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Thursday, September 13, 2012

Foreign Trade and International Price Formation

For a highly developed country, self-sufficiency remains a dream and, to vary a well-known expression of Moltke’s, not even a pleasant dream—all the less pleasant the larger, the richer, and the more powerful a country is and wishes to remain. It is fitting, then, that we include in our survey a brief description of the special characteristics of international market and price relationships.8
Technical advances in the transportation and preservation of goods have gradually eliminated the chief obstacle to commerce between widely separated regions, viz., the expenses and the losses connected with the conquest of distance. Indeed, international trade has truly become world trade, linking together not only neighboring countries but also those most remote from one another. To be sure, not all goods are equally suited to international trade, since the resistance of each good to the conquest of distance varies. There are goods which are real globe-trotters, whose motto might be said to be “where I prosper (i.e., where I get the highest price), there is my country.” They are of such robust constitution that neither the longest overland trips nor the most fatiguing sea voyages seem to affect them. They do not spoil; moreover, their specific value (i.e., their value per unit of weight or volume) is high enough to remain relatively unaffected by transport costs. These are the goods which are designated as international goods. To this group belong the bulk goods of world trade: wheat, metals, rubber, coffee, textiles, etc., and the majority of manufactured goods.
Other goods are not so cosmopolitan. Their “patriotism” is so marked that only in exceptional cases do they undertake a trip abroad. To this group belong goods which spoil quickly: strawberries, fresh fish, livestock, and finally—the proletarians among goods—paving stones and bricks. The latter could no doubt survive the longest voyage, but their specific value is so slight that they would be unable to afford the travel expenses involved. Lastly, there is a group of goods whose patriotism is truly staunch; there is nothing to be gained in their being shipped abroad. Such are goods which, as in the case of certain household goods, serve solely for the satisfaction of a want peculiar to one country.
In addition to material goods, services have acquired increasing importance in world trade, a proof of which is the ever-growing extension of tourist traffic (the so-called “invisible” imports and exports). The majority of services must, in fact, be procured in a given locality and it is upon this peculiarity that the tourist trade rests. The movement of tourists to Switzerland thus represents a virtual (invisible) exportation, though it is certain that not every Zurich barber realizes that in cutting an English traveler’s hair, he is engaging in the export business.
It is, however, not without interest to note the fact that technical progress has made possible the transportation of services which heretofore were available only locally. The motion picture industry, for example, makes it possible for a theatrical performance to be packed in a tin and shipped, ready to be enjoyed, throughout the whole world, a development which has had no small significance for the world economy. Radio and now television-by-satellite render even the film-container superfluous. Whether application of the canned goods principle to art will preserve its quality while increasing its quantity remains an open question.
But international trade is not confined to goods and services alone. It also includes, exactly as trade within a country, every conceivable type of credit transaction and capital transfer. In the course of the development of international trade, the latter activities have acquired ever increasing importance, but they pose problems too complicated to be discussed here.
The importance of international trade can hardly be over-emphasized. The fact is that the nations of the world have, in recent generations, attained a degree of economic interdependence of which few persons have any accurate idea. All countries, all regions are today so closely linked together by economic interrelationships of every kind that a whole has been created in whose successful functioning, as well as in whose decline and destruction, all share. If we do not succeed in rebuilding the structure of the world economy, so heavily damaged by the storms of recent decades, every country will be condemned, in greater or lesser degree, to the ravages of a lingering aenemia. No country can remain indifferent to the success or failure of the reconstruction of the world economy. No country which has its own interest at heart can afford not to contribute its share to such a reconstruction.
