Saturday, April 17, 2010

The mercantalist trap

I finally got the bright idea to see what "buy local" YouTube videos are out there and I came across a CNN interview of Chrystia Freeland of the Financial Times criticizing the movement.

She started off OK and spoke about how if every region adopts a "buy local" sentiment, international trade would cease like it did during the Great Depression. She also fairly labeled the view as one that sounds like a good idea on the surface but falls apart with a closer look.

Unfortunately, Freeland's argument sounded more like a mercantalist view by the end. Her big reason that protectionism and "buy local" are flawed was the following:

"The problem is if you have that same sort of process happening everywhere in the world then American companies, which are strong exporters themselves, will find themselves shut out of world markets."
While this is true, it's incomplete and hardly the largest flaw in the movement.

The big problem of the "buy local" scheme does not wait to manifest if every other region adopts it. It manifests instantly when consumers are robbed of competitive prices.

By buying only from local merchants, customers will pay higher prices. This is a result of both higher production costs and having to shop from a smaller, less competitive pool of merchants.

As Paul Krugman wrote

"... Imports, not exports, are the purpose of trade. That is, what a country gains from trade is the ability to import things it wants. Exports are not an objective in and of themselves: the need to export is a burden that a country must bear because its import suppliers are crass enough to demand payment."
In day to day life, exporting is going to work and importing is buying things. Which one do you want to do more of?

Freeland is focusing on American exports and forgetting about imports. I don't know enough about her other views to make a firm conclusion, but it sounds like she has some deeply-entrenched mercantalist tendencies that need to be teased out. She's on the right side of this issue and her criticism is technically accurate, but painfully incomplete.

The best part is that the person who posted the video called her argument "globalist propaganda" and accused Freeland of being bought off. If there is a big corporate-interest machine that wants to pay people to criticize the "buy local" movement, please contact me. I'm already doing it for free and I could use a new foreign-made car.

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