Foreign Trade in Everything Else

This chapter discusses foreign trade in everything else other than precious commodities. We discuss payments associated with such foreign trade and also the tariff-based mechanism to ensure that such trade happens in a balanced way.

Overview

Previously we have discussed the following:

Foreign trade concerns goods, services and commodities.
Commodities can be broadly categorized into precious commodities and other commodities.
Precious commodities are priced and paid using gold dollars.
The mechanism of import tariff on import of precious commodities, and its effectiveness.

Payment for foreign trade in everything else other than precious commodities is made using fiat currency. That is, the importer pays in local currency, the exporter receives in local currency, and the two UFIs coordinate to make the payment using fiat currency. The reasons for this choice are outlined in the "Fiat Currency for Everything Else" section.

The pricing of everything else other than precious commodities will be done by the exporter in the exporter's local currency; because that is the price the exporter desires to obtain. However, importers can view the prices in both the importer's currency as well as the exporter's currency.

Regarding foreign trade in everything else other than precious commodities, there is a possibility that a society's exports and imports are not balanced. So, if the imports are more than the exports, then we will impose import tariffs on the imports. The section "Import Tariffs on Everything Else" contains the details.

The mechanism for imposing tariff on the import of everything else may seem similar to the mechanism for imposing tariff on import of precious commodities. However, there are differences due to the fact that the payment is made using fiat currency. We will discuss these differences in the "Effectiveness of Tariffs" section and outline how to set up policy parameters to balance foreign trade within a desired timeframe.

The section "Additional Comments" discusses the implications and nuances of the topics covered above.

Fiat Currency for Everything Else

This section discusses foreign trade. In this context, we will discuss transactions across society boundaries. Unless otherwise specified, one party will be in one society, and the other in another.

We have already discussed that payments can be made either in gold or in fiat currency.

In this section, we go through a line of reasoning that explains why everything else other than precious commodities should be paid using fiat currency.

Everything else other than precious commodities can be categorized as follows:

Services
Growable organic commodities
Goods
Any non-precious non-renewable natural resource as a commodity
Fourth-Level Commodities

We will discuss these categories in the order presented above.

Let's discuss paying for imported services.

Consider a client that makes a phone call to an expert in some subject, located in another society, and asks that expert for their expert advice. The expert gives some advice, and the client is willing to pay for that advice. "Giving advice" is a "service" in its purest form. The expert does not give the client anything physical; just words of advice. How should the client pay for this advice?

When discussing Money Transfer completed using the currency exchange rate, we said that just giving away money should be paid using fiat currency. This is because, if the intended transfer does not require something physical to be transferred, then fiat currency is the only alternative that satisfies the giver's intentions and the receiver's intentions.

In the above mentioned scenario, since nothing physical was obtained by the client, nothing physical needs to be paid back. But money needs to be paid. This payment situation is similar to the one-way money transfer, and hence, it should be paid using fiat currency.

Therefore, services should be paid using fiat currency.

When a single person provides services, the person can consider the money earned by means of providing such services as either wages or profit.

Expanding on the scenario of seeking advice, suppose that instead of contacting an expert directly, the client contacts an organization that specializes solely in providing advice. This organization employs several experts, and makes one of them available to each client for consultation and advice. The client pays to the organization; not to the expert giving the advice. In this setup, the expert earns wages, and the organization charges something more than just the wages of the expert, and that something more pays for the organization's expenses other than the wages, and it also contains a component of the organization's profit.

Since the client receives nothing physical, there is no reason to pay for the service in any physical form; and hence paying for it using fiat currency is the obvious choice.

This discussion points out that when we pay for services using fiat currency, we have, in effect, used fiat currency to pay for wages, non-wage expense, and profit.

Now, let us consider the following scenario: We go to a foreign society, visit an organization that specializes in renting cars for us to drive. The organization provides us cars that we would otherwise not get to drive. The organization provides the cars, the fuel, and the tracks to drive those cars on. We go there, pay the rental costs, drive those cars around, enjoy the experience, and return. In all this, we got an experience, but we did not bring any physical thing back. How should we pay for it?

In obtaining this particular experience, we did not bring anything physical back to our society. So, the payment for our experience does not need to be in terms of anything physical. Hence, the payment for such experiences, which are really services, should be using fiat currency.

From the perspective of the organization that rents those cars, the rent that they charge covers their expenses and generates profit. In order to make a profit, they must charge enough to cover all their expenses and some more. Those expenses include wages to their employees, the depreciation of the cars, and the amortized cost of the land on which they have built the tracks, the amortized cost of anything that they have built to run their business operation, and the maintenance costs.

This discussion illustrates that non-wage expenses include capital costs, capital depreciation and other expenses.

