Imports—Where to Get Potatoes?

ENL's theoretical rationale for trade is established, but it is too abstract to handle specifics. What the framework also requires are analytical tools for answering concrete trade questions.

For example, as a society we might decide that potatoes should be added to our diets for health reasons. The question thus arises: where should we get them? Should these potatoes be locally grown, imported, or some combination of the two?

To address this question in its simplest form, we can assume that the potential value of local and imported potatoes is the same. Thus, whether we in British Columbia grow our potatoes in the Fraser Valley or truck them in from Idaho, a 10-lb. bag of potatoes will result in equal health benefits. What this implies is that our choice can be based entirely on comparative input costs.

The first input cost to be considered is obviously that of producing the potatoes locally. But what is the second input cost?

A little thought will establish that this is the input cost of producing the lowest-cost export that allows us to pay for the imported potatoes. See the following figure.

 Where to get potatoes The input cost of the export (ICX) is lower than the input cost of locally-produced potatoes until Q1. All potatoes up to this quantity should therefore be imported. After this point, potatoes should be both imported and locally grown.

The graph uses straight lines for clarity and simplicity. The top line, labeled IC, is for the locally-grown potatoes. The bottom input cost line, labeled ICx, is for the lowest-cost export.

As you can see, the input cost for the export is lower than for local potatoes until the export quantity reaches Q1. Therefore, all potatoes up to this point should be imported. If our society's consumption of potatoes is Q1 or less, it would be irrational to grow any of the potatoes locally.

Let us assume, however, that our consumption exceeds Q1. At Q2, the export's input cost exceeds that of local potatoes. The latter have therefore become the low-cost choice, and it makes sense to switch from exports to local.

Eventually, local potatoes will again exceed imports in cost, and we should switch back.

Briefly stated, once the export's input cost rises above the input cost of local potatoes, we should consume a mix of local and imported potatoes. The relative slopes of the input cost lines will determine exactly what this mix should be.

This approach is powerful because it allows us to simplify our thinking about basic trade questions. When deciding where to obtain a desired output, we should focus our attention on the two costs just discussed.

Unless we have concerns that are beyond ENL's analytical purview — local autonomy, resilience, etc. — we should choose the source that allows us to minimize input cost. This will help maximize the economy's gains and drive both its allocation and economic efficiencies towards 100%.

There is one point to add. The above method assumes that our society has exhausted all possible gains from the exported output, but that we have not yet reached its ecological limit. That is, we are producing at the output's optimum quantity, and have ecological space for further production.

We also need to examine the case where, due to coercive trade relations, a society exports an output before its gains have been fully exhausted in the local region.