Foreign Trade in Goods and Services

Sustainable Foreign Trade as One of 6 Principles of Global Economic Order Under the Maxims Democracy and Market Economy

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Außenhandel mit Gütern und Dienstleistungen

Table of Contents

  1. Overview
  2. Preliminary Remarks
  3. Regulated Foreign Trade and Competition with Goods and Services
  4. Supplementary Free Trade in Intellectual Property


regionaleordnung01In view of the threatening extent of the devastations caused by the neoliberal economic doctrine, the turning towards compatible economic principles becomes almost existential. But only when these principles are combined to form a model of sustainable regional and global economic order, can the urgently needed economic policy measures be derived.

All 6 global principles are summarized in the article Principles of Global Economic Order in the form of questions. The supplementary 17 regional principles are listed in the article Prinzipien regionaler Wirtschaftsordnung, also as questions.

In the context given here, the term »regional« refers to largely homogeneous entities, currently primarily nation states and supranational political and economic areas (unions), that meet all the requirements for political sovereignty and economic autonomy and are therefore in a position to form a viable foundation for the prosperous coalescence of the world. Hereafter, these entities are mostly referred to as economic areas.

The European Union (EU) and, in particular, the euro zone existing within the EU, can serve as a cautionary example here. Both are supranational entities that have emerged from the political and economic self-interest of powerful players, and whose inhomogeneity and centralism have since unfolded great destructive potential (as a supplement see the article Demokratie und europäische Integration).

Preliminary Remarks

In the course of the historical economic development in Europe and the USA democracy and market economy have emerged as useful and reliable Maximes of Economic Order. Both maxims have, however, been distorted by the neoliberal indoctrination since the 1990s to such an extent that the »natural principles« inherent in them are hardly perceived by the citizens any more. It is therefore essential to return to these principles and to combine them into a model of a sustainable regional and global economic order. See also the article Market and Market Economy.

In contrast to the centralistic structures produced by modern Neoliberalism, the model presented here is based on decentralized structures, or, better still: on subsidiary structures. Only if the citizens in as many countries as possible are recognizing democracy and market economy in their interaction again as convincing maxims, can a culture of political co-determination and economic self-determination return to society, politics and the economy and work towards social and ecological justice. Embedded in subsidiary structures, the citizens bear full responsibility for their actions and well-being, so that they are always brought to shape the conditions in their immediate environment in exchange with each other and at the same time create the preconditions and the foundation for global exchange.

Social and ecological justice, by the way, arise from a multitude of economic mechanisms: For example, the terms Efficiency and Productivity as well as specialization, which are wrongly defined in the neoliberal context, are redefined in the sense of social justice and ecological sustainability and are no longer subject to the arbitrariness of »liberalized« (unregulated) markets, but to economic policy control. The market thus regains the freedom it deserves, which enables it under meaningful and uniform framework conditions, rules and standards to allocate economic resources efficiently and equitably like no other mechanism.

Thus, the price is able to perform its original function again as the central information medium and control element of market transactions of individual economic players, because under the conditions of social and ecological justice and productivity it reflects all internal and external costs. By allowing the players to be guided by truthful prices resulting from the interplay of supply and demand, economic resources move – as if steered by an »invisible hand« – to where they provide the greatest benefit to individuals and, at the same time, to society as a whole. As a supplement see the article Economic Pricing.

Subsidiary structures ensure that prosperity and welfare are no longer at the mercy of the imponderables of a worldwide production quantity achieved under oligarchic rule and high capital concentration, but result automatically from the domestic production structure. The production structure alone is decisive for local and regional economic diversity and consequently for the level of employment, the performance-related equal distribution in society and the preservation of natural resources.

Unlike domestic competition, international competition can not, by its very nature, be granted the freedoms of regulated domestic markets. It must rather be based on bilateral trade agreements given the completely different traditions, standards and resources in the world. In these agreements the exchange rate must be set as the crucial trading link, supplemented by autonomous tariffs and trade quotas to balance out the differences and to grant trade profits to both sides. The primary objective of these agreements must be to ensure that imported products with their characteristics and prices are integrated into domestic competition in the most stimulating but harmless way possible.

The separation into regional and global order thus results quite naturally from the principle difference between domestic and foreign trade. Besides, this explains why there can be no superordinate, all-dominant, self-regulating and self-stabilizing world economic order in a desirably diverse and democratic world. For more details see the article Future-Proof Foreign Trade.

