Omnipotent currency and international trade

The duel between free trade and protectionism is not unknown to even lay people and this is the one of the never ending debates in economics. From time to time, people have raised deep doubt about free trade and are still questioning it, but free trade has triumphed.  However, such triumph has not totally depressed the criticism and critics are still worried and doubtful about the following issues: (1) positive relation between trade and growth, (2) positive relation between trade and development, (3) negative relation between trade and inequality.
Even two decades ago, economists were much reluctant to acknowledge that trade and inequality can be positively related. In a discussion with Joseph Stiglitz, Paul Krugman, the founder of the new trade theory, said that 17 or 18 years ago, the statistics on the relation between trade and inequality was so negligible that the negative relation between the two seemed impossible. But now with the emergence of China, trade and inequality statistics looks significant. This acknowledgement by Paul Krugman is not a matter of surprise because the trade theory bears some very cryptic characteristics that will lead to such results either today or tomorrow, irrespective of what current statistics says. The best example is the new trade theory itself. The classical comparative advantage trade theory relied on homogenous preferences and the classical theorists hardly imagined that one day differentiated preferences would lead to trade among countries. Now coming back to the central issue, we ask ourselves why people argue for protection. Well, the most common and popular answer is the infant industry protection. An emerging industry needs protection to get a strong foothold to compete in an open economy. But the question remains why the infant industry argument matters? It matters because the domestic industrial base is destroyed by cheap imports; it matters because the destruction of such industry causes unemployment and so on. We argue that these are the peripheral issues far away from the centre. In this article, we would argue that the debate is not about free trade versus protection but about the omnipotent currency versus international trade.
FREEDOM OF EXCHANGE AND TRADE: One of the prime features of money-based exchange is that it gives sellers and buyers the autonomy of carrying out transactions. For example, if a meat seller and rice seller meet each other in a market and the rice seller exchanges his whole quantity of rice for meat, the rice seller will get more meat than he needs and so is true for the meat seller. Then  the rice seller will search for some persons who need some meat in exchange for, say, fish and the meat seller will look for a rice buyer to get some, say, clothes.
 That means barter system binds sellers and buyers with particular transactions and forces them to look for a similar set of buyers in market until they get rid of the surplus they have.  But money-based transaction does not create such a problem. If the meat seller sells all of his meat to the rice seller for some money, he is not bound to look for some rice buyers who need some rice. Now he can exchange money freely against any goods without getting into trouble of exchanging rice for fish, and cloth etc. This is the peculiar characteristics of money that is not unknown to people. In fact, barter system is equivalent to trading with multiple currencies. For example, when the fish seller looks for meat seller in exchange for fish, and the meat seller looks for a cloth seller in exchange for meat, they are all trading with their currencies which are in fact their own goods. That means in barter system every good is equivalent to a currency and is exchanged with other goods. Thus, if we have N goods, we have equivalently N currencies. But as soon as we substitute N number of currencies for a single monetary unit or currency, the situation becomes somewhat complicated and a bit hazier too. Let us try to expand this point to international trade to see explore the issue of protection.
A MICROSCOPIC PRESENTATION OF INTERNATION TRADE: We can visualise international trade as the microscopic presentation of regional trade. Let's say there is a country called X and all regions of X are self-sufficient except two A and B. A produces potatoes and B rice only. A needs rice and B potatoes. Therefore, A will sell potatoes to B in exchange for rice and B will sell rice to A in exchange for potatoes. Now the question is how they will pay each other? If the transaction is carried in barter system, then each will pay in their own goods; A will pay B in potatoes and B will pay A in rice.
Given that other regions of the country are self-sufficient, trade will occur at a price that will produce no surplus or deficit. Now assume that they trade using one single standard currency, say, Taka. When A pays B in Tk and B pays A in Tk, there is no guarantee that trade will not produce surplus or deficit. Rather, possibility becomes very high that it will produce surplus and deficit. The reason is that Tk has a store value and can be exchanged freely against other goods where potatoes or rice can't. If formerly one pound of potatoes is exchanged for one pound of rice, and if under the money-based transaction, 1 pound of rice is exchanged for 1.5 pounds of potatoes, A will give away more potatoes to B in purchasing one pound of rice. So, the rice seller now has surplus of potatoes but potatoes are not physically there rather they are stored into the paper or monetary unit. Now, B can keep the surplus under the pillow or in banks without worrying much about perishable potatoes. What is more is that B can send these potatoes to other regions which have no need for potatoes storing in the paper currency. Formerly, these regions didn't export or import any potatoes because they were self-sufficient, but now they consume those potatoes in terms of paper money.
 This is strange and a peculiarity of monetary transaction; even if we don't need potatoes, we consume it; and even if we need potatoes, we can't consume it. Now assume that in country X all regions have their own distinct currencies. Now when A buys rice from B, A pays B in its own currency, say Z currency and when B buys from A, B pays A in its own currency, say V currency. But when A pays B in Z currency, B doesn't need to pay A in B's currency. Therefore, the question of surplus and deficit is not possible here because B's currency is not an acceptable standard currency in other region. So, B can't send surplus potatoes to other regions and those regions will not consume them. That means surplus is waste in the eyes of B and so is true in case of A.
 This illustration implies that if we live in a world where N goods are exchanged with one single currency, there is a high possibility that we will encounter the problem of surplus and deficits. But no surplus and deficits occur when multiple goods are exchanged with multiple currencies.
