Christmas Gifts Made Far Away

by Pierre Lemieux

Diversity is diversity of something, not diversity of nothing.

The North Pole is far away–about 3,500 miles from Kansas City in the middle of the United States. But the international shipping event around this Christmas is not Santa carrying his toys to America, but the international imports that have been necessary for retailers to stock whatever consumers want. More generally, the astonishing phenomenon is the extraordinary complexity of trade and markets.

The Wall Street Journal reports a vibrant import season. Retailers build up their holiday inventories before Cyber Monday, which boosts imports before November. Then, inbound shipments in American ports normally slow down during that month. This year however, imports arriving in containers at the Los Angeles and Long Beach ports in November increased 8.4% over October and 10.6% from November of last year. Retailers–including online retailers–rapidly restocked lest they miss sales and lose customers as the holiday season advanced. Low ocean freight rates and increasing airfreight costs also played a role, as any emergency restocking would require expensive air shipping.

Trade is beautiful, as shown in the words of the author of the Wall Street Journal story, journalist Erica Phillips:

In Los Angeles and Long Beach, the ports teemed with activity last month. Trucks lined up outside busy marine terminals, and loaded-up freight trains sped away carrying shipping containers filled with merchandise to inland cities. Freight operators at the ports said they had never seen it so busy the week after Thanksgiving.

The November surge in imports is only one of the multitude of (international and domestic) trade events that will have occurred in America in 2017, but it illustrates the complexity of free markets and how trade contributes to the production of goods and the satisfaction of consumers–a point forcefully made by Friedrich Hayek in his last book, The Fatal Conceit: The Errors of Socialism. Traders and merchants move goods where they are most in demand, bringing needed resources to producers and needed goods to consumers. These middlemen were essential links in the evolution from primitive tribes to the abstract “extended order” of civilization, in which individuals are linked through a vast non-local network of specialization, division of labor, and mutually beneficial exchange. Aristotle and Plato, who witnessed the early benefits of far-away trade, completely missed the phenomenon and its economic and moral significance.

The theory of comparative advantage shows that it is the difference in the conditions of production and relative costs that makes specialization and trade profitable. An interesting part of Hayek’s argument for an extended order of cooperation is how diversity in a more general sense–diversity of cultures, ideas, and preferences–contributes to trade:

Civilization is so complex–and trade so productive–because the subjective worlds of the individuals living in the civilized world differ so much. Apparently paradoxically, diversity of individual purposes leads to a greater power to satisfy needs generally than does homogeneity, unanimity and control–and also paradoxically, this is so because diversity enables men to master and dispose of more information.

This offshoot of Hayek’s theory of information raises a host of interesting issues that we can’t discuss in a short Christmas post. But it is worth considering that embracing diversity does not mean that one should not be happy with one’s own ways. Diversity is diversity of something, not diversity of nothing. Acceptance of diversity does not require the rejection of one’s own preferences–although, of course, an individual should be free to change if he wants to. One should feel free to say “Merry Christmas” even when others prefer to say (or hear) “Happy Hannukah” or whatever and vice-versa.

In A Theory of Economic History, John Hicks (another Nobel economics prizewinner) explained how the development of trade was a crucial step in the rise of the market and prosperity. The period preceding the rise of the market was a “customary economy, made more or less hierarchical by a command element.” Reflecting on this primitive economy, Hicks wrote:

What it does not have, and what is going to be so important, is trade. There are farmers, and soldiers, and administrators, and craftsmen; but there are no traders, no one who specializes upon trade.

I would emphasize that it is specialization upon trade which is the beginning of the new world.

The trader was and remains mysterious, more than Santa himself. Hayek observes:

The ostracism of traders becomes even more understandable when it is remembered that merchant activity is indeed often cloaked in mystery. “The mysteries of the trades” meant that some gained from knowledge that others lacked, a knowledge the more mysterious in that it is often dealt with foreign–and perhaps even disgusting–customs, as well as unknown lands: lands of legend and rumour.

It is of course true that international trade has never been perfectly free (an understatement), even from the simple viewpoint of the citizen’s freedom to import what he wants into his own country. Freedom of domestic trade has seldom been perfect either. Yet, whatever freedom exists in international and domestic trade explains the level of civilization and prosperity that we have become used to. And we should endeavor to extend free trade, not to restrict it more.

International trade contributes mightily to the availability of affordable Christmas gifts. Consider China, the main bogeyman of today’s protectionists (it was Japan in the 1980s).

Because most of what Americans (like other advanced consumers) buy are services such as health, education, housing, and recreation, only 1.2% of their consumer expenditures go to producers in China. But the proportion is much higher in some categories of goods–notably furniture and household equipment, where 10.6% of American consumer expenditures go to Chinese producers, and clothing and shoes, where the proportion is 13.8% (according to researchers of the Federal Reserve Bank of San Francisco). These goods with a high proportion of imports from China have shown substantial price cuts. From January 2001 (the year when China became a member of the World Trade Organization) through November 2017, furniture and bedding prices decreased by 17% in America, appliance prices by 22%, and apparel prices by 4%; during the same period, the total Consumer Price Index increased by 41%.

Toys and sports equipment, another major category of imports from China, provide another illustration. The average price of toys in the U.S. has decreased by 65% since 2001.

Although international trade corresponds to no more than 15% of American GDP, there are many goods for which the pressure of foreign competition has pushed prices down. Consumers are better off when they purchase their goods from producers who have a comparative advantage, whether these producers are located in another town, another state, or another country.

Check where your Christmas gifts come from. Consider the vast and complex network of trade that has made their production possible and their prices affordable. And Merry Christmas!