Building Utopia

Foreign Trade

Foreign trade has a very long history. It has been practiced in the world for several millennia. In general, foreign trade provides plenty of benefits. Foreign trade has a dark past. Foreign trade was instrumental in conquest and colonization of large parts of the world. It is foreign trade that led to the subjugation of many nations, exploitation of several continents and wiping out indigenous people entirely in some cases. It played a key role in the establishment and perpetuation of slavery. With such a history, all nations of the world and all citizens of each country need to be careful in dealing with foreign trade. We want to eliminate all the bad aspects of foreign trade and keep all the good ones. So, what is the most important reason for foreign trade? What are the desirable characteristics of foreign trade? What systems and mechanisms are required to ensure that foreign trade actually can have the desirable characteristics? Can we redesign the system of foreign trade so that trade wars become obsolete? Can this system be fair to all countries? These are the questions that we will discuss in this chapter.

In the context of foreign trade, we will use the words "society", "country", and "nation" interchangeably.

An Overview

What is Foreign Trade?

Foreign trade is an exchange of one resource for another between parties that belong to different countries. In the context of foreign trade, the term resource is used in a broad way and includes raw materials, life-based produce, manufactured products and services provided by humans.

There are many resources that show up in foreign trade. We trade natural resources like gold, silver, metals, crude oil, coal, lumber, ores, minerals, etc. We trade manufactured goods like electronics, cars, heavy machinery, clothes, shoes, jewelry, etc. We trade life-based produce like grains, fruits, vegetables, spices, cotton, silk, wool, meat, dairy, poultry, fish, etc. We also buy and sell processed foods across country boundaries. We also avail of pure services across country boundaries.

What is the need for Foreign Trade?

The section, "The Need for Foreign Trade", provides a more wordy answer that can be summarized as follows:

  • Procure natural resources that cannot be found in the country.
  • Import manufactured things that are better manufactured elsewhere.
  • Import something because it can be imported cheaper than producing it.
  • Export manufactured things that we are better at manufacturing than others.
  • Export something because we have the capacity to manufacture it, but lack demand.

Overall, foreign trade is one component in the overall quality of life that citizens can enjoy.

What is the need to rethink Foreign Trade?

The section, "Need to Rethink Foreign Trade", outlines the several undesirable situations in foreign trade. Here is a summary:

  • Bilateral and multilateral trade agreements are a symptom of the fact that societies of the world have not yet figured out how to do foreign trade that is always mutually beneficial.
  • Trade wars are a symptom of the fact that those trade agreements have serious deficiencies. In a trade war, at least one party thinks there is some level of unfairness, some level of exploitation.
  • Unemployment induced by imbalance in foreign trade.

The imbalance is the root cause of these undesirable situations.

What are the desirable characteristics of foreign trade?

The section, "Desirable Characteristics of Foreign Trade", provides an answer that can be summarized as follows:

  • Fair pricing for both countries; not just both trading parties.
  • Foreign trade should be balanced in terms of the value of imported vs exported goods and services.
  • More regulated and scrutinized than trade within the society. Without additional scrutiny, a society can lose something important.

How do we ensure that the foreign trade occurs in a desirable way?

The section, "Mechanisms of Foreign Trade", outlines the basic mechanisms. Here is a summary:

  • In foreign trade between any two countries, the governments of both countries are intermediaries.
  • The medium of exchange for foreign trade should be gold.
  • The government is the only conduit for making and receiving payments in gold, to and from other countries.
  • We need an International Exchange for Standardized Commodities. This is to ensure that standardized commodities are traded at fair and open prices.
  • Export and import quotas for standardized commodities. This is from a local perspective only. There are no special cases for trading partners.
  • Surplus of exports over imports adds gold to the local economy; it makes gold cheaper. Deficit of exports over imports removes gold from the local economy; it makes gold more expensive.
    • This is the first natural way of nudging to balance.
  • We need to levy an Import Duty when there is excess of imports over exports.
    • This is independent of trading partner nations.
    • The rate is set such that the entire deficit can be eliminated in a fixed number of years by simply collecting the import duties or tariffs at an appropriate rate.
    • This is the second natural nudge to achieve balance.
    • It is dynamic. When necessary, it can be much stronger than current mechanisms, without being biased or arbitrary.
  • The cost of international cooperation for foreign trade is borne by countries in proportion to the value of their annual foreign trade.

Details about the implementation of the outlined mechanism are in the "UFI Book".

What about foreign investments?

That is a good question, but its answer is not short. This book is focused on a Fair Monetary System and Social Welfare System in an ideal society. Foreign investments is not a main component of these two focus areas. Hence, we will not discuss foreign investments in this chapter or this book.

The "UFI Book" discusses the financial infrastructure required to implement the proposals mentioned in this book. That discussion includes local investments and international topics, including international investments.

That said, we would like to mention that in order to buy foreign investments, one does not pay in gold. Surprised? The reasons for this difference are elaborated in the "UFI Book".

The Need for Foreign Trade

The real necessity of foreign trade is to obtain natural resources and life-based produce that cannot be found or produced within the boundaries of one's own country.

