Free trade is gambling

In previous article and Tables A - B of Appendix 23, it is assumed that if a country does not have advantage in one sector, production will be entirely eliminated, become zero. In real economy, there are reasons that some production could remain, even if a country is less competitive. This is shown in Table C of Appendix 23. We assume that A and B will keep 20% of production in the sectors they are less competitive.

The first three columns of Table C are the same with those in Table B. In sector 1, country A is more competitive. Instead of B's production being entirely eliminated and decrease to zero, 20% remains which is 11 billion. In sector 2, country B is more competitive. Likewise, country A keeps 20% of production, 3,4 billion. In real economy, the percentage of domestic production the less competitive country keeps varies, as it will be shown in Table B of Appendix 23B.

In Table A of Appendix 23, countries A and B are more competitive in six sectors each. A is more competitive in odd sectors while B is more competitive in even sectors. The sum of all odd sectors in both countries (A+B) is 487 billion while the sum of all even sectors is 313 billion. That is why country A benefits from free trade while country B is harmed. Their ratio is 487 / 313 = 1,56.

If it is more than that, country A benefits more and country B is harmed more. This can be seen in Tables B and C of Appendix 23. The first three columns in these two tables are the same. Country B is more competitive in sectors 2, 6, 10 while country A is more competitive in the rest. The sum of the sectors in both countries (A+B) where A is more competitive is 629 billion while for the three sectors where B is more competitive the sum is 171 billion.

The ratio is 629 / 171 = 3,68. That is why country A benefits even more than in Table A and country B is harmed even more. The ratio should be around 1, If both countries can benefit. We assume that both countries keep the same percentage of production in the sectors they are less competitive. In Tables A and B this is 0% and in Table C 20%. If the percentage varies, which is what happens in real economy, this should be included in the calculation as well.

In Table D of Appendix 23 we present a case where both countries could benefit. The sectors have different sizes than in the three previous tables. In this case, we assume that the countries will keep 15% of the production in the sectors they are less competitive. A is more competitive in odd sectors and B in even sectors. In sector 1, B keeps 15% of the production it had before free trade, which is 44 X 15% = 6,6 billion. Likewise country A keeps 23 X 1 5% = 3,5 billion in sector 2.

In country A, GDP increases 7,3% to 429,2 billion. In country B, GDP increases 1,5% to 406 billion. Increase of GDP for both countries is 4,4% or 35,3 billion. The aggregate size of odd sectors for both countries is 413 billion while for even it is 387 billion. Their ratio is 413 / 387 = 1,067. When the ratio is close to 1, both countries can benefit from specialization SO FAR but NOT EQUALLY. This is rare though. If it happens, is it a win - win situation?

Not necessarily because productivity can be improved as it will be explained in next article. In the examples we examined, country B should be able to predict that free trade is harmful. They could calculate the aggregate size of the sectors (A+B) in which they have advantage and compare it to the aggregate size of the sectors in which they do not have advantage. B should not get into a free trade agreement in Tables A, B and C but should get (into free trade) in Table D.

Obviously, the four tables in Appendix 23 are very unrealistic. In Table A of Appendix 23B, we add a third county C. A is more competitive in sectors 1, 4, 7, 10. B is more competitive in sectors 2, 5, 8, 11. C is more competitive in sectors 3, 6, 9, 12. Although all three countries are more competitive in equal number of sectors, A and B are harmed while C benefits. This happens because the aggregate size of the sectors for all three countries (A+B+C) in which each country is more competitive are not equal.

For A it is 348 billion, for B 353 billion and for C 499 billion. In country A, GDP decreases 7,1% to 371, billion. In country B, GDP decreases 5,8% to 376,8 billion. In country C, GDP increases 33,3% to 533,2 billion. For all three countries, the increase in GDP is 6,8% or 81,5 billion. Although there is an increase of production for all three countries due to specialization and each country is more competitive in four sectors, only C benefits while A and B are harmed.

So far we assumed that a) increase due to specialization is 10% b) countries keep a certain percentage of the sectors in which they less competitive. This percentage was  20% in Table C of Appendix 23, 15% in Table D of Appendix 23 and 0% in the rest of the Tables. In real economy, both of these numbers are different in different sectors and in different countries. Table B of Appendix 23B is more realistic. The first three columns are the same like in Table A.

Countries A, B and C are more competitive in the same sectors, like in Table A. But the increase in productivity due to specialization varies. Also the percentage that they can keep in the sectors they are less competitive also varies. In country A, GDP decreases 5,5% to 378 billion. In country B, GDP decreases 4% to 384 billion. In country C, GDP increases 24,3% to 497 billion. In all three countries GDP increases 4,9% or 59 billion.

In Tables A and B of Appendix 23B, countries A and B may be able to estimate that they will be harmed and decide not to get into free trade. In real economy, there are hundreds of sectors, many countries with different GDP's. In EU there are twenty seven countries. It is impossible to calculate if free trade is harmful of beneficial. FREE TRADE is like ROLLING the DICE or BETTING in ROULLETE. To a large extent it is RANDOM if free trade will be HARMFUL or BENEFICIAL. Countries that are more competitive have better chances to benefit while less competitive countries have fewer chances but it is gambling for both categories.

One factor is competitiveness. This is determined by a) productivity b) price level. But this is not all. Competitiveness has to be examined in each sector and relatively to all the countries that are in the free trade group. The size of the sectors is also important. The size of the different sectors varies considerably in the same country. Also the size of the same sectors varies substantially in different countries.

Two other factors have an effect a) the percentage increase due to specialization and b) the percentage of the production that the less competitive countries keep. These vary significantly according to sector and country. It is IMPOSSIBLE to PREDICT if FREE TRADE is HARMFULL or BENEFICIAL. FREE TRADE is GAMPLING with people's lives. This is NOT a SERIOUS WAY to CONDUCT ECONOMIC POLICY. NWO - EU FANATICS are SILLY and IGNORANT people.