A fact which merits the attention of psychologists and sociologists is the astonishing inability of most people to comprehend any matters relating to international trade—a purblindness such as they manifest towards no other aspect of economic life. Surrounded by this incomprehension, the economist’s task is a truly ungrateful one. Having in view the welfare of his country, his concern is to explain dispassionately the nature and functions of foreign trade, disassociating these from the extra-economic difficulties arising from such trade. However, the effort to reveal the inanity of the arguments which are invoked in favor of sealing up the country economically, and to expose the superstition behind the fear of an unfavorable balance of trade is one which generally meets with a peculiarly disappointing response. It is not without reason that the great English economist Alfred Marshall could say that for a true economist it was almost impossible to be a good patriot and to have at the same time the reputation of being one.
It is, of course, true that it is precisely in the realm of international trade that we encounter concepts which are especially difficult to comprehend. These concepts can be mastered only when we begin by considering the nature of international trade in its simplest form, starting with the idea that, exactly as internal trade, it rests on the division of labor and on the exchange of goods resulting from this division of labor. No matter how widely extended in space is trade arising from the division of labor, nor how bewildering the tangle of enterprises that compose it, the whole resolves into one process, the nature of which was previously made clear in our discussion of the structure of the division of labor. The fact that in the case of international trade the participants in the process belong to different payment communities does not any more change its underlying character than the fact that they possess different passports and different residences. Nonetheless, international trade encompasses a number of peculiarities which, in a given instance, may give rise to difficult theoretical and practical problems.

Once we have grasped the idea that foreign trade is founded on the principle of the division of labor, the real functions of imports and exports become immediately clear, and a number of misunderstandings are dissipated. Above all, we are in a position to rectify the widespread notion that an export is something good and an import something bad, so that what matters most is to export as much as possible and to import as little as possible. Clearly, exports and imports stand in the relationship of means to end: to be supplied as abundantly as possible with goods is the end, but since the foreigner, alas, generally does not make us a gift of his goods, we must give something for them, and what we give are exports. There are, to be sure, many commodities which we get gratis from abroad, e.g., birds of passage, flotsam, fish, and so forth, and if the concept “abroad” is taken in a vertical sense, we can also include in our reckoning sunlight, meteors, and other presents from Heaven. No one will complain over these cases of “pure” imports, no one will anxiously inquire whether there has been a corresponding export. But the cheaper is a foreign good, the closer it approaches to being a free gift. The less must a country export to pay for its imports, i.e., the higher are export prices in comparison to import prices, the greater is that country’s gain from the international division of labor.9
This conclusion, however, is so opposed by current opinion on the subject, that we must attempt still a second demonstration of its truth. When a country does not produce everything itself but procures some things through exchange with another country, it adopts a method which—as we learned in a foregoing section of this book (pp. 66-67, 129)—permits it to produce certain products cheaper than before. Let us suppose that foreign trade between Turkey and Switzerland consists in the exchange of Turkish tobacco against Swiss paper. We may then conceive of the paper factories in Switzerland as nothing other than huge machines producing cheap tobacco. Conversely, the eye of the economist discovers that the tobacco fields of Anatolia are, in the last analysis, plantations on which paper is grown more cheaply than if it were produced directly. Foreign trade is similar, then, to a labor-saving machine or to any other method of lowering production costs. The usefulness of this machine is the greater, the more favorable is the ratio of cost to yield, i.e., the less we are required to export in order to obtain a given quantity of imports. The dearer is tobacco and the cheaper is paper, the better it is for Turkey, and vice versa for Switzerland. Were the Swiss to put an end to this exchange by prohibiting tobacco imports and growing tobacco themselves, they would be behaving exactly as if they had smashed a labor-saving machine. In addition, the question would arise as to who would now buy Swiss paper, for the Swiss who had up to this point purchased Turkish tobacco had also thereby indirectly purchased their own paper. Conversely, by prohibiting the import of paper, Turkey would not only deprive herself of good and inexpensive paper but would cause a part of the harvest of tobacco to remain unsold inasmuch as every Turk who had purchased paper had also indirectly purchased Anatolian tobacco.