Among politically sovereign and economically autonomous nation-states and economic areas, the global order is reduced to agreements of norms of conduct, especially regarding norms of international trade and cooperation. By applying these norms, economic subsidiarity can be extended beyond national borders and find its perfection at the global level in the form of projects of global interest and scale.

With domestic and cross-border subsidiarity the doctrinal practice of transferring economic powers from lower to higher levels (especially nonstate) is overcome, of which neoliberal protagonists claim it would bring about »more appropriate« and »more efficient« decisions. Along with overcoming this practice, the justification is removed for a World Trade Organization, which is entrusted by its current 164 member states as the guardian of the Grail of global cut-throat competition based on dumping prices in lead currency (i.e. US dollar or euro). This is an unprecedented event in economic history, especially because the condition for membership is the (voluntary) renunciation of national economic autonomy.

It should be noted that the demarcation of the specific functions of the various economic levels, i.e. the subsidiary structure of autonomous nation-states and economic areas both domestically and beyond their borders, is absolutely crucial for the future viability of economically autonomous entities and for the global economy as a whole:

Functioning regionality is a prerequisite for sustainable globality. Globality is the complement of functional regionality.

In what follows, is the plea for regulated foreign trade and competition with goods and services as one of 6 principles of global economic order:

3. Regulated Foreign Trade and Competition with Goods and Services

AußenhandelGüterDiensteJPG01To ensure sustainability, it is indispensable that international trade in goods and services is not based on absolute prices in lead currency (i.e. US dollar or euro), but that trading partners make their transactions conditional to comparative relative price advantages .

This requires an agreed (bilateral) exchange rate between two countries that corresponds to the ratio of the two average prices in local currency of all products potentially traded in both directions. Products whose relative price (product price divided by average price) is lower than the relative price of the comparable product of the trading partner have a comparative relative price advantage and thus become export candidates for the country of manufacture and import candidates for the trading partner. The importing trading partner can calculate its absolute trade profit by converting the absolute price of the imported product at the exchange rate into its own currency and subtracting it from the price of its own product. The great advantage of this trading basis is that different productivity levels of trading partners, and thus different absolute prices, are relativized by the exchange rate, and that, in addition, autonomously determined import tariffs and import quotas create further scope for adjustments to the respective domestic competition..

TradeRelativePricesPNG01As the figure on the left shows, even extremely differently developed countries such as Germany and Greece can trade profitably with each other. In the case shown, the exchange rate results from the two average prices of trade products of 35 euros and 88 drachmas respectively. By comparing the relative prices of comparable products, those with the lowest prices are identified as trading candidates, followed by the calculation of absolute trade profits as explained above to determine the potentially most profitable trade flows. On this basis, Germany could import wine and dried fruit with trade profits of 10 euros and 0.4 euros per unit respectively, and Greece could achieve a trade profit of 27.5 drachmas per unit from imported yarn.

For a deeper insight into foreign trade and competition with comparative relative prices, I recommend the articles Future-Proof Foreign Trade and Comparative Advantage – Upgraded.

OptimizingTradeProfitsPNG01Usually, economic areas trade with more than one partner, so that multi-bilateral structures exist that provide a multitude of different comparative relative price advantages for individual products. Under these conditions, importing countries have multiple choices and can choose the import products with the lowest relative prices and thus highest trade profits.

In the figure on the left, Poland could import potatoes from England at a trade profit of 0,48 zlotys, while Bulgaria can choose between a profit of 1,69 levs from Polish potatoes and a profit of 1,4 levs from English potatoes. In purely monetary terms Bulgaria would have to import Polish potatoes, but …

In the interest of sustainable welfare, however, trading partners should in addition take product quality and social and environmental compatibility of potential imports into account, otherwise unexpected costs could arise during the use and beyond that during maintenance and disposal of products. In the long run, economic areas are therefore well advised to demand product standards from their partners that are comparable to their own, while in doing so, they automatically contribute to the continuous worldwide improvement of standards.

Multi-bilateral trade based on comparative relative advantages enables all trading partners to regularly optimize their trading profits with regard to prices and quality.

