWait, so even if a country is worse at every single thing, they still have something to offer? That sounds like a bit of a math trick.

GuestIt sounds like a trick, but it's just about the ratios. If a country is a little bit worse at making shirts but way, way worse at making computer chips, then their best bet is to make the shirts. It's the thing they're least bad at. By doing that, they have something to offer the rich country. The rich country wants to stop making shirts so they can make more chips. The poorer country does them a favor by taking that work off their hands, and the rich country pays them for it. This is why trade isn't a war where one person wins and the other loses. Both sides end up with more stuff than they had before they started.

HostThat sounds fine for the country as a whole, but it sounds like a raw deal for the person who used to work in the shirt factory. He doesn't care if the country has more chips if his factory closes down.

GuestThat's where the math hits the real world. The math says the country is richer as a whole. You have more money flowing in. But that wealth doesn't just spread itself around to everyone. It usually stays with the chip-makers and the owners. The shirt-maker loses his job and his way of life. This is the big struggle with trade. We get more stuff and more money in the big picture, but we end up with these big holes in our towns where the old factories used to be. You can't just tell a person who spent their life sewing that they should go write computer code tomorrow.

HostSo we're basically trading the well-being of some workers for cheaper shirts and better chips for everyone else.

GuestThat's the honest way to put it. We know that trade makes the world's pile of stuff much bigger, and it keeps prices low for the things we buy every day. But we haven't found a good way to help the people whose jobs get traded away. We're still looking for a way to make sure the gains from being faster and better actually help the person who has to put down their tools.

HostThe surgeon puts down the paintbrush because she knows her time is worth more than a fresh coat of paint.

GuestWe still haven't figured out how to help everyone who gets left behind when a whole town stops making shoes, and that remains the big hurdle for this whole idea.

HostThat smart move of keeping everything in house turns out to be a trap that keeps a country from doing what it does best.