But perhaps all that we have said thus far is not fully convincing, since it appears to suggest that there is really no foreign trade problem at all. Should all countries then proceed to pension off their customs officials? Although worse things could befall mankind, our preceding reflections have had no such radical objective in view. Foreign trade, in fact, encompasses a number of problems which are extremely difficult to solve and which may justify some degree of state regulation. But these problems are quite other than what they are usually thought to be. It is impossible, in a few words, to give any adequate description of them. It must suffice to refer to what has already been brought out in another part of our inquiry: that for the increase in productivity which we owe to the division of labor we must pay a price in the form of possible economic, social, and cultural disadvantages. The further the division of labor is pushed, the more proper it becomes to ask the question whether this price is not too high. This applies especially to the international division of labor which, for obvious reasons, is possessed of a particularly unstable and uncertain character. It is for this very reason that the ideal of obtaining provisions as cheaply as possible is, at present, frequently thrust in the background in favor of other ideals. We should beware, nonetheless, of allowing ourselves to be led astray by those who cite these ideals merely to cloak their own economic interests. To this we may add that the importation of cheap goods, though generally advantageous at present, can have a paralyzing influence on the future development of domestic production or can lead to costly dislocations to which it would be undesirable to see the domestic economy exposed. These few remarks must suffice to show that one need not do violence to logic to justify the purposefulness of governmental interventions in foreign trade. Economics does not teach that every intervention of the state is an evil; it teaches only that it is necessary to weigh carefully the facts in the given case, and thereby proves itself to be the indispensable instrument of a far-sighted and genuinely national policy.
In spite of all we said thus far, we have not yet fully clarified the principle of the international division of labor. Carrying our inquiry further, we discover a difficulty which has already given rise to many wrong opinions. When I write books and leave to the carpenter the job of making bookshelves, I provide one more instance of that division of labor in which every individual is superior in his own field to the nonprofessional and indubitably the better off, economically, for such specialization. But what if it is a question of cataloguing my library? Would it be advantageous for me to engage someone for this task, even though I can do it better myself? Should I engage a gardener to spade my garden although I could do the work just as well myself? There can be no question that it would be to my advantage to employ a librarian and a gardener if my skill in writing books is greater than in cataloguing or spading. It is easy to transpose these simple cases to the level of the world economy. In the exchange of goods between tropical countries and northern industrial countries we have an obvious case of reciprocal superiority in production. We can now also understand how two countries can enjoy a profitable commercial exchange even though one of them is inferior to the other in all branches of production, the proviso being that its inferiority is not the same in all branches of production. Israel for example, is a country which has received a niggardly endowment from Nature. Many infer from this that the Israeli economy should be protected against competition from more favored countries. But there is no reason why Israel should not also enter into advantageous trade relations with countries which are superior to it, if it limits itself to those branches of production in which its inferiority is the least. On the contrary, since Israel can change nothing with respect to its generally rather unfavorable production conditions, the resort to tariff protection to render profitable branches of production in which its inferiority is relatively great can only worsen its situation, to say nothing of the fact that thereby the burden of its productive inferiority would probably be shifted to weaker shoulders. Naturally, such a country must resign itself to having low money costs (meaning, chiefly, low wages), but it would be a still poorer country were it to refuse to share in the division of labor of the world economy. Poor countries can afford even less than rich ones to shut themselves off from the world economy.
In a world where people could move freely from one country to another, equilibrium would result from the fact that people inhabiting the poor countries would flow into the rich countries until average incomes had attained the same level everywhere. There would be, then, no rich countries or poor countries, but only countries with dense or sparse populations. But since there are in fact a thousand and one obstacles to international migration, people must accommodate themselves to unfavorable production conditions by being content with low average incomes. Moreover, their situation could not fail to be considerably improved by the fact that the world economy would allow them to confine their production to the industries in which they can best meet competition. In this way, the international movement of goods acts as a substitute for the now shackled international movement of persons.
Economics of the Free Society

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