Three thoughts on free trade

The Wachau is a roughly 40km long and narrow part of the Danube valley in Austria. It produces and sells essentially only three things: beauty, wine, and apricots. With “producing and selling beauty” I mean that it tries to and manages to attract tourists. Its wine-growing and trading goes back a long way.

Except for perhaps in pre-historic times, it seems that the Wachau was never autarkic, meaning there was always trade (and probably also migration) between the Wachau and the world around it.

Now suppose, counter-factually, that the Wachau were and had always been completely cut-off from the world. What would the Wachau be like?

It seems unlikely that they would focus their production on these three things. They would probably have to grow much more corn and potatoes, pigs, chickens, and cows, a bigger variety of fruit and vegetables, instead of focusing on wine and apricots. Also if they could only attract tourists from within the Wachau region itself, they would probably spend much less on beautifying the place and on restaurants and hotels. In other words the Wachau would have to (try to) produce all the needs of its inhabitants itself.

The problem with this is that, as far as I understand it, the Wachau region is not super-well suited to grow all these things. Their “comparative advantage” (a general insight due to David Ricardo) is in growing wine and apricots. I am no agricultural expert but it seems that the hilly and stony and dry slopes of the Wachau valley are (at least relative to other areas in the world) almost ideally suited to produce these, while (at least relative to other areas in the world) not so well suited to produce potatoes and corn and the like.

Now imagine such a completely cut-off Wachau suddenly realizing that there is a bigger world around them and to consider a free-trade agreement with the outside world.

Thought number 1: My guess (based on Ricardo’s comparative advantage story) would be that the hypothetical cut-off Wachau would overall be a fairly poor place compared to the fairly wealthy real Wachau we indeed have.

Thought number 2: Nevertheless, not everyone would immediately benefit from such a free-trade agreement. Suppose you are a 50 year old highly specialized pig farmer in the hypothetical cut-off Wachau. What would the effect be for you of this free-trade agreement? Very probably pigs are much more efficiently produced in the outside world even if you are using the best technology to grow pigs available in the Wachau. This means pigs will be imported and you will be out of work. You could start growing wine, but this will probably not be immediately successful. It takes many years to prepare the soil for wine-growing. Also at this moment you have no idea of how to do this. After all you have a specialized education in growing pigs. You could start a hotel business. But again, what do you know about starting a hotel business? You have a specialized education in growing pigs. Perhaps you could send your children, if you have any, to get the right education (if you can afford it), something about wine-growing or tourism, and perhaps they will be able to make successful use of this new free trade agreement. It is possible, in fact, I think even likely, that in one or two generations almost everyone is better off in the new open Wachau than their parents or grandparents were in the old cut-off Wachau, but while we get there, life could be much tougher for some in the new open Wachau than it was in the old cut-off Wachau.

Thought number 3: Finally now suppose that we live in the real Wachau of nowadays. I have the impression that, probably rightly so, the people in the Wachau do not currently fear a sudden collapse of the free-trade agreement that they more or less currently have with (at least a large portion of) the outside world. But suppose, because of some political reasons, the Wachau suddenly became cut-off from the outside world. They would have to start growing corn, potatoes, pigs, and all these things again. I doubt they would be very good at it, at least not immediately. It would probably take them some time, perhaps one or two generations again, before they could grow pigs using the best technology as the imaginary 50 year old farmer of thought number 2 was able to do. What I am trying to say is that a high degree of specialization, while great if we do live in an open world with free trade, is somewhat risky if this free trade could potentially collapse.

 

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3 thoughts on “Three thoughts on free trade

  1. A nice example. I especially appreciate thought 3. I appreciate it, because it often is not emphasized enough, when the advantages of free trade are taught – the path dependent dependence on others implied by free trade. It is not rare that the scope for political measures and the credibility of their announcement in the first place are restricted by international competition. While libertarians may see that as a positive side effect, those struggling for sustainability and fairness sometimes may rather face it as an obstacle.
    While I appreciate Ricardo’s theory, I also consider the specific setting for which it holds (just like with regard to the neoclassical proceedings taught in international economics, Heckscher-Ohlin etc.). As thought 1 more or less is a necessary implication of thought 2, I focus on your words there: “that in one or two generations almost everyone is better off in the new open Wachau”. I think this strongly depends, on whether the children mentioned by you can afford a corresponding education and whether the income made as a wage-worker is fair enough to compete with the income of an owner – as your pig farmer was in the past.
    I do not want to go too much into detail, but keep it short and simple: the actual benefits of free trade and their distribution strongly depend on several other institutions, especially with regard to property rights. This does not neglect the theoretical and practical insights mentioned above, but as I would say about several contents taught in economics: we use simplifying assumptions, and we do it for good reason, but we have to say more about the thereby restricted validity of derived conclusions and the risk implied in case of their fail.

  2. Thanks for the free trade thoughts Chris.I’ll totally agree with Timon on Wachau depending heavily on whether the children can afford an education or if the income made as a wage-worker is fair enough to compete with the income of an owner.

  3. Pingback: Intro to Econ: Third Lecture – Efficiency, Fairness, Trade, and a bit about Free Trade Agreements | Graz Economics Blog

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