The benefits of trade were widely understood at a fundamental level even in ancient societies. When people subjectively ascribe unequal values to anything privately owned, they can benefit through exchange. This is the motive for trade, and trade is a recorded fact throughout history, further serving as an impetus for exploration and imperialism. Given two societies with roughly equal ability to project military power, they will conduct bilateral trade that apportions equally the surplus from trade; if one society is militarily dominant, however, the surplus from trade will tend to accrue to the dominant power in proportion to its dominance. Much of military history is nothing more than a struggle to control the surplus generated from trade, a good example being the long 19th Century when European powers competed to control most of the globe.

The classical economist David Ricardo produced in his work On the Principles of Political Economy and Taxation a thorough explanation of trade that still merits reading when studying international economics. He debunked the myth that a nation needs an absolute advantage in producing a good to compete successfully in world markets without protection. His solution was elegant, the abstraction of comparative advantage, which he demonstrated logically and cogently. Simply put, when two countries in economic isolation (i.e., no trade) each produce the same two goods, but possess an advantage in producing the other good, introducing trade causes specialization to occur and total possible output to increase given resource scarcity. For example, if country #1 produces for every unit of good 'A' two units of good 'B' with the same resource inputs, and if country #2 produces two units of good 'A' for every unit of good 'B', then under trade each would specialize in the good that it produces relatively more efficiently, increasing the total goods that are produced and available for consumption. The surplus generated through specialization in this example would accrue equally to both if all other factors are neutral. Ricardo demonstrated that this specialization and consequent surplus occurs with trade so long as production functions differ among countries, almost a certainty given different resources, different levels of economic development, and different preferences between societies.

This is where analysis of international trade ends in common political discourse: by demonstrating the benefits of trade. If this were the whole story, trade theory would merely demonstrate in an abstract, mathematical manner, what humans throughout history have fundamentally understood. This analysis is not enough to demonstrate the effects of trade in capitalist economies because it ignores the element of power exercised by a minority to control the distribution of trade's surplus. This capitalist minority selfishly and selectively uses classical economic reasoning that is almost two centuries old to support its aggrandizing agenda of gaining more economic and political power. It must be recognized that this economic reasoning is still important to prevent protectionism and a return to mercantilist policies though, because such policies quickly lead to a “race to the bottom”, where total output and consumption by all nations previously engaged in international trade decline. The missing part of trade analysis in today's discourse explains how a minority intentionally confuses issues about the distribution of the benefits from trade, thereby successfully reaping the lion's share of the surplus from trade. This missing part of our contemporary dialogue about trade will be outlined in general terms below.

In our time, much of world trade is directed by multinational corporations (MNCs); it happens within and between these behemoths, which are in turn run for the benefit of a small minority of capitalist owners. Decisions about where to produce goods are determined based on production costs, with labor increasingly important as transportation costs decline. International trade becomes simply the routes traveled by raw materials to production points, intermediate goods to further stages of production, and finished goods to places of consumption, all directed by MNCs. Given declining costs for transportation, MNCs can leverage the threat of moving production away from traditional production areas, collocated with the points of consumption, to less developed areas where wages are lower. This threat is commonly called “off-shoring”. It gives MNCs an advantage in negotiations with labor, since these same MNCs control most capital invested in the world. They can decide when and where to invest their capital, a huge advantage that is used to confront workers with the choice of either lower wages and benefits or unemployment.

This element of power is seldom mentioned when issues of “free” trade are discussed, because it is judged by those who shape our discourse to be political fire. It is the root cause why international trade has failed to serve most Americans' interests in the last thirty years. Capitalists have used off-shoring to remove from the US traditionally well-paid jobs that were easy to relocate, threatened to remove jobs requiring greater training in order to extract concessions from American workers, and generally bullied both American and foreign workers into accepting lower wages. The power that capitalists misuse to their benefit is unequal, bringing injustice to capital-labor relations.

If a minority can control the scope and timing of foreign investment, and hence the patterns of international trade, they can use that power to shape the distribution of the clear benefits from trade. This explains why the benefits of trade have not improved the situation of common American workers: the surplus has been gathered by a selfish minority of capitalists. Even as the total amount potentially produced and consumed throughout the world has grown through specialization, the surplus has been apportioned more and more into the hands of the capitalist minority. An example will suffice to show how slight the marginal change in minority control needs to be in order to absolutely reduce the majority's share of consumption. Take an economy that before trade produced $1,000 of goods, where 80% was distributed to the owners and 20% to the workers. If now trade is introduced, and a 25% surplus is generated, but because of power relations and abuse outlined above the distribution of goods changes in favor of owners from 80 to 85%, then even though society as a whole is better off, workers will be worse off under trade! Chart #1 [below] shows the total output before and after trade in this scenario, and Chart #2 [below] the distribution of output before and after trade. Clearly demonstrated is the importance of discussing how the surplus from trade is distributed, because stopping with the surplus itself leaves out how the story ends for the majority. For obvious reasons, this is the story's chapter that the capitalist minority does not want heard.

Because distribution is critical to understanding how trade will benefit Americans, it must be included in our political discourse about trade. The power held by a small minority who controls most American capital is an important factor to consider when evaluating trade policy. Constraints on misuse of this power are needed in order to ensure democratic control over the surplus generated by trade. This will result in a more equitable distribution of trade's surplus, creating in a freer society where future ability to misuse economic power is reduced. Because democracy and equality are esteemed values in our society, the story about how the surplus from trade is distributed has been suppressed by the same minority that unfairly controls its distribution. We need more enlightenment in our society about the distribution of trade's surplus to better understand how a minority unjustly apportions economic benefits to create more inequality in its favor.

[Chart 1 – click to enlarge]

[Chart 2 – click to enlarge]