International trade makes it possible for us to produce and consume more goods and services at lower prices than would otherwise be possible. There are three reasons why this is so.
First, we benefit if we can acquire a product or service through trade more cheaply than when we produce it domestically. Resources differ substantially across countries. Goods that are costly to produce in one country may be economical to produce in another. For example, countries with warm, moist climates, such as Brazil and Columbia, find it advantageous to specialize in the production of coffee. People in Canada and Australia, where land is abundant and population sparse, tend to specialize in land-intensive products, such as wheat, feed grains, and beef. The citizens of Japan, where land is scarce and the labor force highly skilled, specialize in manufacturing cameras, cars, and electronic products. Trade will permit each trading partner to use more of their resources to produce and sell things they do well rather than having them tied up producing things at a high cost. As a result of this specialization and trade, total output increases and people in each country are able to achieve a higher standard of living than would otherwise be attainable.
Second, international trade allows domestic producers and consumers to benefit from economies of scale typical of many large operations. This point is particularly important for small countries like the Philippines. With international trade, domestic producers can operate on a larger scale and, therefore, achieve lower per-unit costs than would be possible if they were solely dependent on their domestic market. For example, trade makes it possible for textile manufacturers in countries like Costa Rica, Guatemala, Thailand, and Vietnam to enjoy the benefits of large-scale production. If they were unable to sell abroad, their unit costs would be much higher because their domestic textile markets are too small to support large, low-cost firms in this industry. With international trade, however, textile firms in these countries can produce and sell large quantities and compete effectively in the world market.
International trade also allows us to benefit by purchasing from large-scale producers abroad. Given the huge design and engineering costs of airplanes today, for example, no country has a domestic market large enough to permit even a single airplane manufacturer to fully realize the economies of large-scale production. With international trade, however, Boeing and Airbus can sell many more planes, each at a lower cost. As a result, consumers in every nation can fly in planes purchased economically from such large scale producers.
Third, international trade promotes competition in domestic markets and allows us to purchase a wider variety of goods at lower prices. Competition from abroad keeps domestic producers on their toes. It forces them to improve the quality of their products and keep costs down. At the same time, the variety of goods available from abroad provides us with a much greater array of choices than would be available without international trade.
Unfortunately, the government imposes regulations that restrain international trade. These can be tariffs (taxes on imported goods), quotas (limits on the amount imported), exchange rate controls (artificially holding down the value of the domestic currency to discourage imports and encourage exports), or bureaucratic regulations on importers or exporters. All such trade restrictions increase transaction costs and reduce the gains from exchange.
Trade restraints are like a military blockade that a nation imposes on its own people. Just like a blockade imposed by an enemy will harm a nation, imposing a blockade in the form of trade restrictions also harms the nation.
Non-economists often argue that import restrictions can create or protect jobs. However, it is the production of value that really matters, not jobs. If jobs were the key to high incomes, we could easily create as many as we wanted. All of us could work one day digging holes and filling them up the next day. We would all be employed, but we would also be exceedingly poor because such jobs would not generate goods and services that we value.
Import restrictions may appear to expand employment because the industries shielded by restraints may increase in size or at least remain steady. This does not mean, however, that the restrictions expand total employment. When the government erects tariffs, quotas, and other barriers limiting the ability of foreigners to sell in the Philippines, they are simultaneously reducing foreigners’ ability to buy from Filipinos. Our imports provide people in other countries with the purchasing power they need to buy our exports. If foreigners sell less to Filipinos, they will have fewer of the pesos required to buy from Filipinos. Thus, import restrictions will indirectly reduce exports. Output and employment in export industries will decline, offsetting any jobs “saved” in the protected industries.
Trade restrictions neither create nor destroy jobs; they reshuffle them. The restrictions artificially direct workers and other resources toward the production of things that we produce at a higher cost than others do. Output and employment shrink in areas where our resources are more productive—areas where our firms and people could compete successfully in the world market if it were not for the impact of the restrictions. Thus, labor and other resources are shifted away from areas where their productivity is high and moved into areas where it is low. Such policies have and will reduce both the output and income level of Filipinos.