Therefore, when we pay for services using fiat currency, a part of that payment is for non-wage expenses. This implies that we are paying for capital costs, capital depreciation and other expenses using fiat currency.

The outcome of the above discussion is that we have listed many kinds of cost components of providing services; services that are paid using fiat currency.

The reason for discussing services like consultancy and renting is to point out that, intrinsically, the following kinds of cost components in the price of anything needs to be paid using fiat currency:

Capital expenses. These represent the recovery of capital spent to deliver services.
Wages.
Other expenses, which include maintenance expenses. These represent expenses paid to other organizations in the delivery of the service.
Profit.

Now let us discuss growable organic commodities. Some examples are: wheat, corn, meat, eggs, cotton and lumber.

Unlike services, these commodities take physical form. All the cost components mentioned above exist within the cost of producing them, and the price of those components should be paid using fiat currency.

All that remains to be established is that the "raw materials" used in the making of these growable organic commodities also need to be paid using fiat currency.

Let us consider wheat and cotton as examples of agricultural commodities. These are seeds of their respective plants. By weight, more than 95% of these are made of oxygen, hydrogen, carbon, and nitrogen. All these are abundantly available on earth; as such they are the opposite of the idea of "precious". Further, these elements are put together in the produced commodity by organic processes; and these organic processes can be made to happen in any society. Therefore, one does not need to pay for these elements in anything precious.

Let us discuss the remaining elements in the commodity which make up less than 5% by weight. They are primarily composed of phosphorus, potassium, magnesium, calcium, iron and zinc. In the earth's crust, each one of these elements is at least a thousand times more abundant than gold.

The raw material that contains these elements are fertilizers. Fertilizers are used up in growing the entire plant, and only a small fraction of it ends up in the seeds. Therefore, only a small fraction of the used fertilizer makes its way into the seed that becomes the agricultural commodity. This small fraction within the seeds is estimated to be less than 1% of the selling price of the seeds; it is negligible.

Considering all that from a cost perspective, the elements in the seed that came from the fertilizer, account for a negligible portion of the price of these commodities. When we pay for these kinds of commodities, we are really paying for the capital, wages, other expenses, and profit.

Therefore, the food and clothing related agricultural commodities should be paid using fiat currency.

When considering animal based food commodities, the proportion of water in those foods is larger than that in the seed kind of commodities, making the content of elements other than oxygen, hydrogen, carbon, and nitrogen much lower than that in seeds.

The above discussion encompasses all kinds of food and clothing related organic commodities. All of these should be paid using fiat currency.

Finally, let us consider lumber. About 99% by weight of lumber is made up of oxygen, hydrogen, carbon and nitrogen. Most of the remaining percent is made up of other elements mentioned above. Fertilizer is generally not used in growing lumber. Hence, with a line of reasoning similar to the one used in food commodities, lumber kind of commodity should be paid using fiat currency.

Therefore, all growable organic commodities should be paid using fiat currency.

Now let us discuss paying for imported goods.

In this context, we will sometimes use the word "product" to mean the same as goods, and individual instances of each product as an "item".

Within a society, a buyer pays for purchased goods using local currency. When goods are exported, what currency should the buyer use to pay for the goods purchased?

When paying for imported goods, since our two options for currency are gold and fiat, we need to know the following:

What proportion of the selling price of an item is made up of raw materials that were classified as precious commodities?
Should the precious commodities component of goods be paid using gold currency?

To answer the first question, we mandate that producers, in their product specification/description, for an individual item, must specify the following:

The suggested selling price of each such item.
The total value of all precious commodities combined at their bulk prices in each such item.

Based on this data we can compute the percentage of precious commodities in the suggested selling price of the product. That answers the first question.

The answer to the second question is: "No. The entire price of the goods should be paid using fiat currency". The reasoning for this answer is as follows:

Goods meant for eating, drinking, wearing, sitting on, or sleeping on are examples of goods that have negligible amount (less than 1%) of precious commodities compared to its selling price. Here are some categories of those goods:

All food products
Clothes made of organic materials
Clothes made out of polymers
Footwear
Wooden furniture
Plastic furniture

Goods that are some sort of household devices are examples of goods that have an insignificant amount (less than 5%) of precious commodities compared to its selling price. Here are some categories of those goods.

All kinds of furniture that may include metals.
All kinds of mechanical and electrical devices.
Almost all kinds of electronic devices.
All vehicles

The important concept here is: most regular-use goods represent a significant value-add over the precious commodities that go into making of those goods. That is, most of the value in goods is not in precious commodities contained within those goods; it is in the local dollars spent (in various ways) in the making of those goods.

Suppose, the percentage value of precious commodities, at their bulk prices, is less than 5% of the suggested selling price of the goods. What does it mean?

