Landsburg and NEAS emphasize the benefits of trade, that is, each party producing and trading only those products at which it is the most relatively efficient, compared to its potential trading partners. But this does not seem to reflect the reality of the world. In reality it seems as though it is the nation that produces an item at an absolute lower cost and can sell it at a lower price that dominates production of an item. For example, does China really produce every product at which it dominates world trade more efficiently in relative terms? How then can it also produce high tech items more efficiently in relative terms?

Another question is the existence of trade deficits. If we are really exchanging products with our trading partners according this trading principal, each producing that which it is most relatively efficient, how then can there be such huge trade imbalances? Why does the U.S. have such huge trade deficits year after year? (Please don't say that this is within the realm of macroeconomics and not microeconomics.)

[NEAS: Some countries restrict imports; some levy tariffs on imports; some do not allow foreign investment; some impose fixed exchange rates that differ from market rates. Some countries have higher savings rates; some countries give high unemployment benefits that reduce work efforts.

Most such government actions hurt their economies. Some government actions can improve productivity, but these are not common. Examples are restrictions on gambling, drugs, and alcohol that may improve productive work. Most government restrictions have complex effects that may hurt their own people.]

I think for your first point it is important to remember how specialized modern industry is.  Apple spent a lot of time coming up with the iPod, and has been rewarded for that development, but it has chosen to have the iPods made in China.  Apple could have its American employees assemble the iPod, but they are better employeed in the thinking-products-up business. That is where their relative advantage lies over China.

That viewpoint addresses a small part of the trade imbalance question too, I think.  China looks like it has a huge trade surplus with us because they have a huge relative advantage over us in the putting-things-together business.  We buy lots of physical stuff from them because they can put products together a lot cheaper than we can.  That doesn't mean that they get all of the actual profit (or welfare, if I understand the idea correctly) from the construction of an iPod.