Trade versus localization

Photo: Philip Brewer

Localization--eating locally grown foods and buying locally produced goods--has become trendy just lately. For the past twenty years, though, globalization has been the dominate force. The tension between trade and localization is not a new one.

The advantages of trade are obvious. Let's say you can design a website in four hours, but it would take you six hours to make a wooden box. Meanwhile, your neighbor is a cabinet maker, for whom the amount of labor involved would be reversed. Clearly, you both come out ahead if you make two websites, your neighbor to makes two boxes, and then you work out some sort of exchange.

In this case--if you can do one thing better and your counterpart can do some other thing better (if each of you has an "absolute advantage" in some task)--the advantages of trade are intuitive. It turns out though, that even if one of you is better at everything, you still both come out ahead if you engage in trade.

Let's say your neighbor is a polymath, who is not only a master cabinet maker, but can also design a web site as good as your best in half the time. If his fine wooden boxes sell for hundreds of dollars though, then it would still make sense for him to buy his website from you, because even if he could make a website in two hours to your four, he could spend those hours making his boxes and then sell them for more than it would cost to buy a website from you.

(This idea, called the theory of "comparative advantage," is credited to David Ricardo who described it in an important economics book in 1817.)

Economists, though, have always had trouble advancing the case for trade in the face the natural preference for people to prefer to trade with their neighbors rather than with strangers.

At times the tendency to buy local has been very strong. For example, small towns and rural communities in 19th century United States usually had only a single cash crop. The result was that the community received the whole year's cash income all at once at harvest time. That money could support any number of local purchases--going to the cobbler for shoes, then to the tanner for shoe leather, then to the rancher for hides to tan, then to the farmer for cattle feed, and so on. But eventually, someone would buy something from out of town--the cobbler would buy new needles, or the farmer would buy seed--and the money would leave the local economy. Since the community had nothing to sell beyond their one cash crop, every economic transaction with someone outside the economy drained cash out of the community.

The tension between trade on the one hand and localization on the other, then, is fundamental--there's no wrong side.

The economists point out that trade makes everyone better off--but what they mean is that trade raises the average standard of living. An individual who used to make things needed in the local market, but can't compete with lower-cost producers, will suffer--and all economists can suggest is that this calls for a "period of adjustment," during which the uncompetitive producers adapt.

The localizers, for their part, point out that being "better off" is a notion that goes beyond simply having the highest possible standard of living, and includes things like doing work that you find satisfying and having fulfilling relationships with your neighbors.

Because the tension is fundamental, there's no solution. Lower-cost products will continue to draw buyers, putting higher-cost producers out of business. Activists of many different sorts will continue to push for localization.

The main tool of the localizers is moral suasion--urging people to "buy american" or "buy union" or to "eat a 100-mile diet," often expressed as slogans (The American diet is too important to be outsourced!). Their secondary tool is government regulation, but that's been hard to come by these past twenty years.

After years of being inclined toward the free trade side of things, I've found myself shifting to more of a middle position. This is partly because I see fuel becoming more expensive. More expensive transportation will take away some of the advantage of low-cost but distant producers, and it would be nice if we could preserve some of our local production so as to have something to build on when it is no longer cost-effective to ship lettuce from California or broccoli from Argentina.

The advantage of trade is simple: higher standards of living, by buying everything from the lowest-cost producer. The advantages of localization are more complex: local production makes the local economy more diverse and more stable; it lets people (both buyers and sellers) be more in tune with nature, growing and eating seasonal foods; it lets people do more of what they love, and less of what global markets will pay the most for.

Neither side will win; the pendulum always swings back.

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Guest's picture

Something not touched on in this post is that there are frequently more tangible benefits to localization. Consider food production specifically:

There are several non-trivial, but also non-monetary costs associated with centralized food production. (1) Shipping food from a centralized location can create a massive carbon footprint . And (2) factory farming methods are a proven drain on the land being farmed and on land downstream.

Of course, your final analysis is the only reasonable one. We'll continue to tend towards methods that utilize centralized specialization in more and more benign ways while distributing the rest of the work.

Myscha Theriault's picture

Interesting. I read a book once (since it's in storage I can't reference the title, sorry) that focused on the trade barter thing in relation to business and diversifying what you are actually able to trade a bit. Basically, it's what you were saying above only with the added element of not necessarily shying away from a surplus of a particular item that someone else wants to use as barter for your services. While you wouldn't want to get too out of hand with it (and you want to make sure what you receive is transferrable) the basic idea is that if you have several items of a particular kind you can still use those goods / services to expand what you are able to trade with other businesses and service providers. For example, if you need graphics services and you provide shoe repair the graphics person may not need shoe repair. But he may need any number of things you have on hand, like certificates for service from the cleaning company, for example. That's an oversimplification, but it's basically one of the main points of the book. Another main push was to always barter at the full cash value of your services / goods, not the overhead cost. You'll get a higher value of goods to trade off that way.

As usual, great post.

Guest's picture

I always understood the 'eat local' campaigns weren't as much about keeping money in the town, as they were about thinking about the intangibles that might make a product more valuable. The tomato from the neighbor tastes better than the one shipped from chile. By following local seasons and surpluses, and 'cutting out the middle man' you were offsetting the cost of the superior product.

I think automobiles may be the best illustration of this point. Quality and human rights issues aren't cluttering up that area as much as with food or clothes.