In any discussion on the much lamented British car industry the underlying theme seems to be that the country would be much better off if we all bought British. While no one should criticise such a proud sentiment it is, nevertheless, rather out of step with economic reality. In fact, this kind of mercantilist, beggar-thy-neighbour approach has not been in vogue for nearly 200 years. It was then that David Ricardo realised that international trade brought mutual benefits due to comparative advantage and the mechanism of comparative advantage.
This theory said that even if a country, which we will call Capitalania, could produce everything by itself it was still much more beneficial to specialise in making a product in which it was comparatively talented; lets call it product A. So Capitalania shifts the emphasis of production to Product A, resulting in a surplus of Product A but a shortage in the product from which it has moved resources, this being Product B. International trade then steps in to fill the gap. Another country, lets call it Labourlon, might find that it is uncompetitive with Capitalania on both Products A and B, but despite this it is comparatively better at producing B rather than A. Since Capitalania has opted to focus on Product A, it can make a trade with Labourlon exchanging Product A for B. By both countries focusing resources on those areas where they were most efficient the two can discover a mutual benefit.
In the real world a good example would be the
The problem is that it is much easier to believe the emotive theory that buying foreign destroys the home industry. Politicians play on this and get votes by claiming to protect domestic industry. Many commentators point sadly at the decline of British industry and the apparent willingness of the natives to run around in foreign cars. If this were truly symbolic of the nation’s decline then with the loss of our once great heavy industries the country really should be bankrupt by now. Yet for every Brit complaining about BMWs there is a German complaining about the dominance of the British financial industry. Not only does this international exchange benefit the
The advantages of international trade are also expressed in the reverse flow of investment funds by way of foreign exchange. When you change money abroad, do you ever wonder what the bank does with your pounds sterling? It can't use the money locally, obviously, but it can sell the pounds to someone who wants to buy something from
Of course, international trade gets a particularly bad press when it causes the loss of a much loved household name. Most recently there has been another round of hand-wringing over the sale of MG Rover to the two Chinese auto makers, SAIC and NAC. It was taken as yet another example of the total dominance of
There is, though, a good reason for supporting local industry in the short term: that is to avoid the costs of restructuring. The real economic problem with the loss of MG Rover is that for a period there are lots of people out of work and retraining for new careers. If the country had to exit industries every few years it would cost a bundle as resources were shifted from the old industry to the new one. Much better build flexibility into the economy and efficiently manage the changeovers when they inevitably occur. Fortunately this is mostly what happened with MG Rover due to its steady decline, the final crash aside, although the proposed deal from Alchemy in 2000 might have managed it a little better.
So, these are the reasons why you should be proud to buy foreign:
1. It supports other sectors of British industry where the country does enjoy a comparative advantage.
2. It helps
And these are the reasons you should be proud to buy British:
1. It supports an industry that enjoys a comparative advantage
2. It avoids expensive restructuring costs
In other words, support