Global trade: ‘Cost minimization’ to ‘shared prosperity maximization’ model

China’s rise as the world’s factory and global import dependence

Global trade, once hailed as a great equalizer, is increasingly turning into a tool of dominance.

With China emerging as the factory of the world, many other nations are sliding into a China-dependent, import-driven mode.

The widening trade deficit of the US with China was a key reason for Trump’s tariff war.[1], [2]

Contrary to simplistic interpretations, the tariff war is not merely political rhetoric but a necessary intervention against systemic imbalance. Trump’s way of handling the problem may be difficult to defend, though.

China: A new form of economic colonialism?

If current trends were allowed to persist:

• Countries that import for reasons of low cost will run out of foreign exchange reserves.
• They may have to pledge their natural resources and compromise sovereignty.
• A new form of economic colonialism could quietly emerge.

Globalisation (unfettered/ limited), under the rules of WTO, is at the core of FTAs (Free Trade Agreements), whether bilateral or multilateral (say, within a bloc of countries).

Bilateral agreements, while not perfect, may lead to less imbalance than sweeping multilateral free trade deals.

The core message

We must rethink globalization, which currently focuses only on minimizing costs of production and logistics. Instead, we need a new model that ensures balanced development across nations.

Boiling frog: A metaphor for global trade

The world today resembles a frog placed in gradually heated water. Initially, it enjoys the warmth. But eventually, it is boiled alive, having failed to recognize the rising danger and jump out.

This is the state of global trade.

China’s state-controlled strategy uses both transparent and opaque practices, reinforced by propaganda.

This narrative that ‘low-cost production is best for the global good’ is being pushed by global media, social media influencers, intellectuals, and even powerful political leaders, especially in developed and middle-income countries, notably Europe, at China’s behest.

The appeal of cheap goods blinds nations to the looming consequences.

None of the affected countries had the political courage or economic clout to call out that “the Emperor is naked.” The entire world’s opinion was manipulated.

Trump’s tariff war, controversial though it may be, has provided a much-needed jolt to China and a moment of awareness to the entire world.

Current global trade model: Cost above all else

Introduced by the West, mainly the US (ironically) and Europe, championed by China, and thrust on the rest of the world in the name of the rules-based order, the global trade system today channels manufacturing to the lowest-cost producer (mainly China).

This has resulted in:

• Over-reliance on China, which has aced the system, by fair means and foul
• Weakening of domestic industries and jobs in other nations
• Widening trade deficits
• Mounting debt of importing countries

Analogy of cancer

Trade imbalance is like an undiagnosed cancer. It progresses silently, and by the time symptoms appear, drastic interventions, even surgery, may be needed. Ignoring it isn’t benign, it’s fatal. But the typical tendency of patients is to procrastinate.

Trump’s tariff war, though self-serving, offers a window of opportunity for course correction for the rest of the nations. Hope Trump focuses on China while understanding and safeguarding other nations’ interests.

A truly global solution must prevent the US-China duo from monopolizing the benefits at the expense of others.

A thought experiment: AI as the future factory

Imagine AI grow rapidly and functions autonomously, producing goods at rock-bottom costs. It sounds efficient, but what if a lot more of people lose jobs worldwide, than the very few who gain? Would we still celebrate this efficiency?

Do we want to live in a world where we get replaced by computers as they produce at the lowest cost?

Proposed model of global trading system: Shared prosperity maximization

Let’s propose a simple model of the global trading system, conceptual rather than real, to understand and correct the internal imbalances.

Though mathematical (based on Optimization Techniques), it’s intentionally kept less so to help everyone understand it. Mathematical Modelling Professionals can refine it for practical application.

Assumptions

The world is grouped into five major blocks:

• Block A: US
• Block B: China
• Block C: EU, UK, Canada, Australia, NZ, and other developed countries
• Block D: India, Russia, and other middle-income and developing countries
• Block E: Rest of the World, including Africa

Each block has:

• A manufacturing capacity (based on population, GDP, and technology)
• Domestic consumption needs
• Export potential

The current model seeks to minimize costs without constraints, which is unsustainable.

Proposed model of shared prosperity maximization

1. Minimum assured capacity use rule: Every block will be assured a certain minimum % utilization of its manufacturing capacity, to avoid being fully import-dependent.
2. Balanced trade rule: Exports and imports must roughly match.
3. Tariff support rule: Under-performing (laggard) blocks can impose tariffs to protect their local industry.
4. Export dominance cap: No block may exceed global average exports by more than a certain %. Excess requires compensating others.
5. Technology transfer/ innovation pool rule: Countries that utilize in excess shall contribute to a global pool in the form of technology, capital, and capacity building for the laggards.
6. Redistribution rule: Underperforming blocks receive aid proportionate to their under-utilization.

Fairness of these rules

Rich and middle-income countries may claim that these rules are socialist and bureaucratic, but they are not. Because:

• Many of the rich countries got there by colonialism, which wasn’t fair either.
• These rules are only for export, not for domestic production and consumption.
• WTO has bureaucracy as well; a certain level of it is unavoidable.
• Rich and middle-income countries should not grudge poor countries trying to come out of poverty.

Expected outcomes from this model

Block B: China

• Short-term slowdown, which is in the anvil anyway
• Incentive to innovate
• Can grow domestically without constraints
• Should reconcile to the new order of no single ‘factory of the world’
• Becomes a leader in technology sharing
• Can come out of the present trade war with the US and the world with ease

Block A: US

• Moves toward balanced trade
• Resurgence of local jobs and industries
• Initial inflation, long-term resilience
• Can come out of the present trade war with China and the world with ease

Block C: EU + allies, Russia

• Minor disruptions.
• Contributors to the innovation pool
• Gains regional stability
• Can come out of the current rut better.

Block D: India, other Asia

• Significant beneficiaries
• Gain access to technology and capital
• Opportunity to build an industrial base, create jobs, and reduce poverty

Block E: Rest of the world

• Becomes a growth frontier
• Gain economic autonomy
• Can come out of poverty better

Systemic benefits of this model

• Reduced global manufacturing risk
• Inclusive growth
• Lower geopolitical tension
• Environmental gains from reduced transport
• Shared prosperity
• May cater to certain expectations of Trump, though not all
• Won’t target only China (though China should reconcile to the new reality)

Implementation challenges

• How to monitor and enforce rules globally?
• Resistance from dominant exporters
• Ensuring fair measurement of underperformance
• Managing short-term economic shocks

Bilateral agreements, though less ideal than a global reform, may help ease the transition until consensus emerges.

Conclusion

• The current trade model is silently eroding the economic independence of many countries.
• Like untreated cancer, it appears painless until it’s too late.
• A planned, rules-based, globally coordinated reform, though painful at first, is the best path to long-term survival and prosperity.

This simplified model is just a conversation starter for developing countries, led by India, taking advantage of the opportunity offered by Trump’s tariff war.

Economists, trade experts, and policymakers can create a more realistic framework with rules that balance efficiency with equity in global trade.

Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

References: –

[1] Trump’s crypto czar’s 5-word verdict on tariff as stock market looks up – Apr 9, 2025, ToI

[2] Peter Navarro – Wikipedia

For all the latest updates, download PGurus App.

The post Global trade: ‘Cost minimization’ to ‘shared prosperity maximization’ model appeared first on PGurus.