In theory, every country can manufacture anything that they need and want. So, when one country imports manufactured products from another country, it does so only for the convenience of not needing to manufacture all the things that are needed and desired.

A country may want to specialize in some products and may want to rely on other countries for the rest of the products. Economic advantages of scale of manufacturing operations may also imply that it is less resource intensive to import rather than manufacture locally. The reasons to import manufactured products like desire to specialize and economies of scale are in the category of "good to have" rather than "strictly necessary".

In theory, citizens in every country can provide its own fellow citizens the services that they need. The most obvious example of this kind of service is a call center that employs people, and uses communication technology and devices to communicate with customers, in order to answer their questions, and assist them remotely in troubleshooting problems associated with the products that they have purchased. All this communication is just a matter of knowledge, and knowledge can be had by anyone.

So, when citizens of one country use citizens of another country to provide them some service, they do so only because it is convenient or because the country has not taken efforts to develop the required knowledge. Availing services from some foreign country is basically using labor that resides in that foreign country to do some work that does not directly translate to obtaining natural resources, manufactured goods, produce or processed food.

Foreign trade in manufactured goods and services are not strictly necessary as every country, in theory, can manufacture stuff and can provide services.

To the extent that a country is not able to manufacture goods or provide services needed within the country boundaries, it will need to avail those things as part of its foreign trade.

For any country, the amount of comfort that the citizens of that country can enjoy is directly proportional to the net quantity of natural resources in the country.

For any country, the amount of comfort that the citizens of that country can enjoy is inversely proportional to the number of citizens in the country.

For any country, the amount of comfort that the citizens of that country can enjoy is based on the wise use of knowledge, resources, technology, and automation.

Foreign trade is involved in this "comfort equation" primarily in aspects of resources and technology. Either some resources are being traded or some products made using technology are being traded. So, it is in the best interest of any country to ensure that for every resource exported, it gets something of equivalent worth. Similarly, for everything imported, it should ensure that it pays no more than its fair price, because if it did, then it would be equivalent to losing its resources.

Need to Rethink Foreign Trade

Currently, countries all over the world are involved in foreign trade, but this trade has several undesirable characteristics.

These undesirable characteristics are indirectly visible when we observe trade wars between countries. Whenever such a thing happens, there is some unfairness that is being attempted to be dealt with. Usually this trade war never resolves the core issues, it merely makes it look like there are winners and losers. Moreover, both countries in such a trade war claim victory.

These undesirable characteristics are visible when civilized countries don't engage in what seems to be a trade war but they "negotiate and sign treaties" or "form pacts and alliances" and claim these negotiations, treaties, pacts and alliances to be a win-win situation. Clearly if after these negotiations, treaties, pacts and alliances they claim a win-win situation, then before that there were losers in that foreign trade. So are these win-win parties truly the winners? Can there be winners without there being losers? Do these winners have all the desirable characteristics of foreign trade?

Many times, the undesirable characteristics don't even show up on our radar. That is because the unfairness is so high and one of the trading partners is so weak that the weak trading partner is truly helpless and hence cannot even afford to wage a trade war and does not have any negotiation leverage.

As mentioned in the "Reasons for the Rich Getting Richer" chapter, an excess of imports over exports will induce, in the importing society, some level of unemployment. This unemployment is induced by an imbalance in foreign trade.

The imbalance in foreign trade is the main issue that causes the symptoms like "losing jobs to foreign societies", "need for trade treaties", and "trade wars". We need a system that constantly nudges any emerging imbalances towards a balanced state.

The idea that "foreign trade needs to be balanced" implies that societies need to be self-sufficient. Because, without self-sufficiency, there will be an imbalance in the foreign trade.

For any society, self-sufficiency should be the general goal. So, most of the things that are needed and wanted within a society should be created within the society. However, every society does not have all kinds of resources needed for creating the products and services that satisfy the needs and wants. This is the justification for foreign trade. Foreign trade should be just a means to obtain that which is available from some other society in exchange for something of equivalent value and abundantly available locally. The idea of "balanced foreign trade" should be viewed in the context of "A society should be self-sufficient".

Desirable Characteristics of Foreign Trade

Trade of any kind is not charity. It needs to be fair. It needs to be compensated. As in any trade, foreign trade needs to be fair for both parties. This means that when exporting, we need to ensure that we are getting a fair price for what is being sold. This means that when importing, we need to ensure that we are not paying too much for what is being bought.

In foreign trade, the value of exports and imports will seldom be exactly the same in any time period. From a country's perspective, in any period of time, that country may either have a surplus or deficit of exports over imports when the value of the exports and imports is measured in terms of the country's currency. The ideal desired state in foreign trade is to neither have a surplus nor have a deficit. Balanced foreign trade is desirable.

Some people may consider that they need the freedom to do whatever foreign trade they desire. In a Utopia, citizens have this freedom within the boundaries of their country. When engaging in trade with any party outside one's own country, citizens and organizations have a duty to ensure that such a trade is not to the overall detriment of their own country. For a country to be a utopia, it needs to be vigilant in identifying intentional or unintentional harm that may come from foreign trade. For this reason, free foreign trade is not possible. Foreign trade needs to be more regulated and more scrutinized than trade within the boundaries of the country.

