Drive the Fred Hartman Bridge over the Houston Ship Channel and look down. Tankers, barges, tank farms, cracking towers, rail cars by the hundred. A lot of what is made here leaves on a ship. Some of it ends up as plastic film in Asia, car parts in Europe or pipe in South America.
Why here? Why does a stretch of Texas coast make things for the whole world? The best answer comes from an idea that is more than 200 years old.
Ricardo's wine and cloth
In 1817 a British economist named David Ricardo published a book called On the Principles of Political Economy and Taxation. In it he used a simple example with two countries and two goods.
In his example, Portugal could make both wine and cloth with less work than England could. Making a certain amount of cloth took 90 workers a year in Portugal and 100 in England. Making a certain amount of wine took 80 workers in Portugal and 120 in England. Portugal was better at both.
You might think Portugal had no reason to trade. Ricardo showed the opposite. Portugal's edge was biggest in wine. England's disadvantage was smallest in cloth. If Portugal put its workers into wine, England put its workers into cloth, and they traded, both countries ended up with more wine and more cloth than if each made everything for itself.
That is comparative advantage. You don't have to be the best at something to gain from trade. You only have to be relatively better at some things than at others, and focus there.
The same idea, for a person
It works for people too. Picture a plant manager who is also the fastest typist in the building. Should she type her own reports? Probably not. Every hour she spends typing is an hour she is not running the plant, which is worth far more. Even if her assistant types more slowly, it pays for both of them if he types and she manages.
The question is never "Who is best?" It is "What does it cost you to do this instead of something else?" Economists call that the opportunity cost.
What Baytown is relatively good at
The upper Texas coast has a few things that are hard to copy:
- Raw material, nearby and cheap. Since the shale boom took off in the mid-to-late 2000s, the United States has produced huge amounts of natural gas. That gas carries ethane and other natural gas liquids. Ethane is a main feedstock for the plants that make ethylene, the building block of most common plastics. Ethane costs less than propane and the oil-based feedstock called naphtha, which many plants in Europe and Asia use. Cheap ethane gave Gulf Coast chemical plants a cost edge.
- A hub. Mont Belvieu, about 14 miles northeast of Baytown, has the largest underground storage for natural gas liquids in the United States, and its prices are the national benchmark. Pipelines run in from the gas fields and out to the plants.
- A channel to the sea. The Houston Ship Channel puts all of it a short trip from deep water.
- People who know how. Generations of operators, pipefitters, electricians, engineers and inspectors. Skill like that takes decades to build and is hard to move.
Put those together and the opportunity cost of making ethylene and plastics here is low compared with most places on Earth. So that is what the region specializes in, and the world buys it.
The part economics books skip
Comparative advantage says trade makes the whole pie bigger. It does not say every slice gets bigger. When a region specializes, it also puts more of its eggs in one basket.
Baytown knows this. When prices for plastics or fuels fall, or a plant shuts a unit, the hit lands on one town at once. Specialization brings good pay and a large tax base, and it brings risk. Communities that live by comparative advantage do well to build some cushion: savings, training for other trades, a city budget that plans for a bad year.
Trade also connects Baytown to decisions made far away. A factory slowdown in another country can reach a paycheck here. That connection works in both directions; it is why the region grew.
A question to take with you
Comparative advantage is really a question about choices. For a country, a town or a person, it asks the same thing: what are you relatively good at, what does everything else cost you in time, and who could you trade with?
The ships under the bridge are the answer Baytown gave. It is worth knowing the reasoning behind it.
Related on HERE
Sources
- David Ricardo, On the Principles of Political Economy and Taxation (1817), chapter 7, "On Foreign Trade."
- U.S. Energy Information Administration, "Hydrocarbon gas liquids explained: uses" (ethane mainly used to make ethylene; lower cost than propane and naphtha).
- Mont Belvieu storage and price benchmark: city and regional histories of Mont Belvieu, Texas.