Problems in Present-Day Foreign Trade

This chapter enumerates several problems with present-day foreign trade. When a better alternative is not available, problems may not appear to be problems. In the prior chapters, we have established the key concepts and mechanisms associated with "Utopian Foreign Trade". All those concepts and mechanisms are necessary for seeing the problems in present-day foreign trade.

Setup for Discussion

In this chapter, when we are discussing "problems", we are discussing systemic problems. We are not discussing problems arising from illegal activities. For example, we are not dealing with the problem of currency counterfeiting. By the way, because Utopian societies have no physical money (that is, cash in the form of paper bills or metal coins), the problem of counterfeiting Utopian money does not exist.

When considering foreign trade in goods and services in present-day societies, what do you think is the currency of this foreign trade?

It could be the currency of any one among a handful of countries. But for a single trade, it is always the currency of one specific country. So, for the presentation of all situations and scenarios that highlight the problems, we will consider that the currency of a single country is used.

None of the present-day currencies are backed by gold or anything precious. So, the currency of foreign trade is the fiat currency of one of several countries in the world. Let us say that it is the currency of Country-X. That is, Country-X dollars are used for foreign trade.

In fact, Country-X dollars are used to pay for everything across society boundaries. The term "everything" in the previous sentence encompasses precious commodities, all other commodities, goods, services, and investments.

A couple of chapters earlier, we introduced four types of currencies. Now we are able to present their complete terminological and usage distinctions. The following table summarizes these distinctions.

So, as per this terminology, Country-X dollars when used for foreign trade are token dollars. Many problems arise from the use of token dollars for all monetary transactions across present-day society boundaries.

Problem 1

The first problem is fundamental and it pertains to foreign trade in precious commodities.

Consider the following example: If country A wants to sell one ounce of gold, then it will get paid in Country-X dollars. Suppose that one ounce of gold is priced at 3,000 Country-X dollars. Then the buyer of such gold has to hand over 30 hundred-dollar bills of Country-X and take possession of gold. The country selling the gold is exchanging their gold for someone else's paper! The hundred-dollar bills mentioned in this example are examples of token currency.

Similar to the above example, visualize one ounce of gold being paid for using a single one ounce steel coin with face value 3000 Country-X dollars. Here, gold is being exchanged for steel. The one ounce steel coin with a face value of 3000 is an example of token currency.

In the above two examples, gold is being exchanged for paper or steel, which is manufactured from abundantly available natural resources. That is, gold is being exchanged for something that is intrinsically worth very little.

What applies for gold, also applies to all precious commodities. That is, precious commodities are being exchanged for something that is intrinsically worth very little.

Would countries exchange their precious commodities for tulip bulbs or roses or beads or cowrie shells?

The value of the tokens of some other country's currency is not entirely at the level of cowrie shells. That value is based on the "trust" in the country's ability to manage its money supply. But, this is dependence on some other country's management ability. "Management ability" cannot be objectively defined and evaluated. For independent countries to depend on some other country's management ability to manage their local currency is contrary to the notion of "independent countries".

In the past, factoring the level of technology available, using the tokens of some well managed country was the better alternative among the then-existing alternatives. However, technological situation has changed immensely since that system was established.

When precious commodities are paid for using gold dollars, there is no need for such kind of "trust". Utopian societies recognize this and do just that.

Using gold dollars for international trade in precious commodities frees all countries from the possibility and adverse consequences of a single country mismanaging or manipulating their local money supply.

Problem 2

The second problem is fundamental and it pertains to foreign trade in everything other than precious commodities.

For all countries other than Country-X, Country-X dollar is a precious resource. Why? Because other countries cannot mine it, cannot manufacture it, and do not have control over it. Furthermore, all other countries, when they sell their precious commodities, they get paid in Country-X dollars. If we assume that the price was fair, then a certain amount of Country-X dollars are on par with one ounce of gold. Further more, Country-Y can "buy" Country-X dollars by selling their gold. Sometimes, in order to deal with balance of trade issues, countries can be forced to buy Country-X dollars by selling their gold. These points provide us with sufficient reasons to conclude that Country-X dollar is a precious resource for all other countries.

Currently, all foreign trade is conducted in Country-X dollars. It follows that foreign trade in goods and services is currently being conducted using a precious currency.

As we have discussed in the previous chapters on Utopian foreign trade, foreign trade in goods and services has nothing intrinsically precious about it; and its payment does not need to be in anything precious. However, currently, we do exactly that! That is a problem.

Problem 3

Country-X has a major advantage in this system of foreign trade: it is able to purchase precious commodities using their fiat currency. Country-X gives nothing precious in exchange for precious commodities. Country-X merely offers its own fiat currency.

All other countries have a major disadvantage in this system of foreign trade; they have to trade using Country-X dollars. They have to pay for precious commodities using a precious resource, and they have to pay for all other non-precious things using the same precious resource.

To tackle this problem, one could wonder whether switching to the currency of some other country would be better.

Let us say that instead of using the Country-X dollars, the world starts using the Country-Y dollars. Then in that system, countries in the world will start using Country-Y dollars, and that makes Country-Y dollars precious for all countries other than Country-Y. The switch changes what was deemed precious from Country-X dollars to Country-Y dollars.

So, switching the currency of foreign trade to some other country's dollars will not solve the issue.

