The Power of Exports

The world’s most successful civilizations have been built on the strength of their exports.

In today’s political climate, there is an underlying fear that across-the-board import tariffs proposed by Donald Trump could cripple not only the U.S. economy, but also the global economy. A prolonged trade war could break out between the world’s fiercest superpowers, the United States and China.

The fears are justified.

Because it is the largest exporter in the world, however, China has much more to lose from closed borders, which means that Xi Jinping will do his best to keep goods flowing from China to the U.S. In the presence of a strong will to smooth relations, China would be compelled to fix many of its flaws that have irritated western countries.

Although globalization has had plenty of positive impacts on the world, we are now seeing that it has its limitations. It has great power to improve the global standard of living, but it can only do so when countries have a mutual understanding of respect for their counterparts’ citizens.

As global leaders met in Davos, Switzerland for the World Economic Forum, some were undoubtedly defensive about globalism, but others understood that some companies’ elite positions have been largely enabled by taking advantage of the imbalance in incomes across the world, producing goods with the poorest workers and selling those goods to better-off workers. Automation is a convenient scapegoat for the associated job loss.

Photo credit: Cycling Man / Flickr.

Europe and the U.S. have sat idly as China has repeatedly failed to subject itself to the same rules of trade as the rest of the developed world. For years, inaction was encouraged. Multinational corporations were satisfied with the tectonic shifts in manufacturing because they were able to ride the wave of outsourcing and grow profits in the process.

The path to mending trade relationships begins with addressing the truth. China has already initiated a trade war.

China already taxes a wide variety of imports, according to data from the World Trade Organization. A brief survey of Chinese AV duties (VATs) on imports of manufactured goods shows that the country’s borders are far from open.

2015 data from the WTO.

By acting now, the U.S. can keep itself at peace and address underlying issues of commerce using moderate, dynamic tariffs rather than rifles.

Today’s Trade Winners

China, Germany, Russia, South Korea, and the Netherlands sit at the top of a list of the countries with the largest trade surpluses, and all of them have had enviable 15-year annualized GDP growth. While this doesn’t necessarily demonstrate causality between the two variables, there is a connection between the strength of a country’s exports and its economic growth.

Derived from World Bank data.

Like a family buying a house it cannot afford, our country will not succeed by buying more foreign goods than it can afford.

Comparison of the Netherlands’ trade surplus to the United States’ continuing trade deficit.

World History of Exports

We’ve learned the hard way that total deregulation of trade created a void in which opportunistic nations have capitalized. In itself, the opportunism isn’t the problem; it’s expected. What is surprising is the lack of an American response.

For much of human history, the world’s superpowers have made a concerted effort to place themselves at the center of trade by ensuring that their exports dominate the global economy. Only in recent history has there been a prioritization of trade deregulation over positive trade balances.

Congress won’t have to reinvent economics to work out difficulties in global commerce — it can get a solid start simply by emulating the great civilizations that have come before us.

The ancient Greeks exported fine pottery, wine, bronze work, emery, marble, and ruddle (a waterproofing material for ships) to places as far away as Africa’s Atlantic coast. Many of their imports consisted of raw materials that sustained their economic growth, including wheat, grain, fish, wood, papyrus, glass, and metals. Ancient Greek city-states such as Athens and Thasos used taxes and policies to incentivize traders to put these hubs at the center of regional trade networks.

Great Britain established colonies to maintain its wealth, stay self-sufficient, and compete with its European neighbors. England needed raw materials, including lumber, wool, iron, cotton, tobacco, rice, and indigo from its colonies. In turn, British manufacturers sold textiles, furniture, knives, and guns back to the colonists, who cumulatively incurred a negative trade balance. As the American economy grew, England did everything it could to keep trade tilted in its favor. American ships were prohibited from trade using non-English ships, so colonists were forced to sell their raw materials only to Britain. Furthermore, the colonial Americans were prevented from manufacturing their own goods and shipping them between colonies. These policies enabled the British Navy to become one of the most powerful in the world.

A network of trade routes known as the Silk Road was established during China’s Han Dynasty starting in 130 BCE, lasting nearly 1600 years. The Chinese used the routes to export silk, paper, gunpowder, and other novelties to the west. Silk was highly valued in the Roman empire, so the Chinese closely guarded the silk worms and methods of harvesting the silk in order to maintain the price premium on China’s silk exports.

Corroding Factors

In today’s trading environment, several factors have corroded our nation’s ability to maintain a positive or neutral balance of exports to imports. While there are plenty of domestic policies that bear blame for creating an uncompetitive environment for the world’s largest industries, there are also forces at work abroad that put the U.S. at a comparative disadvantage in economic development.

Abandoned automotive factory in Detroit. Photo credit: Freaktography / Flickr.
  1. Low labor costs: low foreign wages aren’t necessarily a calculated way to undermine developed economies, but they certainly create an incentive for outsourcing. American trade agreements and policies have the potential to reward countries that develop their workforces such that a good portion of economic gains are channeled to their working class.
  2. Weak intellectual property protection: countries like China have the laws in place to protect American patents and trademarks, but they typically don’t take the initiative to enforce these laws to help American companies. One way to overcome this is to use confidential patents, which involves transitioning the patent registration system from full transparency to a verification-based system (to be discussed more in a subsequent article).
  3. Currency manipulation: it’s hard to tell how widespread the practice of currency devaluation truly is and whether it could be self-limiting in the long term, but the practice greatly improves exports in the short term by making a country’s goods cheaper for foreigners to buy.
  4. Economic espionage: stealing trade secrets is clearly unjust, but it has become more common with the rise in digital record-keeping. Cyber-security is an important responsibility of the military and other federal agencies when it comes to ensuring the integrity of business in this new economy.

Outcome-linked tariffs have the potential to mitigate these factors, especially weak IP protection, by levying tariffs selectively against troublesome trading partners and progressively lowering these tariffs in response to their willingness to cooperate in several core areas.

Unrestrained free trade has created deep wounds in our country, and we have the capacity to mend these wounds without taking massive hits to the federal budget through debt-financed education spending, infrastructure spending, or jobs training programs. By taking advantage of outcome-linked tariffs and confidential patents, we’ll be at the center of a new age of global trade.