WHY INFANT INDUSTRY PROTECTION ARGUMENT MISLEADING: Up to this date, opponents of free trade have been trying to justify protection against cheap imports to save new and emerging industrial base using the infant industry argument. One of prime advocates of free trade Paul Samuelson once said that this infant industry argument is the only argument that justifies protection. But to an advocate of free trade, this argument resounds like the mercantilist economy's argument in which export is hailed and import is cursed. In fact, such infant industry-based argument justifies protection but in the wrong way. It propels one to attribute such protection-augmenting argument to the spreading of mercantilist philosophy.
 The objection in a sense is justified because the infant industry protection argument hardly enters the core of the problem of the free trade. Rather, it just relies on some emotional appeal which is often huddled and cornered, faced with more forceful argument that "only the fittest survives in market competition and market is not run by mercy or emotional appeal".
 Over time, people have been deluded by the deceptive force of the infant industry-based argument for protection against free trade. The reason is very clear. We have harboured a habit that protection against free trade comes from blocking the door of trade with foreign countries. None even said that free trade has nothing to do with border restriction or as such. In fact, conflict with free trade lies elsewhere. Opening the border and letting the trade flow freely has nothing to with trade restriction and this truth has been utterly neglected to this date. The established thought is that restriction is needed to prevent free trade; rather we argue that free trade operates perfectly when we have restriction in other terms, not in terms of border protection or infant industry protection. To say more precisely, pure free trade is bound to happen under restriction (here restriction means not a border protection or embargo or as such); any deviation from this line would swamp and spoil free trade. That means even if trade occurs under no tariffs or any such kind of restriction, it doesn't necessarily qualify as a free trade. This point, we guess, until now is totally ignored and deserted.
THE SOURCE OF CONFLICT WITH THE FREE TRADE: It is now clear that conflict with free trade doesn't come from the man-made border restriction or infant industry protection theory because such protection has nothing to do with free trade. The real clash comes from the currency itself.
While the trade theory has been largely successful explaining why trade occurs, and why some trade is better than no trade, it has completely failed to integrate currency with it. For example, question of balance of payments is totally left to the arbitrary assumption that supply and demand will restore the balance. Trade theory is completely mute here to contest the opposition that equal import may not be accompanied by equal exports and one country can have long-run trade deficits while the other can have trade surplus. The reason is very clear. For example, if one country imports some items from another country, there is no guarantee that the exporting country will import some other items from the importing country. If the importing country pays the exporting country in internationally accepted standard currency, say, dollar, there remains no certainty that the same dollar will make its way to the importing country causing some exports for the importing
countries.
As the dollar is the accepted standard currency all over the world, it can make its way to any direction with the freedom given to its convertibility and unbridled acceptance as standard currency. If China exports to Bangladesh and  Bangladesh pays China in dollar, that dollar while being deposited in banks of China can fly anywhere with no certainty that the same will make its way back to Bangladesh. China now can send the same dollar to one country which is already blessed with too many exports or in countries burdened with too many cheap imports. Money is given the omnipotent power to fly everywhere whereas trade is tamed to fly in the specific geographic location. Once trade occurs in particular geographical confines, the omnipotent standard currency enjoys the flight to everywhere where it finds its return promising.  In a world where trade occurs under the shadow of omnipotent currency, little hope exists for justice in trade and little hope also for free trade. Free trade is itself not the real devil as we are taught in our classroom by our instructors, or as the layman thinks. The real culprit has always slipped away from talk and has trapped us in a wrongheaded argument to impose the burden on the shoulder of free trade.
Therefore, we need protection, not against free trade but against omnipotent standard currency; we don't need to tangle over the closing and opening of borders which is quite irrelevant. This proves why infant industry protection argument misleads us in seeking protection placing wrong, irrational, and unreal cause.
THE SOLUTION: The solution is no less puzzling because we can't live in a world where we exchange thousands of goods with hundreds of currencies and it will be a mess. On the other hand, we can leave the full responsibility to the omnipotent standard currency since it defies its responsibility of creating trade balance. This perplexing situation leads us to the central theme and that is: protection is not anyway irrational and it is as true as the pure comparative advantage. The argument for pure protection comes from pure economic mechanics and its basic deficiencies, not from manmade arbitrary border protection wars. Even if people protect borders being persuaded by the pure reasoning that omnipotent currency and trade don't go hand in hand, we can strongly justify that protection.
PROTECTION IS HIDDEN IN THE TRADE THEORY: Free trade advocates have always hammered the point that protection is something that is manipulated and unnecessarily imposed on the mechanical comparative advantage principle. Before human beings placed restriction on borders, trade theory from its birth had already placed such restriction. The free trade advocates who think that supply and demand would solve the problem of trade imbalance give us a hope where the hope always betrays us.
Such betraying attitude can be seen referring to the two graphs we have drawn above. They show two regimes of trade. The second regime in which we live show that equilibrium is a chance rather than a certainty as it is in classical equilibrium analysis where equilibrium is a certain outcome. But here equilibrium is completely a probability with odds leaning more to opposite outcomes or disequilibrium. If the world itself is a chance, then where is the assurance of classical equilibrium and justice in free trade?
The writer is with the University of Denver, USA.
[email protected]