Balancing Trade

Trade imbalances can produce many benefits to a nation or other entity, just not net over the entire nation.


Trade is often thought of as goods moving across borders, and that is convenient for many purposes. The obvious generalization is to anything that moves across borders, whether it is people, manufactured goods, agricultural goods, ideas, various financial objects, or whatever. The generalization is useful in that it allows one to contrast trade in goods to the exchange of anything else, and possible gain some insight.

Something is inside at least one of the borders, but there doesn’t necessarily have to be an equivalent entity on the other side of the border in question. Balance means there are two specific entities, typically geographic, but not necessarily. Equivalent entity trade would be between two hemispheres, two continents, two nations or groups of nations, two states or provinces or whatever is the next division below nation, two counties or parishes or whatever is the next below states, and even down to two boroughs, or regions of one city. Single entity trade is between any one of these entities and the rest of the world. There might be two entities involved in the balance, or a thousand; with multiple entities there is a network of trade and otherwise it is simply bipolar.

What might be the benefits of balanced trade, either in some single well-defined category, or some larger quantity lumping together some set of categories? The seemingly obvious flaw with unbalanced trade is that something must compensate for the imbalance. Either the entity with the deficit in exports is agreeing to pay for the difference in trade sometime in the future or with fixed assets in the country. If the imbalance is only temporary, the fluctuations in the direction of trade balancing out over time, then imbalance is only an accounting convenience, and disappears over a long enough duration. If instead it is chronic, and the total amount accumulates with each reporting period, then after some number of periods, the debt situation fails to work. The total debt becomes too large and there is either a default or a tendering of some assets of the country to the trade principals with net surpluses.

It might be possible to talk about the short-term aspect of trade imbalance separately from the long-term aspect. In the short term, a country with a shortage simply runs an arrears for the goods it imports in excess of the goods it exports. It might seem to be doing quite well, if the costs for the total of the excess do not grow too large. The country would have a standard of living, defined any which way as a measure of how much is consumed, and that standard of living would certainly be higher than if there were no trade. But debtors always live higher than those who live within their means. The argument that the debtor is therefore somehow better off can only be made by using a very restricted use of the term ‘better off’. A consumer debtor is not ‘better off’ if some long-term integrated measure is used.

This is a contrast with the producer debtor, who might be using near-term capital to become more productive and gain the amount needed to pay off his debt, while still producing more goods than this amount. The question of when a producer debtor is ‘better off’ is more complicated that for a consumer debtor, and depends on the use of the debt amounts, the repayment terms and any other obligations, what the expectation is of his current and future productivity and how much credibility there is in these estimates, and probably a half dozen or more other factors. But the question of the consumer debtor is simple, unless there are more than one.

If a country, or other entity, thinking of allowing a trade imbalance to exist in a chronic fashion, consists of multiple separate factions, with different powers and different assets, then the division into factions might influence the decision to allow the chronic trade imbalance. Who gains and who pays is the question. If there is a separation of these activities between factions, with one set of factions gaining the increased standard of living or some other benefit from imbalanced trade, and the other complementary set of factions being responsible for paying in the long term for them, then the decision might be taken in a somewhat non-holistic way. If the factions that benefit but do not carry the burden of long-term disadvantage also control the governance of the entity, then they would certainly have the motivation to allow chronic trade imbalance. Whether they could do this would depend on how the governance was organized, for example, if there was a constitutional or customary rule that trade must be balanced, then obviously they would be prevented from taking advantage of the separation into factions in this way, until the constitutional or customary rule could be bypassed or revoked.

There could be multiple other benefits that do not fall equally to the different factions within an entity, and multiple other disadvantages that also do not fall equally. Thus, to assess if the entity is likely to permit chronic trade imbalance two factors need to be addressed: the regulatory posture of the entity as a whole, as to whether it would permit trade imbalances, however they might be measured, and the net benefit less disadvantages of the factions which have control over the decision-making on allowing chronic trade imbalances. If there are no checks or barriers for this, for example, if there were sufficient public relations output promoting it and little opposing it and no historical custom to disallow chronic trade imbalances, and some net benefit would go to the factions making the decisions, then they might certainly consider it.

As to historical custom, if chronic trade imbalances were used for long periods by one set of factions, perhaps a changing set of factions, then the custom would be in this particular entity to allow it, despite the overall net disadvantage of it. Such a long period of use of chronic trade imbalances by one set of factions would also allow plenty of time for there to have been justifications, clever or absurd, created for it, even though a sufficiently high-altitude look at it shows the overall net disadvantage. The justifications could concentrate on the differential benefits, in the short-term, and ignore the integrative disadvantages, in the long-term, and if the justifications were sufficiently convincing, eloquent, erudite and obfuscating, then there would be little in the way of barriers to the use of chronic trade imbalances on the part of one set of factions to obtain a net benefit over both the short-term and the long-term.

Once constitutional regulations, historical custom, commonly held discourse and other potential obstacles are all removed or relegated to being inconsequential, the factions with decision-making authority or influence could simply go forward and make the necessary arrangements within and without the entity to induce chronic trade imbalances. Any objections to the arrangements could be dismissed as issuing from those who are uneducated as to the details of the processes that are about to take place, or rather, have been taking place for some extended duration. An even more solid buttress against objections can be constructed if one of the factions that receives net benefits from chronic trade imbalances is the one which generates the large body of discourse on the topic. With this additional impetus, the literature would continue to be amassed on the side of the differential benefits, and the integrative holistic disadvantages could continue to be ignored.

Perhaps the most serious concern the successful set of factions would have would be the constituent parts of the group, and any efforts by some of the factions to oust others, thereby possibly concentrating these net benefits into fewer hands and thus magnifying their amounts per individual. There would seem to be a minimal set of factions necessary to organize such a takeover of the trade situation, and any other faction might be a candidate for ousting, at some time. The minimal set would consist of those involved with regulatory matters relating to trade, imbalances or other aspects, those involved with the justification of the chronic imbalance and the publication of the justification together with the suppression or at least the ignoring of any counter-arguments, and those involved in the trade process. The trade process could be quite complicated, involving many moving parts, including shipping, outside-the-entity production, inside-the-entity distribution, financial arrangements for all of this, inter-entity transportation, plus governmental regulation of any and all of this. Finally, somehow the flow of benefits has to be arranged for, as there is not necessary flow between these factions comprising the minimal set. Some processes would have to be grafted onto the trade process itself to ensure that the necessary factions all receive some share in the factional benefits gained by chronic trade imbalances. But this type of flow would not have to be overt or else could be overt but disguised in any of a huge number of ways, most of which might be laudable under some rationalizations.

Thus, chronic trade imbalances between any two entities, or between one entity and the rest of the world, might induce significant advantages to a set of factions which somehow collect all the power necessary to organize it and keep it in place. This arrangement does not have to be thought up by some genius of chronic trade imbalances, but can grow over a long period of history, if this situation continues to exist.

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