This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the July/August 2020 issue.
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Local or Far Away?
Economists tend to assume that the sole goal of our economic activity is to get things as cheaply possible. But outside the narrow world of economics, people care about a lot of other things.
Dear Dr. Dollar:
I have always been skeptical of the argument that it is better for economies to specialize, importing what they cannot produce as cheaply as someone else. Doesn’t the Covid-19 pandemic show that it’s not a good way to obtain medical supplies and equipment? And what about food and energy? Wouldn’t there be more resilience in the economy and in the society it is supposed to support if there were a higher degree of local self-reliance coupled with selective regional or national specialization? —Katharine Rylaarsdam, Baltimore, MD
Here’s the problem—and it is a general problem among economists—economists tend to assume that the sole goal of our economic activity is to get things as cheaply possible. It follows automatically, then, that if things from far away can be obtained more cheaply than they can be obtained locally, they should be obtained from far away.
The as-cheaply-as-possible outlook of economists has provided support for the interests of many firms, which profit from using labor and obtaining raw materials from wherever they are least expensive. Low-cost supplies mean higher profits.
But outside the narrow world of economists and away from firms’ balance sheets, getting things as cheaply as possible is not people’s sole goal in their economic activity. We also care about, for example, security, resilience, fairness, and environmental sustainability.
Trade-related Environmental Damage in the Netherlands
In preparing this article, I corresponded with a friend, David Sogge, in the Netherlands. Here are some further comments that David offered:
“With the airplane and truck freight involved in re-export via the distribution hub [of the Netherlands], but especially with the production and transport of the stuff produced on home ground, the carbon requirements of flowers, bulbs, and other ‘ornamentals’ are clearly substantial. A carbon tax would have a major impact on the price. Dutch greenhouses are heated year-round by gas, most of which is pumped from beneath the North Sea, in Dutch waters.
“The Dutch ‘ornamentals’ industry also has terrible consequences for the quality of underground and surface water, thanks to the intensive use of liquid manure and agrichemicals. Cleaning that up no doubt also brings costs in carbon in the longer run. But now that you’ve got me started on the environmental effects of greenhouse agriculture (flowers and vegetables) there’s the awful light pollution of those gas-warmed/illuminated greenhouses. At night in much of the West of the Netherlands, you can see barely any stars. Then biodiversity has also taken a big hit. Insect populations, and the birds that lived on them, have declined here dramatically in the past three decades, largely thanks to intensive (and much more economically concentrated) agribusiness.”
Yes, it is nice to get things cheaply. But do we care that cheap goods often come from areas—in southern U.S. states, Bangladesh, or China—where repressive labor regulations keep wages low? Or from factories just across the border in Mexico, where health-damaging pollution is rampant?
And, as the Covid-19 crisis has brought out, by the United States obtaining much of our medical equipment from far away, we have undermined the resilience of our health care system—which, of course, means more loss of life. (There is something a bit grotesque in advocates of free trade arguing that an exception should be made for “national security,” but not mentioning health care equipment. “People security” does not seem to merit the same exception.)
Part of the reliance on goods from distant countries is a result of the fact that the real cost of transporting those goods to consumers is higher than the price that those consumers pay out of pocket. For example, when fresh flowers are flown from Colombia to the U.S. market or from Kenya to the European market, the cost of environmental damage from the planes’ use of fossil fuel doesn’t show up in the market price. Many of the flowers destined for Europe go through the Netherlands, which is a hub for distribution to the rest of Europe—which results in more fossil fuel use.
And the Netherlands also produces a large amount of flowers for export. While much of the Netherlands’ production is in open fields (tulips), there is also production of higher priced flowers (e.g., roses, lilies, chrysanthemums) in greenhouses, which use heat and light from fossil fuels. Again, there is no accounting for these environmental costs in the price of the flowers. (And there is also the light pollution from the greenhouses. A friend in the Netherlands reports, “At night in much of the West of the Netherlands, you can see barely any stars.” See sidebar for more.)
If the prices of flowers and other goods transported over long distances included the cost of the environmental damage generated by that transportation, the prices would be higher and there would be less long-distance transport. Complex international supply chains would be reduced. And reliance on local sources of supply would increase. A carbon tax and regulations that protect the environment would also help.
Regardless of the problems of “free trade” (minimal taxes and regulations) and the consequent reliance on distant sources of supply, it should also be recognized that there are some very positive results of international commerce. International exchange in the arts, sciences, and intellectual pursuits generally can be highly beneficial. Also, many fruits and vegetables cannot be grown, for example, in New England. We should not expect to get them at low prices because of the repression of workers or because environmental costs are ignored, but it would be nice to be able to get them; and wheat is probably best produced on the Great Plains. As to energy, if we are going to move our energy system to solar and wind power, those of us in the Northeast will need a way to get energy from the Southwest (where the sun shines the most) and the Great Plains (where the wind blows the most). (See “Is a Rapid Green-Energy Switch Prohibitively Costly?” in D&S March/April 2020.)
International commerce based only on getting goods as cheaply as possible should not define our economic policies. But this does not mean a retreat into nationalism and isolation. The need is to regulate our commerce in ways that serve the large set of economic goals to which most people aspire, including security, resilience, fairness, and environmental sustainability.
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