Manufacturing Advantages

It’s no great mystery why we would import products that are made more cheaply or efficiently in another country. If another country can produce a larger quantity of the product at a lower cost and fewer workers then we can buy it for a cheaper price than the cost of domestic production. Why then do we also import products that we could make more efficiently domestically? The answer is primarily comparative advantage and consumer choice.

When a country–not accounting for barriers to trade such as shipping costs and tariffs–can produce a product more efficiently than another country, they have a competitive advantage. This is a concept coined by Adam Smith in his book The Wealth of Nations where he argues that the wealth of an economy should be measured by the goods and services it produces.

If Country A has an advantage for Product #1 over Country B, common logic suggests that Country A should produce more of Product #1 than Country B. But that industry doesn’t exist in a vacuum. To invest in the industry of Product #1 means you invest less into Product #2. This is where we consider comparative advantage.

Even though Country A has an advantage for Product #1, they may also have an advantage for Product #2 but at a greater margin. This means they have a comparative advantage for Product #2 and could produce more of Product #2 if they invest all their resources into Product #2. This is a reason Country A would then import Product #1 from Country B even though they could technically produce it more efficiently domestically. In this scenario, Product #1 will be produced at a lower efficiency by Country B than if Country A produced it, but that deficit is more than made up by the increased efficiency of Country A producing Product #2.

If Country A were to have an advantage for Product #1 while Country B had an advantage for Product #2, this would be a simpler scenario in which Country A could invest into Product #1 and import Product #2 from Country B so that both countries are producing what the other country cannot effectively produce domestically.

However, countries don’t typically have a monopoly on types of products, despite the probability that it would be most efficient for each country to singularly produce the products that they specialize in. This is because consumers want choices.

Japanese companies’ cars are exceedingly popular in the U.S. and are manufactured at greater volumes overseas in countries like the U.S. than in Japan. This is despite numerous American-based companies offering alternative products, but consumers like being able to choose between Chevrolet and Nissan and the various other brands of cars.