Translated from Urdu Ilm-ul-Iqtisad
In the previous chapter, we discussed the determination of value and proved the fact that the value of commercial goods depends upon the processes of the law of demand and the law of supply. However, in this chapter, we want to know whether the law is true for all forms of trade.
It is possible that when the exchange of goods takes place in different regions of the same country, the determination of value is subservient to the same law. However, when exchange takes place between different countries and nations, due to differences in the conditions, there must be some other law for the determination of value. In the first part of this book, we stated that due to the difference in conditions, a change in the principles of knowledge is possible. Therefore, now our purpose is to investigate whether, in both the above forms of business, the value of goods is determined by the same principle or by different principles. However, before trying to answer that question, it seems appropriate to make you aware of the common features and benefits of International Trade. Some thinkers are of the opinion that International Trade is like the trade that takes place within different parts of the same country. Therefore, there is no need for any new principles. The same earlier laws of demand and supply are true in this case as well. These thinkers raise different objections to international trade. The following are a few of them:
1. Trade does not take place between different nations but between different individuals. When we say that trade takes place between England and India, it means that between the two nations, there are individuals who exchange goods. Therefore, the same law of value determination that is true in trade between individuals is also true in trade between different countries.
2. For all forms of trade, there should be a unique principle for determining value that will overcome all circumstances. It is in contravention of principles of knowledge that different laws are devised for the explanation of the same type of event.
3. In the present time, due to inventions; distance and dimension are not a hindrance to trade. Therefore, it is inappropriate to differentiate between international trade, trade between countries, and different forms of trade.
There is no doubt about the fact that there is necessarily a kind of similarity in the trade objectives of different countries. However, the difference between different countries and nations is such a clear reality that it cannot be denied. In the case of a particular country, it is true that between its different parts, labor and capital, or, in other words, worker and capital, can move from one place to another without any restrictions. Even in economic terms, the word nation is defined as a group of people who produce commercial goods, between which labor and capital can move without any restrictions. According to this definition, two conditions are involved in the meaning of the word “nation”.
1. Between every group of people, capital and labor can move without any restriction.
2. Workers or members of one group cannot move towards another group. Implying the movement of the workers and capitalists of one country towards another country.
The real purpose of the abovementioned objections is to prove that, particularly in the present times, workers, and capitalists from one country can easily move to other countries. Because the problems of distance, which were obstacles in olden times, have now vanished due to different kinds of inventions and conveniences for travel, we accept this fact to some extent. However, despite this fact, it is also true that there are some problems with the movement of capital and labor from one group of individuals or nation to another.
First, geographically, there is a distance between different countries, which sometimes is very vast.
Second, different countries have different systems of governance. Some countries have dictatorships, while others have democracies.
Third, different countries and nations have different religions, social principles, customs, etc.
Therefore, although we cannot say that capital and labor cannot move between different countries, it is evident that there are problems with this movement. And these problems differentiate international trade from other forms of trade. You know that if capital and labor are unable to move across different parts of a country, trade competition vanishes in that country. And it is evident that due to the presence or absence of competition, there is a change in the value of commercial goods, even if it does not negate the law of demand and supply but necessarily affects it. We have just mentioned that capital and labor cannot freely move between different countries. Therefore, according to the abovementioned principle, in international trade, due to the absence of competition, the law of demand and supply should be affected. The purpose of the present inquiry is to know how and to what extent this law is affected due to the abovementioned cause. The answer to this question will be provided at a later stage; now we will discuss some benefits of foreign trade.
With the help of foreign trade, or international trade, we can get those goods that are not produced in our country. Either the environment of our country is not conducive to producing those goods, or people do not have the expertise of industry and commerce to produce such goods. Hence, with the help of foreign trade, a country can take advantage of the production of goods by other countries. Additionally, this method of operation enhances the efficiency of labor and capital. For example, in England, iron and coal are available in such huge quantities that extracting them requires very little labor and capital as compared to other countries. But there is very little land in England that can be cultivated for agricultural purposes. The production of grain in England is not sufficient even for their citizens, and if they try to increase the production of grain, then a lot of infertile land must be brought under cultivation, which will lead to an increase in the price of grain. In other countries, for example, France, India, etc., there is a lot of grain production. Therefore, if England exchanges its goods with the grain of those countries, all will benefit.
