Why Trade?

If you’re like me, you have a long shopping list this holiday season.  But have you ever stopped to think where the products you purchase come from? Chances are, those flowers you ordered online came from flower farms in Latin America.  The hand-crafted bracelet you bought in a department store could have come from Bali or even India.

This is not just a sign of the times.  Over the past three centuries, the levels of access people have had to goods, services and even each other has risen dramatically.

Trade has been a crucial part of the human experience for much of recorded history. Historically, the quest for materials and markets drove global exploration, colonization and expansion. Christopher Columbus stumbled upon the Americas looking for an alternate route to India and China.

Today, if you have the Internet and access to a global express delivery company like FedEx, you can sell anywhere in the world, and you can purchase goods from anywhere in the world.  You are part of the global economy.

FedEx strengthens and expands global trade, especially the trade of high value goods.  Of course, it has only been 35 years since FedEx was born and with it, the modern express transportation industry!

However, many people question, what is the impact of trade? Is trade good? Does trade even matter? The reality is that trade is critical in expanding global prosperity and lifting millions of people out of poverty.

Take for example a small maker of belt buckles in Mexico whose exports have soared 2,300 percent in five years because of free trade and the Internet, and about Indian artisans, once impoverished, who are selling their jewelry and fashions worldwide with the help of an efficient supply chain.

For this blog, I want to explore a simple question - why should countries trade with each other?

Let's break it down to simplest of principles.  If country A produced two commodities X and Y.  It produced X very competitively and Y not so competitively.  As for country B, it does exactly the opposite - produces Y very well and X, not that well.

What's the best outcome for both countries?

It would be for country A to produce only X and for country B to produce only Y and trade with each other.

I am not sure if this is intuitive or not.  The theory of comparative advantage is the underpinning of trade between countries.  Multiply the number of countries and tack on the commodities produced, this can get complex in a hurry.  Not to mention artificial trade barriers and opaque trade processes.

But, it doesn't hurt to start from first principles.