In any discussion on the much lamented British car industry the underlying theme seems to be that the country would be much better off if we all bought British. While no one should criticise such a proud sentiment it is, nevertheless, rather out of step with economic reality. In fact, this kind of mercantilist, beggar-thy-neighbour approach has not been in vogue for nearly 200 years. It was then that David Ricardo realised that international trade brought mutual benefits due to comparative advantage and the mechanism of comparative advantage.

This theory said that even if a country, which we will call Capitalania, could produce everything by itself it was still much more beneficial to specialise in making a product in which it was comparatively talented; lets call it product A. So Capitalania shifts the emphasis of production to Product A, resulting in a surplus of Product A but a shortage in the product from which it has moved resources, this being Product B. International trade then steps in to fill the gap. Another country, lets call it Labourlon, might find that it is uncompetitive with Capitalania on both Products A and B, but despite this it is comparatively better at producing B rather than A. Since Capitalania has opted to focus on Product A, it can make a trade with Labourlon exchanging Product A for B. By both countries focusing resources on those areas where they were most efficient the two can discover a mutual benefit.

In the real world a good example would be the US, which can pretty much do everything for itself from farming to heavy industry. However, Americans are particularly well disposed towards capital intensive industry so they are better off concentrating on that and importing labour intensive agricultural products. This is true even if the country selling them the agricultural goods is relatively inefficient at doing it in comparison to the US, the point is that trade allows the US to structure itself more efficiently and make exchanges with the agricultural country. Having said that, the US would not want to dedicate everything to industry because those last few resources would have such scarcity value that prices for that resource would rocket. So, whatever happens, the US will always benefit from having some agriculture, just without giving it the top priority.

The problem is that it is much easier to believe the emotive theory that buying foreign destroys the home industry. Politicians play on this and get votes by claiming to protect domestic industry. Many commentators point sadly at the decline of British industry and the apparent willingness of the natives to run around in foreign cars. If this were truly symbolic of the nation’s decline then with the loss of our once great heavy industries the country really should be bankrupt by now. Yet for every Brit complaining about BMWs there is a German complaining about the dominance of the British financial industry. Not only does this international exchange benefit the UK but we can even see it in the extraordinary strength of the economy. The loss of heavy industry has meant that the country can focus resources where the comparative advantages lie. The City of London, for example, now dominates international finance in a way that has not been seen since the height of empire. Granted, many of the banks are foreign owned, but that only emphasises the strength of Britain's advantage: foreign banks have to come here and employ British people to be in the game. Sadly for patriots it is not a very romantic industry, much nicer to dream wistfully about MGs racing down country lanes, but despite this the wealth generated in the City is trickling down and boosting the country as a whole.

The advantages of international trade are also expressed in the reverse flow of investment funds by way of foreign exchange. When you change money abroad, do you ever wonder what the bank does with your pounds sterling? It can't use the money locally, obviously, but it can sell the pounds to someone who wants to buy something from Britain. Thus, ultimately something from Britain will have to be exported to balance the money that has been handed over to the foreigners. From time to time politicians like to make a big show of having their holidays in Britain, but if they really wanted to help the economy they should go to Japan or China and dump a load of pounds on them.

Of course, international trade gets a particularly bad press when it causes the loss of a much loved household name. Most recently there has been another round of hand-wringing over the sale of MG Rover to the two Chinese auto makers, SAIC and NAC. It was taken as yet another example of the total dominance of China as a production site. In fact, it was just the wheels of globalisation taking another turn as they drive the international economy forwards. If we assume that people buy rationally and that foreign products are, taking everything into account, better than home-grown products then at least UK consumers have been pushing pounds sterling on the Germans, Japanese, Chinese etc. This money could not be spent in those countries so at some point had to find its way back to Britain and be spent on something British. The nature of international trade means that this money would be spent on those areas where the UK has a comparative advantage; in a sense, if you buy a BMW the Germans can then buy British pharmaceuticals. It also comes back as investment, the money being spent on MG Rover simply being our own cash coming home. It even means that those nice foreigners are supporting our depleted pension funds.

There is, though, a good reason for supporting local industry in the short term: that is to avoid the costs of restructuring. The real economic problem with the loss of MG Rover is that for a period there are lots of people out of work and retraining for new careers. If the country had to exit industries every few years it would cost a bundle as resources were shifted from the old industry to the new one. Much better build flexibility into the economy and efficiently manage the changeovers when they inevitably occur. Fortunately this is mostly what happened with MG Rover due to its steady decline, the final crash aside, although the proposed deal from Alchemy in 2000 might have managed it a little better.

So, these are the reasons why you should be proud to buy foreign:

1. It supports other sectors of British industry where the country does enjoy a comparative advantage.

2. It helps Britain to become more efficient.

And these are the reasons you should be proud to buy British:

1. It supports an industry that enjoys a comparative advantage

2. It avoids expensive restructuring costs

In other words, support Britain and buy foreign.