One Man's Trash is Another Man's Treasure

Adam Smith reminds us in The Wealth of Nations that “a jack of all trades will never be rich.” Specialization allows us to develop comparative advantage in the production of goods and services. Once we have a comparative advantage in production, we can exchange our goods and benefit from trading with other people who have developed their own comparative advantages. David Ricardo expanded on Smith's ideas and explained that there is mutual benefits from trade even if one country is more competitive in every area than its trading counterpart and that a nation should concentrate resources only in industries where it has a comparative advantage.*

Aside from comparative advantage in production, there is another reason why nations trade. Suppose neither the US nor China had an absolute or relative advantage at chicken production, would it make sense for them to trade?  Counter-intuitively, the answer is yes. 


The reason both China and the US stand to benefit from trade, even though they have no advantage (absolute or comparative) in chicken production, is because both countries have comparatively different preferences.  Suppose that Americans prefer to eat white meat chicken breasts and Chinese prefer to eat chicken feet.  From the American perspective, chicken feet are a byproduct of the chicken production process, without access to the international chicken market American farmers would need to sell chicken feet to local buyers who value chicken feet at a lower value than the Chinese.  Barriers to trade would make the American chicken farmers poorer than they otherwise would be if they were allowed to sell their chicken feet to the Chinese. Conversely, Chinese people prefer not to eat chicken breasts because they view them as less delicious than dark meat and less fun to eat because they lack bones.  Without access to international chicken markets, Chinese farmers would need to sell their chicken breasts to local buyers who would pay less than the Americans.  Therefore, if the Americans trade chicken breasts and the Chinese trade chicken feet, even if production costs were identical, gains from trade would occur.

Ricardian trade theory assumes homogeneous preferences.  However, traders often have heterogeneous preferences.  Heterogeneous preferences encourage trade because it may be possible to satisfy both traders varying preferences even if they have the same production costs. 

One way for Americans to explore trade driven by heterogeneous preferences is to go to a grocery store in Shanghai.  While walking through the store, you will likely see items that surprise you including but not limited to piles of fish heads, rows of pigs feet, and boxes of chicken hearts.  American grocers don't stock these items because there is no demand for them, but in China, they are all considered delicacies. I have limited experience outside of China and America, but I suspect that preferences across the world vary widely, resulting in trade. 

To the extent that there may be information frictions between countries, arbitrage opportunities based on heterogenous preferences may exist.  As the saying goes, one man's trash is another man's treasure.


* David Ricardo's Wikipedia