Foreign Trade
This chapter discusses two goals that foreign trade between Utopian societies should accomplish. These goals aim to mitigate potential harm in foreign trade while retaining its benefits. Additionally, we categorize all monetary transactions between societies. Some of these are related to foreign trade, and others are not.
Overview
We begin with some fairly obvious points.
Trade is the exchange of one item for another, typically involving the exchange of a resource for money. Some examples of resources are: raw materials, agricultural produce, manufactured goods, and services.
Trade involves a change of ownership of the traded item. This change must be recorded, as we measure individuals' wealth based on all assets they own.
Foreign trade refers to the exchange of resources between parties from different countries. Foreign trade is beneficial.
When considering foreign trade or any other monetary transaction between two Utopian countries, the changes in ownership need to be recorded across country boundaries. This implies the involvement of the UFIs from both countries.
In light of the recent events related to foreign trade and tariffs, it is clear that societies have yet to solve their foreign trade problems.
Currently, two major methods attempt to address these problems:
- Making deals and agreements, then renegotiating them. For example, transitioning from NAFTA to USMCA.
- Inflicting economic harm on local entities and their foreign counterparts by imposing significantly higher import tariffs, thereby compelling all parties to the negotiating table.
Regardless of the method, past negotiations, deals, and agreements have failed to resolve the problems. They have failed to establish an effective foreign trade system, necessitating renegotiation.
This is expected, as current societies are not ideal; they are not utopian.
The following two goals encapsulate the idea that "foreign trade should not be harmful":
- Preserve local employment opportunities.
- Prevent the exploitation of resources by other societies.
The "Goals" section elaborates on these objectives.
The "Categories" section classifies all international monetary transactions into categories. The categories of goods, services and commodities are considered foreign trade. The categories of investments, money transfers, and asset transfers are not considered foreign trade.
The system described in the upcoming chapters handles all these categories by applying the appropriate principles to each while striving to achieve the two goals.
Goals
In the Building Utopia book, we discussed how an export deficit relative to imports can significantly reduce employment opportunities within our society. This is undesirable because almost all of us need employment to earn a living in order to survive, be comfortable, and enjoy life.
Therefore, preserving local employment opportunities is a key goal of the Utopian foreign trade system.
As discussed in the Building Utopia book, a Utopian society implements wealth redistribution, wealth-based taxes, a much better fiscal policy, a much better monetary policy, the Utopian Payment Model, and social employment.
All of these systems reduce the need for the citizens of a Utopian society to critically depend on foreign trade as their means of survival and basic comfort. Moreover, these systems reduce the harm associated with imbalanced foreign trade.
If citizens engage in foreign trade, either directly or indirectly, they do so to improve their standard of living beyond survival and basic comfort.
Engaging in foreign trade is neither a right nor a privilege. It is a freedom, though subject to necessary limitations and constraints. Allowing unrestricted freedom in foreign trade is unwise, as excessive trade can eventually harm other citizens; whether within one's own society or another society. An ideal society does not seek to benefit some citizens at the expense of others.
Import tariffs are the most obvious constraints in foreign trade. Rather than banning imports outright, tariffs aim to discourage them. The Utopian foreign trade system will have them; but its underlying principles are very different than those in today's world. This is to be expected, because today's world is not utopian.
In the past, resource exploitation of one society by another took the form of conquest and subsequent plunder. The world has largely abandoned this "take it by force" behavior. But, there are subtle ways in which it still happens. We will design a system that makes this subtle exploitation impossible.
If trade occurs within a single society, both the buyer and seller being in the same society, the payment and its receipt are in the same local currency.
In local trade, whatever got traded stays within the society. From a society's perspective, resources are neither gained nor lost. We aim to achieve this, to a significant extent, with almost all international monetary transactions.
This goal has a much bigger impact than the goal of preserving local employment opportunities.
Categories
When we think of foreign trade, we generally think about goods and services. However, there are additional categories beyond goods and services that have a monetary impact across borders. We need to consider all international transactions. All these transactions fall into the following categories:
- Goods
- Services
- Commodities with the following important subcategories
- Precious Commodities
- Other Commodities
- Investments
- Money Transfer
- Asset Transfer
Only some of these can be considered foreign trade. UFI enables and facilitates international monetary transactions, including foreign trade. UFI will handle transactions within all these categories based on principles and mechanisms that are consistent across all these categories.
In this section, we provide a brief description of these categories where necessary. For categories that require elaboration, we provide further details in a separate section.
The categories of goods and services do not need any further description. These are the subject of our first goal of "Preserve local employment opportunities".
Commodities are an important part of foreign trade, and their significance is elaborated in the "Commodities" section. In short, commodities are classified as either precious commodities or other commodities. Precious commodities are the subject of our second goal: "Prevent the exploitation of resources by other societies".
The second goal is more important than the first goal, and we will discuss it first in the upcoming chapters.
International investments differ from foreign trade, and the reasons are explained in the "Investments" section. In short, an international investment is something that one can own from another society or country, and that thing can also be considered as a monetary investment by many, as long as that thing cannot be taken out of that country.
The category of money transfer is about giving some money to another person. Money transfer implies a change of ownership of the money. Many people routinely give money to other people in their own society. Similarly, it should be possible to send money to someone in another country. Country boundaries may imply some restrictions and limits.