Mechanisms of Foreign Trade

All three desirable characteristics are intertwined. Hence, the mechanisms to ensure the desirable characteristics are also intertwined. So their discussion will also be intertwined.

In foreign trade between any two countries, the governments of both countries are intermediaries. The purpose of introducing the government as an intermediary for all foreign trade is to enable citizens to ensure fairness and balance of the trade. It also introduces regulation and scrutiny about what is being exported and imported. This involvement of the country's government as an intermediary in foreign trade is consistent with protecting our own national interests. If we need to spend money on arms, ammunition and armed forces, then we also need to spend money on ensuring that foreign trade does not cause our country to lose resources to other countries that are trying to exploit us or merely trying to buy our resources cheaply. Not all countries in the world are trying to extract a "great deal" just for them. Most of the countries would be in favor of fair and balanced trade. But just like in the case of national defense, regardless of the intentions of other countries, it is our responsibility to protect what is ours.

In foreign trade between any two countries, the pricing and conducting all foreign trade should be in gold; the precious metal. That is, the medium of exchange for foreign trade should be gold. All exports and imports should be priced in gold. Payment for all exports should be received in gold. Payment for all imports should be made in gold. Gold is chosen as the currency of exchange in foreign trade because it is a scarce natural resource, and it is considered precious by all. An imbalance in exports and imports will cause its local price to fluctuate and hence make either exports or imports more attractive and hence act as a natural nudge towards balance.

As the government is an intermediary of all foreign trade, it is the only conduit for making and receiving payments in gold to and from other countries. Thus, any citizen or organization that is involved in exports or imports must go through the government for the payments related to exports and imports. The government of our country being an intermediary will coordinate these payments with governments of other countries. Countries of the world will set up an "International Trade Facilitation System" to manage, administer and facilitate international trade.

The most important part of this international trade facilitation system is "International Exchange for Standardized Commodities". It is an international market for buying and selling standardized commodities. Standardized commodities are those natural resources, manufactured goods and produce that can be standardized and have been standardized. The purpose of this international exchange is to ensure that standardized commodities are traded at fair and open prices. Ideally, almost all foreign trade should be in terms of standardized commodities.

For foreign trade in things that are not standardized commodities, the government must assess each proposed foreign trade for its price fairness and has the authority to reject the request for the trade if it considers that the trade amounts to a less than fair deal to the nation. All countries must do their due diligence in non-standard commodities. All countries must encourage their citizens and organizations to conduct their foreign trade in standardized commodities. A country must charge a fee called "Non-Standard Export Import Fairness Compliance Fee" to pay for the assessment of the proposed foreign trade in non-standard commodities. The value of this fee is a small percentage of the total value of the trade. This percentage is a policy parameter that citizens collectively control.

Every country may have "Export and Import quotas" for standardized commodities. These quotas limit the total amount of the standardized commodity being imported or exported. These quotas are from a country's perspective, regardless of which other country is the other party for the standardized commodity.

A surplus of exports over imports will add more gold to the local market than previous levels, thereby causing downward pressure on its price. A deficit of exports over imports will reduce the total quantity of gold from the local market, thereby causing upward pressure on its price. This is the natural nudge for exports and imports to be in balance.

The method to assure a state of balance is for every country to impose "Import Duties" when there is a deficit in the value of exports as compared to the value of imports. The rate of such duties or tariffs is the same for all imports regardless of the country of origin and regardless of whether the imports are standardized or not. The rate is set such that the entire deficit can be eliminated in a fixed number of years by simply collecting the import duties or tariffs at an appropriate rate. This rate of import tariffs depends on the quantity of deficit and the number of years in which to eliminate the deficit. So, on any given day, the rate of import duties should be such that the current accumulated deficit can be eliminated in some fixed number of years. The number of years in which to eliminate the deficit is a policy parameter that citizens collectively decide. This parameter is called "Import Deficit Elimination Years". Note that if there is no deficit, there are no tariffs.

Since payment for imports is in gold, the import tariffs are also in terms of gold. The gold thus collected as import tariffs is kept safe by the government for a fixed number of years, starting from the day the payment was made. After that period is over, it is sold into the local gold market. This keeps the gold out of the local market for a fixed number of years, thereby adding to the upward pressure on the local price of gold, thereby dissuading imports. After the fixed period is over, it is returned to the local market, since it has served its purpose. The money obtained by the sale of gold into the local market is distributed equally to all citizens, by depositing that money into citizen's accounts.

Countries bear the expenses incurred for international cooperation in proportion to the value of their annual foreign trade. Funding of all expenses that a country has to incur both for its international obligations and for being an intermediary in foreign trade is through taxes. Just like all other things, since foreign trade is for the common good, its cost is paid for by taxes paid by all citizens proportional to the wealth they possess.

From the perspective of describing the concept of the mechanism of foreign trade, the above is sufficient. However, its implementation is more involved, and requires more concepts to be discussed. All that is done in the "UFI Book".