Logically enough, the majority of Logistics Viewpoints (LV) readers work in the logistics field. And LV is a logistics industry blog, not a political op-ed site. However, I believe the issue of global trade is both a core logistics topic and a hot political one. Furthermore, the presidential candidates from both major parties have been denouncing international trade as of late. I actually believe both candidates are supporters of free trade, whether it be domestic or international. But that isn’t obvious given some of the recent rhetoric. So I thought it important to briefly restate the benefits of trade – both domestic and international – given the negative press that it has been receiving and its importance to the logistics industry.
Trade Enables Productivity, Leading to Prosperity
Productivity improvements are considered a primary driver of economic prosperity. Centuries ago Adam Smith and David Ricardo discussed productivity, resource allocation theories, and the concepts of absolute and comparative advantage. The theories explain the mutual benefits from a person, organization, or country, doing what it can do best, then trading with others that have a different core competency. More recently, Michael Porter explained in the Competitive Advantage of Nations that national competitive advantages are determined by the dynamic interaction of a number of determinants that allow a region, national, or set of organizations to produce a good or service superior to that offered by others. Key to Porter’s model is the importance of specialization, investment, and continuous improvement. These factors improve quality and efficiency, and I would also argue they lead to greater variety and more purchasing options – ultimately benefiting consumers with the spoils of progress.
Specialization, Expertise, and Economies of Scale
Specialization allows for a concentration of focus that contributes to expertise. Add competition among experts and this can lead to continuous improvements in a product or service. When a nation specializes and trades, it is likely to obtain increased demand for its superior products or services. Increased sales volume makes capital investments both feasible and increasingly profitable. Investments serve as a fixed cost that reduces incremental costs for each unit. Once these investments are made, the producer increases the potential for total profit, but also becomes more reliant upon high levels of production to pay for the initial investments. Ultimately, this reliance on high volumes reduces price to the consumer even further.
Logistics, Globalization, and Specialization
Logistics is a critical function to global trade and our economy as a whole. In fact, I wrote a Logistics Viewpoint article that discusses economic research crediting modern inventory management practices with modern-day improvements in macroeconomic stability. Similarly, the efficiency of modern transportation allows low price producers to retain their cost advantages even when including transportation and other elements of total landed cost. Sophisticated transportation networks allow consumers to purchase crops from around the world. Fifty years ago it was a rare treat to get an orange for Christmas. US supermarkets now sell apples from the southern hemisphere each spring and domestic apples in the fall. Logistics supports globalization and globalization increases choices. I believe that politicians and the average person understand the benefits of global trade. We just need to remind ourselves of trade’s benefits every once in a while.