Let us talk of two crucial issues in foreign trade. They are not examined because they do not exist in modern economic theory. The concern is about hoarding and ownership of wealth. They are hidden in plain sight. Until they are settled, all conversations about foreign trade create heat but not much light.

Much of the conversation about foreign trade is concentrated on three controversial points: Who pays the tariffs? Who benefits from foreign trade imbalances? Who cheats?

The last question is most fascinating, but least relevant.

Apart from concerns about hoarding and ownership, not much new can be added to the fourth traditional question, “Who benefits from foreign trade?” In ideal, textbook conditions, if two nations engage in trade, they both benefit. Empirically, it is even possible to determine whether both nations benefit equally.

Who Pays for the Tariffs?

It is the citizens of the nation that imposes tariffs who pay the tariffs. It is they who are penalized. The goods they buy are more expensive than they would otherwise be.

Who Benefits?

Who benefits from tariffs? Once one goes beyond the simple fact that the government that imposes tariffs benefits, at least in the short run, the answer is complicated.

If national producers of goods imported are capable of exploiting the rise in prices of foreign products and are capable of producing goods of the same quality as imported goods, that nation clearly benefits, because tariffs create income and growth opportunities for locals.  Yet, there are qualifications. If newly employed resources could be more effectively engaged producing different things, the advantage turns out to be illusory.

The damage inflicted upon the foreign country depends on the importance that foreign trade has in that nation. It also depends on their assumed inability to produce at lower cost, so to nullify the benefit to local nationals of the country imposing tariffs.

Long Run Issues

Long run consequences are hard to identify, because they depend on sets of movable parts. If tariffs on our products are imposed in retaliation, who among our exporters is penalized? Do we grant an incentive to our foreign competitors to leap-frog current technology—so they might be encouraged to create entirely new technologies fit for the next stage of development?

Tariffs, in other words, can produce much churning within the two nations involved in trade. That is why wise economists have always opted for free trade: no tariffs; no trade wars.

The remaining issue then is: What are the effects of tariffs on the balance of payments?

Effects on the Balance of Payments

Effects of tariffs on the balance of payments can be positive or negative. The most interesting case to analyze is that of negative effects, because this effect immediately bifurcates—depending on the international status of currency used. To be specific, is the negative balance in “dollars”?

This is a crucial question. Most international trade is carried out in dollars. This is a huge issue. It has nothing to do with economic science; it is an issue of pure political and military power.

Crudely stated, when people of the world export their goods to the United States, the creator of dollars, countries of the world send us real goods produced by the sweat and tears of their workers—and the exhaustion of their natural resources.

We, in the United States, send them paper money and digital money.

This is a condition of enormous importance. It clearly explains the efforts of China trying to have their currency, the renminbi, accepted in international trade.

Two Crucial, Hidden Issues

There are two crucial issues that are absent from the current discussion on imbalances in foreign trade. Since we in the United States exchange paper and digital money for real goods, we are letting our negative balances grow so large that we periodically have to change the scale of our graphs to see those imbalances.

Who cares? Let them eat paper and digital money is the general posture. This is such a natural tendency; we are having such a free ride. Who would not exchange real goods for pieces of paper?

Those who are concerned about outrageous imbalances in foreign trade instinctively know that there is something rotten in Denmark.

Here is the rot: Hoarding of money in this country or, worse, abroad is extremely dangerous because its behavior is unpredictable. One thing is constant: It responds to the herd mentality. Once a leader sprouts, followers follow. Thus, it is just like in snow avalanches. The last crystal of snow that changes into ice creates an imbalance that sends a mass of snow downhill.

The second effect is the issue of ownership. When Americans hear that the Rockefeller Plaza is in foreign hands, they gasp. Many other properties are in the hands of German, Japanese, and Chinese people Even the Italians have acquired control of Chrysler.

That is the issue: control. Control over peoples’ lives—through control of their property. Control can take one hundred subtle forms that go much beyond the scope of this presentation. This effect ought to concern each one of us greatly.

The fear of God might finally enter our psyche if we will ever notice this possibility: Because of their relatively small military and political power, Chinese people are still reluctant to use their economic power. They are hoarding dollars and are the major buyers of American bonds. What happens the day in which they say, “Enough already; either you do such and such (about foreign trade, for instance), or we demand an immediate exchange of bonds for dollars and our dollars for real estate and capital goods.”

This piece has greatly benefited from incisive comments from Dr. Peter J. Bearse.