I’m not an economist, but I recently came across a simple law of economics, first thought of by David Ricardo in 1817. It’s called Ricardo’s Law of Comparative Advantage and it really should be required reading for any citizen.
Suppose that in Britain it takes 100 units of labour to produce one unit of cloth and it takes 110 units of labour to produce one unit of wine.
In Portugal it takes 90 units of labour to produce one unit of cloth and 80 units of labour to produce one unit of wine.
Britain: cloth costs 100 units, wine costs 110 units
Portugal: cloth costs 90 units, wine costs 80 units
Now, if both countries produce 1 unit of cloth and wine, it will cost Britain 210 units of labour and Portugal 170 units.
But what if Britain produces only cloth and Portugal produces only wine and then they trade? Now it costs Britain just 200 units and Portugal just 160 units.
Specialisation and trade results in an efficiency gain for both trading partners.
That’s cool, but it gets even cooler. Portugal benefits from selling wine to Britain and importing cloth even though it can produce cloth cheaper itself.
Now suppose that the British government decides it wants to protect its wine industry. It taxes the cloth industry by 5 units and gives this to the wine industry as a subsidy. There is no longer any advantage for Britain to import wine from Portugal and so trade ceases. Both countries lose out.
Or suppose that Portugal wants to protect its cloth industry. It places an import tax on British cloth of 10 units. Now it costs Britain 110 units to produce cloth, and there is no trade advantage. Again, trade ceases and both countries lose out.
Ricardo framed his law in terms of countries, but you can equally think about how companies trade globally. In both cases, free trade creates wealth; taxes and subsidies destroy wealth.