Once upon a time, the idea was in place that the benefits that accrued due to foreign trade should be estimated in accordance with the currency that is transferred from one country to another. Therefore, people in all the countries would demand that exports be increased and imports decreased. Because due to an increase in the former, we get currency, and due to an increase in the latter, we lose currency. To achieve the objective, a lot of suggestions were acted upon. Prizes were provided to increase exports, and to decrease the number of imports, various taxes were imposed. In this way, differences instead of unity would crop up between different countries. This method of operation was named the system of trade. However, for a long time, the real fallacy of it has been revealed. An explanation of this can be offered with the help of the following example: Suppose that by mutual trade between England and France, we mean that English iron is exchanged for French grain. Further, suppose that in France, to produce 27 mounds of iron, we require as much labor and capital as is required to produce 20 mounds of grain. But in England, we require as much capital and labor as is required to produce 10 mounds of grain. Therefore, the value of iron as compared to grain in France is double that in England. If both England and France exchanged goods, it would be beneficial for both. If France exchanged 15 mounds of grain with England for every 27 mounds of iron, England would get a benefit of 5 mounds of grain. According to the same theory, France will also benefit. Because if France produces 27 mounds of iron, the country will require as much labor and capital as is required to produce 20 mounds of grain. Hypothetically, France will have to pay only 5 mounds of grain; therefore, both will benefit and no one will face any loss.
From the example, it becomes clear that to get the benefits of foreign trade, it is a necessary condition that the marginal value of the exchangeable goods must be different in both countries; otherwise, there would be no benefit from the mentioned trade and the cost of transportation would go to waste. The difference mentioned is the precondition for foreign trade, and according to the terminology, it is known as the difference in comparative cost. However, some thinkers say that due to this precondition of foreign trade, two harmful results take place that cannot be avoided.
1. If foreign trade is based on differences in comparative cost, then it is possible that some countries benefit from importing goods that they themselves can produce at a comparatively lower cost.
2. It is possible that some countries would avoid producing specific goods for which they are naturally more conducive due to other factors, and they would think that getting those goods in exchange would be more beneficial for them.
The meaning of these results can be explained with the help of an example. Suppose “A” and “B” are two different countries, and “x” and “y” are the two goods in the production of which both countries have specific abilities. Further, suppose that “A” has a production capacity of 2x or 3y and “B” has 1x or 2y. Obviously, if there is no exchange between the two countries, the total production would be 3x + 5y. It is also obvious that x has more value than y. Because, in country A,” to produce both goods, as much labor and capital are required as is required to produce 3y, and in country B,” to produce 1x, as much capital is required as is required to produce 2y. Therefore, from a business point of view, for country A,” it is beneficial to produce only x, and for country B,” it is beneficial to produce y. Additionally, it is also evident that country “A” has convenience in producing both goods; furthermore, as compared to the production of y, it has a comparative advantage in the production of x. There is no doubt in the fact that these results must be accepted. However, the truth is that all foreign trade is not like the above-mentioned example. Generally, all countries take in exchange those goods whose production is difficult due to natural or other reasons. Therefore, the first benefit of foreign trade is that it benefits all countries. In addition to it, it creates many other benefits, which are briefly stated as follows:
1. With the help of foreign trade, all countries can get those goods without making efforts that could not be produced without difficulties.
2. Foreign trade is a form of division of labor with the help of which all countries can spend their capital to produce those goods for which they are suitable and the production of which can provide them with the maximum quantum of profit.
3. With the help of foreign trade, markets for the sale of goods are created.
4. With the help of foreign trade, craftsmen from different countries experience great development in their skillfulness.
5. With the help of foreign trade, different nations interact with each other, which has numerous civilizational and ethical benefits.
The writer is a Senior Lecturer in Economics and can be reached at [email protected]