Under appropriate circumstances, transnational trade, i.e., buying goods produced in one country to sell in another, can be beneficial to all concerned. The appropriate circumstances were lucidly described two centuries ago by the eminent British economist David Ricardo, in terms of what is called, "the theory of comparative advantage" [1]. It is interesting that these conditions can prevail even when the nations differ greatly in levels of industrial development, as well as when they are at very similar levels; or anything in between. But comparative advantage is not the basis for most contemporary foreign trade involving the US.
For the past several decades, the US has been incurring massive trade deficits by importing goods from China and other nations that exploit sweatshop labor and abuse their environment. This process, unrelated to the Ricardo theory, has, while further enriching the wealthy elite, been a major contributor to the plight of American workers. In the following sections, I will explain the Ricardo theory, and then discuss what is actually happening in the US with respect to international trade.
Suppose Cb and Cs are the costs of producing units of products B and S, respectively. Then, if Cs/Cb is substantially greater in nation N1 than in nation N2, it is mutually beneficial to buy B in N1, and sell it in N2, and to buy S in N2 and sell it in N1. To illustrate this idea, let's consider an example of trade between the US and Blogistan.
Suppose that the prices of tennis balls and shirts in these countries are as shown in the table below. The prices are in terms of local currency: dollars or yuks, for the US and Blogistan respectively. A unit of tennis balls might be 50 cans of balls, and a unit of shirts might be 20 shirts. As will become evident, the unit sizes are of no importance, as long as we use the same units for both countries.
| BALLS | SHIRTS | ||
|---|---|---|---|
| US | $100 | $400 | |
| BLOGISTAN | Y2000 | Y2500 |
In order to simplify the discussion, I will assume that the prices shown are the same for both buying and selling. I will ignore shipping and transaction costs. I also assume that the quality of the products is the same in both countries.
Looking at the table, we can see that, compared to shirts, tennis balls are cheaper in the US than in Blogistan. That is, you can buy more units of tennis bills for the price of a unit of shirts in the US than you can in Blogistan. The ratio of the cost of shirts to the cost of balls in the US is 400/100 = 4/1, while that ratio for Blogistan is 2500/2000 = 5/4. So buying balls in the US, selling them in Blogistan, and using the proceeds to buy shirts to sell in the US ought to be profitable.
Let's check this out. Suppose an American company buys a unit of tennis balls in the US (for $100--see table). The balls are shipped to an agent in Blogistan, who sells the balls locally for Y2000, and then uses this money to purchase Blogistani shirts, obtaining 2000/2500 = 4/5 units of shirts (see the table). These are shipped to the US, where they are sold for 400 x 4/5 = $320. This yields a gross profit of 320 - 100 = $220. The relative gross profit, i.e., the gross profit per unit of currency spent in the initial purchase, is 220/100 = 2.2.
Readers are invited to verify that a blogistani trader could carry out a similar transaction, starting with a purchase of a unit of Blogistani shirts for Y2500, and grossing 8000 - 2500 = 5500 yuks, again with a relative gross profit of 2.2. (Note that the relative gross product is not changed if either row, or either column, of the table is multiplied by a constant.)
There are some important points to note about this process. First, it amounts to simple barter. At no point is one nation's currency exchanged for that of another. So, if via a deliberate action, or some inflationary process, the yuk were to fall to a third of its value, resulting in all Blogistani prices tripling, this would have no effect on the process described here (assuming it didn't happen in the middle of a trade).
Absolute efficiency of production is irrelevant. I.e., if all production processes in Blogistan became twice as efficient (or half as efficient) it would have no effect on the transactions discussed here.
Note that, because the above calculation did not consider such factors as shipping costs, and the fact that you usually can't sell a shirt for the same price you would have to pay to buy one, a given trade would not yield a net profit if the gross profit as calculated here were not big enough.
Consumers in both countries would obviously benefit from such trades. Companies, and their employees, who produce their products more efficiently (tennis balls in the US and shirts in Blogistan) also benefit. The losers would be the companies and their workers, in both countries, whose products are relatively more costly (shirts in the US and tennis balls in Blogistan). Unless the less efficient producers improve significantly, one would expect many of these companies to go out of business. Hopefully, their workers would then find employment with more efficient companies, which would be expanding to handle the exports.
