How a Free Trade System Fosters Innovation

A trading nation is a nation where foreign trade constitutes a major portion of its gross domestic product. With the ability to trade with nations throughout the world, a trading nation has an edge over other nations. In fact, a trading nation allows businesses that do not have an internal trading division to increase their revenues by opening an office in a trading nation and outsourcing many of their jobs. The nation in which a business decides to open an office is not the only consideration.

First, it must determine which currencies it wants to trade. Currently, the United States, Japan, and China have the largest shares of global trade. Each country’s currency represents a unique set of assets. China is the largest trading nation because of its enormous economy and the number of consumers who purchase Chinese products. It also has the largest economy in the world, so it has the most potential for growth and the potential to become the biggest exporter of consumer goods in the world.

Because of these factors, China’s economy and its purchasing power are extremely important. For this reason, the U.S. dollar is usually the currency most preferred by Chinese exporters when buying goods in other countries. However, there are two sides to every coin. Although China’s economy and purchasing power are very significant, they also create a market that is unbalanced because the excess amount of Chinese exports have led to deflation in certain sectors of the economy and trade deficit. On the other hand, because of the large amounts of goods that are imported into the U.S., many industries have moved from manufacturing to service jobs because of the low wages and lack of skills that accompany those jobs.

With more people turning to international trade as a way to make a living, many nation-states, such as China, find themselves isolated from the rest of the world. As China becomes more open to the world and develops a stronger economy, the government increases its restrictions on domestic businesses. This isolation causes China’s trade surplus to reduce, making it even more difficult for China to receive the services it needs at home and abroad. For these reasons, it is no surprise that China has begun to develop a strong international defense posture to counter the U.S. Navy’s dominance in the Western Pacific.

One of the primary concerns of the Chinese government is its use of “strategic dominance.” The United States and its allies have claimed that China uses its vast trading resources to try to gain unfair advantage over them through its massive commercial activities in foreign markets. Proponents of free trade and globalization claim that such an argument misunderstands the nature of international trade. By promoting their view that international trade is simply an exchange of goods, without any political or territorial implications, China is trying to increase its influence in international markets. Critics of free-market capitalism argue that if the benefits of increased international trade are not reaped by society at large, the benefits will be reaped by small groups of powerful investors who will use their economic power to push their own interests. If China follows this strategy, it could prevent true international cooperation and increase the power of monopoly-driven globalization.

The other major worry for the Chinese leadership is that its enormous trade surplus is slowly leaving the country’s economy vulnerable. China’s huge exports have supported its rapid economic growth, but they have also put the country in an economic deficit, causing slowing demand for its export products and forcing the currency depreciation. A stronger currency would alleviate some of these problems, but it is unclear whether the United States will be willing to let China win this competition. For now, the United States must focus on reducing its own trade deficit rather than trying to keep China from trading with the rest of the world. If the U.S. wishes to regain a leadership role in the global economy, it must start reducing its own domestic consumption by focusing on improving its own domestic infrastructure development.