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Selling out America: Transnational Trade

By       Message Stephen Unger       (Page 1 of 3 pages)     Permalink    (# of views)   6 comments

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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.

When trading tennis balls for shirts is a good idea

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.

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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.

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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.

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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.

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I am an engineer. My degrees are in electrical engineering and my work has been in the digital systems area, mainly digital logic, but also computer organization, software and theory. I am a Professor, Emeritus, Computer Science and Electrical (more...)

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