The optimized multi-bilateral trade flows that economic areas establish by identifying relative price advantages are a never-dwindling source of wealth creation. Every single import increases the prosperity of an importing country whenever a product enters the country across the border and the relative price advantage is transformed into an absolute trade profit by applying the exchange rate. At the same time the exporting country receives foreign exchange for the transaction which it can use in return to pay for its own imports.

The prosperity gains achieved in the trade based on relative price advantages do not only benefit the companies directly involved in the trade, but indirectly benefit all citizens within the participating economic areas. The trade profits therefore have a business and a macroeconomic effect. In addition to precisely calculated exchange rates, as stated above, two other factors are decisive for the effects:

In trade agreements, economic areas must grant each other autonomy to limit trade volumes of imports and to impose customs duties on imports on a case-by-case basis to adjust import prices in such a way that imports, on the one hand, improve the diversity of domestic supply and stimulate domestic competition, and on the other, to prevent existentially threatening crowding-out of domestic competitors. Volume limitations should also be set for export products to avoid extreme specialization in supposedly lucrative export markets including the associated harmful concentration of production capital and entrepreneurial power, but also to protect domestic economies from risky dependencies on other economic areas and from the risks of general external developments and shocks.

The autonomy, that is mutually granted in bilateral trade agreements, also serves economic areas to achieve equitable trade and current account balances with each of their partners in the long term, again to avoid both import and export dependencies as well as overall structural imbalances. The course for this is set in the regular compilation of bilateral product price lists and the calculation of exchange rates when the opportunity arises to plan trade flows of goods and services in advance with a view to achieving balanced trade.

In trade with comparative relative advantages, autonomous economic areas can direct their trade flows towards incentives to increase their productivity, towards an increase of their supply diversity, and towards a balance of payments and trade.

By the way, competitiveness on export markets is documented to the advantage of all players in the course of the periodic recalculation of bilateral exchange rates. Each recalculation provides exporting companies with their exact competitive position in foreign trade, both with regard to their domestic and their foreign competitors. This means that exporting companies get a regular chance to adjust their productivity and price levels in relation to their own national average as well as to the relative prices of trading partners. Companies belonging to non-export branches have to compare their own absolute productivity and price level with that of their domestic competitors.

To avoid misunderstandings: Even in foreign trade and competition based on comparative relative price advantages, companies can be driven out of their market if they lose their competitiveness. This reflects the constant process of clean-up and renewal that is in the service of productive progress and is indispensable in a market economy. The crucial difference to the neoliberal system, however, is that in the regulated market economy promoted here the possibility of crowding-out of companies by foreign competitors who wilfully dump their absolute dollar or euro prices is systemically excluded.

Under the above conditions, trade in goods and services essentially comprises two product groups:

Firstly, country-specific goods and services including specific raw materials that are unrivalled worldwide as specialties and thus have a natural relative price and competitive advantage. To ensure that these unique products do not burden the necessary bilateral current account balances, economic areas are required to agree with their trading partners, wherever possible, on a mutually value-balanced trade in country specialities.

Secondly, all conceivable products of the basic supply, which are produced in a similar form across the globe and which experience continuous qualitative improvement under the pressure of international competition. Due to their worldwide spread, these products can be mutually traded in agreed quantities with all suitable trading partners. This so-called intra-industry trade allows economic areas to expose their producers to beneficial international competition through imports limited in volume and prices adjusted by means of customs duties. As already mentioned, these measures have a dual effect: domestic producers are encouraged to improve their productivity and, at the same time, the diversity of domestic supply is enhanced.

4. Supplementary Free Trade in Intellectual Property

Foreign trade in goods and services based on comparative relative price advantages is usefully complemented by global free trade in intellectual property, which is another of the 6 principles of global economic order and entirely at the service of global progress. See the article Freihandel mit geistigem Eigentum.

Note on the COVID-19 Pandemic

The pandemic has noticeably revealed the significant weaknesses of the neoliberal economic system for everyone, above all the shortage of medical, but also other products, caused by disruptions in the absurdly networked value and supply chains across the globe.

The analyses of the neoliberal system as well as the principles and practical procedures based on them for building a sustainable system, which are presented in this compendium, thereby obtain an unexpected topicality. Now is the time to seize the opportunity and build up economic policy pressure to enforce the development of an economic order that is sustainably oriented towards social and ecological welfare.

The following article refers to the targeted arguments contained in the Compendium: COVID-19 and Globalization

Click here for the German-language version: Außenhandel mit Gütern und Dienstleistungen.

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