It means that precious commodities make an insignificant percentage of the suggested (and hence expected) selling price of the product. That means that the product represents a significant value-add over and above the precious commodities present in each item of the product. All that "value add" is in term of wages, profit, recovery of capital, and recovery of other expenses. The "value add" is good for the economy.

If the purchase of such goods is paid using fiat currency, then the society exporting such goods will lose some precious non-renewable natural resources but only get fiat currency in return.

If such purchase of such goods is paid using fiat currency, and if the buyer desires to purchase goods only for its precious content, then they still have to lose, in local dollars, the equivalent of the suggested selling price of the goods. If they purchased the goods just for the precious commodities in the goods, then they would be paying more than 20 times the value of those precious commodities. Compared to buying goods for the precious commodities in them, the buyers could just buy the precious commodities at the bulk prices, and spend an insignificant amount of their local dollars buying them. So, buyers would not buy the goods for the precious commodities contained in them; they would buy the goods for what they really are.

From a society's perspective, it is completely acceptable to lose a small percentage of precious commodities when exporting goods. This is because the small loss in precious commodities is helping support a significantly larger dollar amount of the local economy. The preceding logic is valid as long as goods are not being purchased for the precious commodities contain in them; and we have just mentioned that buyers are extremely unlikely to purchase goods for the precious commodities contained in them.

Therefore, all goods should be paid using fiat currency.

We mentioned a 5% as a cutoff below which any precious commodities within those goods represents an insignificant proportion of the suggested selling price. In practice, this percentage is actually a policy parameter which the citizens collectively decide. We will call this policy parameter as 'MAX_PRECIOUS_COMMODITY_PERCENT_THRESHOLD'. The value of 5 is a good starting point for this policy parameter.

Any goods that have precious commodities content that is more than this threshold are not eligible for export. This rule ensures that our intent of allowing goods to be exported as long as they contain precious commodities in insignificant amounts by price.

Moreover, at the time of actual sale, based on the actual selling price, the percentage value of the precious commodities in the item should be below the above mentioned threshold; if not, then the sale is not permitted; that is the export of that product at that price is not permitted. The exporting society's UFI will be involved in the transaction and it can block such a transaction.

That concludes our discussion about "paying for imported goods".

Now let us discuss paying for import of commodities representing non-precious non-renewable natural resources.

The process of turning non-precious non-renewable natural resources into commodities is similar to that of manufacturing goods. It entirely consists of using local dollars and taking the non-precious non-renewable natural resources and packaging it as a commodity. Therefore, for their payment, they should be treated on par with goods.

A good example of this is the element silicon. In earth's crust, silicon is more abundant than iron and aluminium combined. It does not deserve to be classified as precious. Thus, processing quartz or sand to produce industrial grade silicon does not create a precious commodity. Industrial grade silicon is refined further, and that goes into the manufacture of electronics.

Therefore, any non-precious non-renewable natural resource as a commodity should be paid using fiat currency.

That may still leave some commodities that are neither growable organic nor non-precious non-renewable natural resources. We will call them fourth-level commodities.

These fourth-level commodities are very similar to manufactured goods in what it takes to make them; it takes local dollars for capital, wages, other expenses, and profit. Therefore, for their payment, they should be treated on par with goods. One example of such a commodity is electricity generated using wind or solar energy farms. It can be exported if the society generates an excess of it.

Therefore, fourth-level commodities should be paid using fiat currency.

That concludes our discussion of paying for everything else other than precious commodities.

To summarize, for various fundamental reasons, the cost of all imported goods should be paid using fiat currency.

Import Tariffs on Everything Else

In this section, when we say imports, we mean import of everything else other than precious commodities. Similarly, when we say exports, we mean export of everything else other than precious commodities.

Utopian societies will impose a tariff on imports when the net amount of imports exceeds the net amount of exports in the preceding few years. That is, there is a deficit of exports over imports.

The import tariff is paid by the importers (both retail and bulk importers). This makes those imports more expensive, thereby suggesting to the importers to find suitable substitutes. It nudges them to find alternatives within the society.

Tariffs are charged as a percent of the value of the imported item. The percent rate at which the tariff is charged is set such that the entire deficit of exports over the imports over the preceding few years can be collected as import tariff in the next few years as long as the rate of deficit remains the same.

Both the number of preceding years and the number of next few years are policy parameters. By controlling these policy parameters, citizens express their view (and decision) on how much the import tariff should be. Citizens' views can be influenced by leaders, but the decision remains in citizens' hands.

Note: the parameter names mentioned above are conceptual. In the implementation, the actual names will differentiate between the import of precious commodities versus the import of everything else. For our discussion, conceptual names are fine.