The above calculation can be stated very simply, in terms of the table showing prices in the 2 countries. The relative gross profit is the ratio of the largest to the smallest diagonal product in the table, minus 1. E.g., (400x2000/100x2500) -1 = 3.2 -1 = 2.2.
The above analysis accounts for the benefits of some instances of current international trade. Sales of US airplanes to Japan, and purchase of Japanese cars by Americans is a real world example. But a great deal of US trade is driven by very different considerations.
Whereas the previous discussion involved people in different nations exchanging products they produced relatively efficiently for products more efficiently produced elsewhere, the motivation behind much of the current trade carried out by US corporations is of a very different nature. In fact, the term "trade" may not be appropriate, since it is usually a one-way process. The basic concept is to buy goods at low prices in countries that produce them cheaply by grossly underpaying, and otherwise maltreating, those doing the work, and often abusing the environment in the process.
The principal source for such goods today is China, tho several other countries are playing a growing role in this regard (see below). There are several variations of the process. All of them involve the closing of American factories. A common practice is to have production carried out in China by Chinese companies. The US companies often provide technical assistance to facilitate start-up operations. The product is sold in the US under the original American brand name.
Another path taken is for American companies to set up their own factories in China, leaving their workers behind. Following this approach, big "American" corporations have become, and continue to become, less and less American. Companies such as GE, GM, and Apple, do most of their manufacturing in other countries, and are also selling products overseas. They often have R&D labs outside the US. These companies also pay little in US taxes.
A less common option is for US companies to buy Chinese products and import them to the US under Chinese brand names.
Wages in China are steadily increasing, and are currently something like a fifth of US wages. The resulting price increases have led to some US companies resuming production in the USA. (This often involves opening factories in southern states, where unions are virtually unknown, and wages are minimal.) Perhaps more important is that other countries, such as India, Indonesia, and Vietnam, have wage scales less than a tenth of US wages. These countries are joining, and, to some extent, replacing China as suppliers for American companies. Mistreating workers is not the only factor in the lopsided trade relations between the US and China.
In a truly free market, exchange rates between currencies of nations N1 and N2 continually change, usually by small amounts, so that, if a package of goods and services can be purchased with K1 units of N1's currency and K2 units of N2's currency, the exchange rate will be such that one could obtain K1 units of one for about K2 units of the other.
If this is the case, and there are no restrictions on trade, then goods would be exchanged between nations roughly as described in the previous section, with goods flowing in both directions, except that it would not be necessary to link purchases of one product with sales of another. Instead of exporting US-made goods to Blogistan , selling them to obtain yuks and using the yuks to buy Blogistani products to sell in the US, the necessary yuks could be obtained directly in exchange for dollars, and vice versa, so US goods could be purchased with dollars received in exchange for yuks. The bottom lines would be about the same. But a good deal of international trade, particularly US-China trade, does not work this way, because the exchange rate between the yuan and the dollar is not determined by a free market.
Referring to the table used above to discuss US-Blogistan trade, suppose the yuk were very cheap in terms of dollars, so that we could buy Y40 for $1. Then, instead of acquiring Y2000 by buying a unit of tennis balls in the US for $100, and selling it in Blogistan, we could simply buy Y2000 for only $50, and use these yuks to buy the same 4/5 unit of shirts, worth $320 in the US. This yields a gross profit of 320 - 50 = $270, and a relative gross profit of 5.4, as compared with 2.2 figure corresponding to the 2-way trade discussed above.
It is interesting that we could have used the Y2000 to buy tennis balls in Blogistan for export to the US. Altho not as profitable as buying shirts would have been, this would yield a gross profit of $50, and a relative gross profit of 1 (100%). In this case, a profit is made by exporting tennis balls to the country in which tennis balls are more efficiently produced than in the exporting nation! Such an exchange rate could not exist in a free market. But the exchange rate between the dollar and the yuan is not determined by a free market.