The category of asset transfer is about giving things to someone; and that involves change of ownership of that thing. The recipient could be in the giver's society or in another society. Asset transfer also arises in immigration. When people immigrate from one country to another, they take with them several of their own possessions. Immigrants continue to be the owners, ownership does not change, but the society where those things are located changes. Citizens of more than one society can transfer assets to themselves from one society to another.
In addition, the system should also handle monetary transactions related to international travel. For example, visitors routinely purchase goods and services while they are in a foreign country. How are these paid for?
Commodities
A commodity is a physical resource that is nearly the same regardless of who produces it. The market sees all units of it as interchangeable.
Some commodities are natural resources, such as iron ore, copper, and crude oil. Some commodities are highly refined natural resources, such as silicon and jet fuel. Some commodities are agricultural produce, such as wheat, corn, coffee, and cotton.
In order to be freely traded, either for spot delivery or future delivery, commodities are standardized. The standard specifies the quality and quantity of one unit of tradable commodity. Standardization enables buyers to know the exact specifications of the commodity they wish to buy, and buyers do not need to know who the seller is.
Standardization implies that anyone could be the producer of such a commodity. Thus, wheat of a certain kind and quality, as specified by an authorized standard, is a commodity, whereas a specific model of car manufactured by a particular manufacturer is not.
Moreover, when we use the word commodity, we usually mean that the minimum quantity that can be bought or sold as per the standardization of that commodity is so large that an individual would not purchase a unit of that standardized commodity for personal or family use. However, organizations purchase commodities using the units set by the standard and use them as their raw materials in the goods they manufacture.
From an individual's perspective, commodities are neither goods nor services. An individual is unlikely to buy one "lot" of any standardized commodity, but from an organization's perspective, commodities are raw materials and hence goods.
When commodities are produced, sold, bought and used or consumed within a society, one really does not need to worry about the society losing something to another society. But when a commodity is produced in one society and sold to someone in another society, the producing society has to consider what it is losing and what it is gaining in such a trade; and whether that trade is fair. This sort of consideration is similar to the consideration when importing goods and services and the potential of losing employment opportunities.
Some commodities that are non-renewable natural resources may be considered as precious because exporting them implies that some natural resource of the society has been depleted. Good examples of precious commodities are gold, silver, platinum, and palladium.
Not all natural resources are considered precious. For example, silicon obtained from sand can hardly be considered as precious. Another example that cannot be considered precious is the electricity generated from solar energy farms. Just because a commodity is valuable and useful does not mean it is precious.
There are many standardized commodities, but only a few can be intuitively classified as precious. Commodities that are renewable, like solar energy or agricultural produce, cannot be termed as precious. Just because a commodity represents a non-renewable natural resource does not make that commodity precious.
From a producer's perspective, a commodity is something a producer creates to generate profit. Producers are interested in profit because it is their source of income that supports their standard of living. The profit desired by producers is in local currency.
If a society desires that such people have more of the local currency, it could simply print it and give it to them, so, exporting precious non-renewable natural resources is not necessary for those individuals to enjoy the money that they seek from profit. But of course, society should not print money and give it to a select few people in this way and for this purpose.
This means that society should allow the producer to manufacture the commodity and earn the associated profit. However, since the society is not interested in letting its non-renewable precious natural resources get depleted, the kind of compensation that the producer gets when selling precious commodities to someone outside the society is a major concern for the society.
What compensation should a society expect for allowing the sale of its precious commodities, and thus giving up those precious commodities? We will address this major concern in the chapter on "Foreign Trade in Precious Commodities", and answer it there.
Investments
Here is a short description of the concept of investment, including what can and cannot be considered an investment, especially an international investment.
An asset that generates income is often considered an investment. Generally, one does not need to take any action beyond owning the asset for it to generate that income. A good example is owning a share of a highly profitable business.
A depreciating asset that provides convenience to its owner is not considered a financial investment, such as a car. However, if owning a car enables someone to earn more money, then it can be considered an investment.
Many people consider a house an investment because its market value tends to increase over time. But in reality, a house itself wears down, needs maintenance, and eventually has to be rebuilt. The real reason house prices rise is growing demand from a larger population, combined with limited new housing supply.
In everyday English, the word "investment" is used in a much broader sense. We often use it to refer to something that provides a benefit. A person may consider anything an investment.
From a monetary perspective, we can consider owning some asset as an investment. This includes ownership shares in organizations, houses, etc. But we usually cannot consider spending on services that get consumed as investments. What is considered an investment within a Utopian society does not matter. It is just ownership of something. It would be a good investment if it either grows in value or it earns money without losing value.
We are free to choose what we own within our society. We are free to invest within our society. Similarly, it should be possible to invest in another society. There might be limits and restrictions on these investments.
When considering the idea of international investments, we realize that it should be something that cannot be taken back to our society. If it could be taken back, it is just a thing; we call such things goods. If it could be purchased and eventually consumed, then it is just some service. Both goods and services are considered under imports and exports and are classified as foreign trade; not international investments.
That leaves us with owning shares in organizations and real estate as the only possibilities that can be properly called international investments. There might be other financial instruments that can also be classified as international investments (such as futures and options), however, from the perspective of handling monetary transactions across societal boundaries, stocks and real estate are sufficient to form the framework and its rules.
Thus, an international investment is something that one can own from another society or country, and it can also be considered a monetary investment by many, as long as it cannot be taken out of that country.