All partners reap the rewards
Specialization means focusing on what each country produces most efficiently and trading for the rest. And because specialization is more efficient, it creates more wealth than if each country tried to do it all on its own.
International trade is no different from domestic specialization and internal trade—few of us grow our own food or do our own dry cleaning. Instead, we specialize and trade.
On a global scale, the benefits of combining specialization with trade can be enormous:
- Being able to sell products in other countries allows companies to produce on a much larger scale. In a smaller market such as Canada, some goods or services might be too expensive to produce because high fixed costs make the average cost of each unit too high. But if a company can sell to other countries, it can make more units, so the average cost per unit goes down.
- With open markets, companies invest in new technologies to meet the increased demand for their products. This creates economic growth and wealth.
- The efficiency gains from international trade make consumers better off too: they get better quality goods, at lower prices. Trade also leads to more choice for consumers.
- Freer trade means the production of a good can be spread across many companies and in different countries. Companies can further specialize by developing their competitive advantage in a part of a good rather than the whole good—producing just the brake pad in a car, for example—and relying on other companies or other countries to produce the rest. This type of production creates a supply chain that drives down both costs and prices.
Trade protectionism makes everyone worse off
While freer trade—in both exports and imports—makes us better off, the opposite is also true. Barriers to free trade, such as tariffs, have a negative impact on our economic well-being.
Tariffs are normally paid at the border by the company importing the good or service, not the exporter. It’s the buyer, not the seller, who gets billed.
The buyer then has the option of passing part of that cost on to customers by raising prices, or sharing the increase with the exporting company.
- Example: American drink can manufacturers buy aluminum from Canadian producers. The manufacturer (the aluminum importer) pays the tariff, which increases the cost to make cans. So, consumers in the United States would likely pay more for their drinks.
Who ultimately pays, and how much, is normally determined by the availability of a close substitute at a lower price. But, in most cases, the citizens of the country imposing the tariff find themselves paying more.
Freer trade has made countries more interconnected and has allowed businesses to take advantage of specialized supply chains. Reversing the trend by imposing tariffs disrupts this global market and eliminates many of the benefits.
