In traditional economic theory, started by John Stuart Mill, two countries will always be better off by trading. One country is comparatively better at producing one good the other country is comparatively better at producing another good, when they trade both countries are better off. It seems very inuitive and is the reasoning behind the free trade agreements between countries today.
But what happens if one of the countries borrows money to pay for the good instead of trading?
Lets make a simplified model:
Country A, lets call it China, is very good at producing more or less everything. A low value of the currency and a huge motivated work force is able to produce more or less everything at a lower price than any western country.
Country B, Lets call it USA, has got the consumers with the biggest buying power in the world, and the biggest corporations that has found it profitable to outsource as much as possible for many years. USA has a huge negative trade balance deficit each year.
The most interesting aspect of the trade between these countries for me is when USA pays for goods with borrowed money. When a good is traded for debt, I don’t see the comparative advantage of the trade. USA don’t have a comparative advantage of debt production (allthough it certainly seems that way)
If all the trade between country A and B was goods traded for debt, would they still be better off by trading?
Imbalances in trade happens from time to time, but lately it has been very systematical. The consumers in rich countries have earned a lot on this trade, we get cheaper products than we normally would, but the countries get more and more in debt and by outsourcing we lose a lot of knowledge about production. The question is, will the debt ever be paid back and what will happen to western countries in the process.
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