In addition to undercutting US production costs by grossly underpaying its workers, China has been manipulating the exchange rate between the dollar and the yuan, to lower the dollar cost of the yuan. This is done by buying US treasury notes, in effect lending money to the US [2]. China currently holds well over a trillion dollars in treasury notes. This makes Chinese goods even cheaper, further encouraging US purchases. It also makes US goods more expensive, minimizing US exports to China. Altho Japan and Brazil have, at some points, engaged in currency manipulation, the effects are minor in comparison with China's massive operations that are having a major effect on the US.
China also has various regulations that discourage imports. The overall result is that US imports from China are well over triple US exports to China.
US corporations are happy with this situation, as they participate profitably by buying Chinese goods at very low prices and selling them in the US at prices somewhat lower than previous prices, but high enough to be very profitable. They are making large profits without the nuisance and expenses involved in manufacturing and outbound shipping. US consumers benefit to a modest extent by somewhat lower prices. US workers take the hit, losing manufacturing jobs or taking wage cuts due to competition from the newly unemployed.
US imports from China are huge, with a massive trade deficit exceeding $318 billion in 2013 (imports $440.5B billion, exports $121.7 billion, both record highs) [3][2].
US imports from China have exceeded exports to China since 1985. The annual US-China trade deficit has exceeded $10 billion since 1990, and $100 billion since 2002. As of January 2013, the cumulative US-China trade deficit was $1.264 trillion. With respect to worldwide US foreign trade, the 2013 deficit was about $472 billion.
The excess dollars received by China could be used in many ways:
Large US corporations are abandoning the US in many ways. They buy complete products, components, and subsystems from other countries, set up factories abroad, treat American workers like dirt, and do everything possible to avoid US taxes [4][5][6], including moving manufacturing and other operations out of the country.
More generally, a major effect of expanding international trade is to make work a commodity, subject to the same economic factors as raw materials and manufactured goods. Competition among nations results in driving down the price of labor (i.e., wages and salaries), just as it does the price of shirts. This applies to all kinds of workers, ranging from hotel chamber maids to skilled machinists, to engineers, and to other professionals. Worker remuneration is being driven down toward subsistence levels.
Along with low pay, goes hazardous, uncomfortable, and tedious working conditions. We are seeing, in other counties, disasters reminiscent of the 1911 Triangle Shirtwaist Factory fire in Manhattan, which killed 146 girls and young women. Similar factory disasters, some with much higher death tolls, have occurred recently in Bangladesh, Pakistan, and China [7][8][9].
This discussion of problems with transnational trading is by no means complete. Much damage is being done by the North American Free Trade Agreement Treaty (NAFTA) [10], and there is a threat of even more serious damage via the Trans-Pacific Partnership (TPP) treaty [11], now being pushed toward ratification in semi-secrecy.
[1] Wikipedia, "Comparative advantage", Wikipedia
[2] Kimberly Amadeo, "U.S. China Trade Deficit: Causes, Effects and Solutions", About News, September 30, 2014
[3] Census Bureau, "Trade in Goods with China", U.S. Census Bureau, 11/2014
[4] Bonnie Kavoussi, "General Electric Avoids Taxes By Keeping $108 Billion Overseas", The Huffington Post, 3/11/2013,
[5] Anne Singer, "Press Release: General Electric's Ten Year Tax Rate Only Two Percent", Citizens for Tax Justice, February 27, 2012
[6] Mark Gongloff, "Apple, Google, Microsoft Avoid Taxes By Keeping Billions In Profits Offshore: Senate Report", The Huffington Post, 9/20/2012
[7] BBC, "Bangladesh factory collapse toll passes 1,000", BBC News, May 10, 2013
[8] Adil Jawad and Sebastian Abbot, "Pakistan Factory Fires Kill Nearly 300 In Karachi", Huffington Post, 2012/09/12
[9] Ben Blanchard, Reuters, "Fire kills 119 in China poultry factory", The Christian Science Monitor, June 3, 2013
[10] Ben Beachy, "NAFTA's 20-Year Legacy and the Fate of the Trans-Pacific Partnership", Public Citizen, February 2014
[11] Public Citizen, "Trans-Pacific Partnership (TPP): Job Loss, Lower Wages and Higher Drug Prices", Public Citizen, 11/14
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