Saturday, March 27, 2010

Trade Isn't A Zero Sum Game

Jeremy Warner at The Telegraph notes that the economic forecast of Chancellor of the Exchequer (British finance minister) Alistair Darling assumes that net exports will increase (or in other words that the British trade deficit will decline).

As previous forecasts of increased British net exports have failed to materialize, there are good reasons to be skeptical of this forecast. Warner further notes the difference between now and the period following the 1992 drop in the value of the pound:

"The difference is that following the recession of the early 1990s, there was a lot more external demand than there is this time around, when there seems to be a real possibility of the eurozone, by far Britain’s biggest trading partner, stagnating entirely. Almost all countries are hoping to export their way out of trouble this time around, which is quite plainly a logical impossibility."

Warner is right to note that it is a logical impossibility for all countries to increase net exports/strengthen their trade balances. On a global scale, net exports or the balance of trade is a zero sum game. If one country sees an increase, another must by necessity see an equal decrease.

But at the same time, it should be noted that increased exports, or more accurately increased trade, is in fact a way out of trouble. While it can't alone solve all problems, increased trade will promote higher real income in all countries, as it allows for increased specialization something which in turn will allow us to reap the benefits of the principle of comparative advantage.

Removing trade barriers is thus a good way of promoting economic recovery in all countries, regardless of whether or not net exports would increase or decrease in certain countries.

While the balance of trade is a zero sum game, trade certainly isn't.