Positive Externalities in the Double Thank-

You Moment
By Abhyuday Joshi and Bhavya Yadav

When was the last time you went to a coffee shop? What happens when you receive the order?
Most probably the receptionist will thank you for visiting and you will respond with another
thank you for receiving your favorite coffee. As normal as this conversation might sound, it has
great relevance in our lives. Millions of such trade happens on a daily basis, and billions of such
thank-you’s are exchanged. This double thank you moment illustrates one of the most significant
characteristics of trade, i.e. trade is a two-way process that benefits both sides. Contrary to
popular opinion, any and every kind of trade is a positive sum game because the self-interests of
both the parties involved ensure it benefits both of them. On a macro level, trade increases
production in an economy, and in turn global wealth. Yet, can trade, in general, and international
trade, in particular, help to solve the modern-age problems of society? Or is the double thank-
you moment only restricted to the personal gains of the two parties involved?

Sustainable Development Goals

The Sustainable Development Goals (SDGs), adopted by the United Nations, are a universal call
to action to end poverty, protect the planet, and ensure prosperity for all. Comprising 17
interconnected goals, the SDGs address a wide range of global challenges. Achieving the SDGs
requires collective efforts and innovative solutions to promote economic growth, social
inclusion, and environmental stewardship, leaving no one behind in the pursuit of a better world.

Trade and Sustainability

An argument against increasing international trade that is often given is that MNCs are on a hunt
for countries with flexible environmental norms to gain a comparative advantage in terms of
costs. This was countered by economist Tim Harford when he wrote in his book The Undercover
Economist,
“Environmental regulations are not a major cost; labor is. If American environmental standards
are really so strict, why do the most pollution-intensive American firms spend only 2 percent of
their revenues on dealing with pollution? Most spend much less. When companies move abroad
they are seeking cheap labor, not a pollution haven. And companies do not pollute for fun; the
latest manufacturing techniques are often cheaper and less polluting at the same time. Energy
efficiency, for instance, saves money and reduces pollution.”

Moreover, countries like China, Mexico, and Brazil show an interesting pattern of reduction in
air pollution with increasing Foreign Direct Investment (FDI) in the economy (2001, Wheeler).
As international borders open up, greener and cleaner technology moves from developed nations
into the developing world. Looking around, one might observe how their vehicles, ACs, and
other polluting machines are getting more efficient with time.
Hence, promoting international trade solves SDG 7: Affordable and Clean Energy, SDG 11:
Sustainable Cities and Communities, SDG 13: Climate Action, SDG 14: Life in Water, and SDG
15: Life on land.

Flawed Perception
Discussions over the problems of developing nations are often misguided. More often than not
we take poverty to be the same as inequality. While inequality in itself is a major concern, we
should not consider it as an issue for developing nations. The foremost concern of a developing
nation should be to ensure every resident can afford food, clothing, and shelter.

To illustrate this, let us think of a scenario where there is a millionaire and a billionaire in the
same room. Would anyone complain about the inequality? After that, a beggar enters the room
and now everyone cares about the inequality. Yet, what happens when inequality diminishes and
everyone becomes equally poor?

Most of the problems in the developing world stem from poverty, however, we tend to conflate it
with inequality. Thus, we are firing shots in the wrong direction most of the time.

What’s the solution? We have already established how trade benefits both the parties engaged in
it. Hence, free markets result in economic growth. The same could also be seen in the Indian
scenario where the average annual growth rate was just 3.5% in the first three decades of
independence when the country followed a Soviet-style economy, and it jumped to 7% post-1991
liberalization1. But, good economic growth gives rise to income inequality. As Ray Dalio puts it,
“Wealth gaps are self-reinforcing because rich people use their greater resources to expand their
power. They also influence the political system to their advantage… to develop between the rich
‘haves’ and the poor ‘have-nots’.”
At the same time, economic growth also leads to a faster reduction in poverty. Poverty declined
by 1.36 percentage points per annum after 1991, compared to that of 0.44 percentage points per
annum prior to 19912.

This is not to say that SDG 1: No Poverty, contradicts SDG 10: Reduced Inequalities. This is
also not to say that SDG 1 is of greater importance than SDG 10. A part of this answer lies in the
fact that inequality means much more than just income inequality which we have discussed in
this section. Even when talking about income inequality, we have emphasized that it is not an
issue for developing nations. However, the moral imperative changes to focusing on inequality
as a nation becomes wealthier.
Neighbors are Important!
Big trade deals always make it to the news. While these trade deals have their own importance,
trade with neighbors is essential for a nation. As Ruchir Sharma writes in The Ten Rules of
Successful Nations,
“Rising intraregional trade was one of the main drivers of the long economic miracles in Japan,
Taiwan, South Korea, and lately China, all of which proved willing to drop old wartime
animosities to cut trade deals.”
India has lacked big time on this front. In 2019-20, India’s exports to Togo, a small country in
Africa, were more than Myanmar, Afghanistan, or Pakistan3. As Sharma points out,
“Isolation, lawlessness, and the lingering bitterness produced by regional wars have made it
difficult for India, Pakistan, Bangladesh, and Sri Lanka to open borders, and so far, no leader has
stepped forward to ease hostilities.”

While political rivalries exist, an important question is whether it should act as a roadblock to
cross-border trade. We have the examples of China dropping its age-old animosity as discussed
above, and Britain that traded with almost all its battleground rivals. We have the opinion that
the economic prosperity of citizens should take priority over political rivalry. This would not
only help in achieving SDG 8: Decent Work and Economic Growth, but also SDG 17:
Partnerships for the Goals.

Conclusion
We started this discussion by establishing the fact that trade brings about the double thank-you
moment which benefits both the parties. But, as we move forward, we see trade helping society
at large. The accomplishment of SDGs along with a logical and moral approach is a testimony to
that. Hence, a singular trade when seen from a macro-level perspective creates what in
economics is called a positive externality.
References
1. Twenty-Five years of Indian economic reform. (2022, June 18). Cato Institute.
https://www.cato.org/policy-analysis/twenty-five-years-indian-economic-reform
2. Dev, S. M. (2016, July 25). Poverty and inequality after reforms | Mint. Mint.
https://www.livemint.com/Opinion/Mr2DS2Qv4ika8zEuScxN1L/Poverty-and-inequality-after-
reforms.html
3. Kaul, V. (2020, August 11). India’s trade with neighbours has largely been flat | Mint. Mint.
https://www.livemint.com/news/india/india-s-trade-with-neighbours-has-largely-been-flat-
11597158241853.html