So, if a society's exports are worth 20% less than imports in the preceding few years, then the rate of tariff will be 20% if we want the deficit to be wiped out by the tariff in the same number of next few years as the preceding few years that we measured the deficit for.

The rate of tariff is automatically computed and adjusted at the end of each day. There is no need for any other human intervention beyond citizens adjusting the policy parameters.

These imports are paid using fiat currency. It means that the buyer pays using their local currency, which is converted by the two UFIs using the currency exchange rate, and the seller gets paid using their local currency.

Since the import tariff is collected by the buyer's UFI, the buyer simply pays the local UFI using the local currency. That is, the import tariffs are paid using local currency.

Import tariffs are to be paid at the same time as paying for the import.

Effectiveness of Tariffs

In this section, when we mention just the word "import" or "export", we mean import or export of everything else. When referring to the "import of precious commodities", we will state it explicitly.

Tariffs on imports do not function in exactly the same way as tariffs on the import of precious commodities. There are two reasons for that:

While the tariff on the import of precious commodities is paid using gold, the tariff on import of everything else is paid using local currency. Hence, when there is a deficit in the exports over the imports, there is no natural nudge to restore the balance.
Unlike the tariff on the import of precious commodities, the tariff on imports does not impact the price of anything. So, there is no possibility of a stronger nudge.

Therefore, the tariff on imports is the only nudge within a society to dissuade its importers from importing. Furthermore, assuming all other things being equal, the tariff on imports provides a weaker nudge than the tariff on the import of precious commodities.

To compensate for the weaker nudge, citizens should set the value of the number of next few years parameter to half of the value of the number of preceding years parameter.

With this adjustment, the tariff on imports will increase faster as the deficit increases, thereby giving the incentive to manufacture locally or to provide the service locally.

Additional Comments

Many imported items may require shipping from the exporter to the importer. For example, goods and commodities need to be shipped, but services typically do not require any shipping.

In Utopian societies, shipping is the responsibility of the exporter, not the importer. The exporter either directly ships it or uses specialist transport organizations to complete the transport.

The task of transporting involves moving physical goods or commodities across country boundaries. However, the things being transported were paid for as part of the export-import transaction. So "transportation" or "shipping" is a service, not an item of some physical product.

Thus, shipping is a service provided by the exporter to the importer. Hence, this service is also an import. Hence, the cost of the service must be paid using fiat currency.

Since the shipping service is an import, it is also subject to an import tariff. This tariff is paid using local currency.

In foreign trade, the seller is not allowed to offer any credit. This is similar to the current situation of a person going to a physical retail store and buying something by immediately paying for it. The store won't let you have the item unless it gets paid. Similarly, the importer has to pay first, and only after that can the item be shipped.

Sellers are not allowed to offer credit because Utopian societies are not interested in having and accounting for monetary liabilities across society boundaries. Note that credit is available within the society in the form of collective credit, social credit and loans (For example, when an organization sells bonds).

It is almost never the case that imports and exports are perfectly balanced. So, in a large span of time, it is expected that about half the time there will be import tariffs.

When imports are subject to tariffs, for at least half of this period, the rate of import tariffs will be low. This happens in the first half of the period in which the imbalance is progressing from just getting imbalanced, then increasing, and eventually reaching its maximum level on the deficit side.

When the deficit reaches its peak, the tariff rate is also at its peak. Eventually, with higher tariffs, the desire to save the money spent in tariffs pushes local businesses to find similarly priced local alternatives, thereby reducing the deficit for the society, and increasing the demand for local employees.

What does society do with the money collected from import tariffs? It distributes it equally to all its citizens.

This is because tariffs are not taxes. Tariffs are a way of dissuading some people from doing something that is deemed undesirable. Taxes are the responsibility of every citizen, and the responsibility is in proportion to their wealth. Reducing taxes to the extent of collected tariffs, benefits only those who have wealth, and does not benefit those who have no wealth at all. All citizens benefit equally when the collected tariffs are distributed equally.

Every Utopian society strives for a balance in foreign trade. Import tariff is the tool. The deficit considered, for imposing import tariffs, is for all other societies combined. Hence, when tariffs are imposed, they are imposed on all imports from all other societies at the same rate.

Why are different societies not subject to different rates?

Between a pair of societies, it is very feasible that one is a net exporter and the other a net importer. From a single society's perspective, the desired outcome is balanced foreign trade when the totality of trade is considered; that is ideal.

Insisting that trade between a pair of societies be balanced, and, if not, attempting to remedy the situation with import tariffs serves no useful purpose.

Moreover, it is nearly impossible for each such pair of societies to accomplish a balanced trade; and hence implementing different rates of tariffs for different countries is subversive to achieving an ideal situation world-wide.