Furthermore, if some Country-X dollars that go out of Country-X never make it back, all that the Country-X lost was some pieces of paper or some cheap metal coins, but in return they got something more useful in the form of commodities, goods, or services.

With the Utopian way of conducting foreign trade, these problems do not occur.

Problem 4

To better understand the problems with the present-day foreign trade system, consider this question: Why do countries currently have different tariff rates for different types of goods?

Countries have to earn the precious resource of Country-X dollars to pay for the goods that they import. Earning those dollars requires doing some work, producing something of value, and exporting it to others. Other countries also face the same challenge: that of earning Country-X dollars.

Not all goods have the same societal value; some goods are essential, and some other goods are frivolous.

No country will be eager to spend its hard earned Country-X dollars on something that they consider to be frivolous. So countries try to dissuade their import by imposing a higher import tariff on goods that are considered as having lower societal value. This is how we end up with different tariff rates for different kinds of things.

As a consequence, it is not easy for any country to earn Country-X dollars. Countries will find it difficult to sell trinkets to foreign countries, because such trinkets will (or should) attract substantial import duties.

It is easier to manufacture trinkets compared to precious commodities that one does not have. So, there are no employment opportunities in mining and refining of resources that a society does not have. However, there are employment opportunities in manufacturing trinkets that the society can manufacture. So many times, these higher tariffs are positioned as a means to protect local jobs. But the reality is that it is better to dissuade import of trinkets with higher tariffs and facilitate import of commodities that the society does not have with lower tariffs or no tariffs at all.

With the Utopian way of conducting foreign trade, countries do not have to engage in foreign trade in goods and services using precious currency. Instead of using Country-X's fiat currency, they use the purest form of "fiat currency".

In Utopian societies, there is no need to have different tariff rates for different goods and services. Between Utopian societies, there is no need for tariff wars.

Problem 5

If Country-X engages in quantitative easing, they are "printing" more of their token money; either in physical form or digital form.

What would Country-X do with these additional Country-X dollars? Be a net importer.

When Country-X is a net importer, they are essentially giving away low cost pieces of paper or coins or digital records for something far more valuable.

Imagine importing one ounce of gold or platinum by paying for it with a few pieces of your own paper currency. You can continue doing that year after year, decade after decade, century after century!

Of course, if Country-X has to maintain its status as the currency for international trade, it cannot conduct quantitative easing for "no good reason". It will also have to do it in limited quantities. But, it can do it endlessly and derive benefits that no other country can derive.

Utopian societies get rid of this problem by mandating that precious commodities be paid using gold. Fiat currency or token currency is not appropriate for foreign trade in precious commodities.

Problem 6

This section is a variation of the problem highlighted in the previous section as it relates to foreign trade in everything other than precious commodities.

If Country-X engages in quantitative easing, they are "printing" more of their token money; either in physical form or digital form.

What would Country-X do with these additional R-dollars? Be a net importer.

When Country-X is a net importer, they are essentially giving away low cost pieces of paper or coins or digital records for something far more valuable.

Imagine importing grain, shirts, shoes, TVs, etc. and paying for it with a few pieces of your own paper currency. You can continue doing that year after year, decade after decade, century after century!

Of course, if Country-X has to maintain its status as the currency for international trade, it cannot conduct quantitative easing for "no good reason". It will also have to do it in limited quantities. But, it can do it endlessly and derive benefits that no other country can derive.

Utopian societies get rid of the problem by mandating that goods and services should be paid using fiat currency. Gold dollars or token dollars are not appropriate for foreign trade in goods and services.

Problem 7

In token currency, the currency exchange organization provides its currency exchange service with the intention of making a profit. Thus it buys foreign currency at a lower rate than it sells. Then the currency exchange organization may buy 1 Country-X dollars for 1 Country-Y dollars, but will sell them for something more than 1 Country-Y dollars. Let us assume that it sells Country-X dollars for 1.01 Country-Y dollars. Thus, on each such trade, it makes a one percent profit. The payer bears this extra cost.

The profit motive of the currency exchange organizations makes the exchange of token currencies inefficient in inverse proportion of the profit percent.

The actual cost of making a single digital transaction is not anywhere close to one percent of the value of the exchange.

When payment is made using fiat currency, there is no bid-ask spread. From this perspective, the payment using fiat currency is better than payment using token currency. However, this is the least of the problems with using token currency.

In the Utopian way of conducting foreign trade in goods and services, one uses fiat currency, and there is no bid-ask spread for the underlying currency conversion. So, this problem, however insignificant, is also eliminated.

Concluding Remarks

The chapter "Foreign Trade" mentions two most important problems that Utopian societies should solve. They are:

1. Preserve local employment opportunities.
2. Prevent the exploitation of resources by other societies.

Several subsequent chapters discussed the system that achieved the two stated objectives.

The problems mentioned in "Problem 1" and "Problem 2" sections are the most significant of all problems related to present-day foreign trade. All other problems related to present-day foreign trade are a result of using the wrong currency for foreign trade.

Using the terminology introduced in the "Four Types of Currency", present-day societies use token currency for foreign trade.

Utopian societies use a combination of gold currency and fiat currency to conduct foreign trade.

All problems, related to present-day foreign trade, mentioned in this chapter simply cannot occur in the Utopian way of conducting foreign trade.