Introduction
Trade transactions between Germany, Italy, and Greece were examined in Economakis and Markaki (2023) as an empirical indication of unequal exchange within the European Union (EU). The present article aims at a further empirical study of unequal exchange through trade transactions among all the 27 national economies of the EU (EU27). Moreover, a further elaboration of some aspects of our theoretical view of unequal exchange is presented.
Unequal exchange in international trade is defined as the exchange of unequal quantities of labor between more and less advanced (developed) countries (national economies). More specifically, on the world market, the less advanced countries sell the product of a relatively large number of hours of labor in order to obtain in exchange from the more advanced countries the product of a smaller number of hours of labor (see Bettelheim 1972, 272; Mandel 1976, 351).
This exchange of non-equivalents between more and less advanced countries expresses value extraction in international trade at the expense of the less advanced countries. As Grossmann (1992, 172) argues, the exchange of nonequivalents in international competition on the world market results in a transfer of profit from the less to the more advanced countries. Therefore, unequal exchange in international trade is a form of exploitation in international economy of the less advanced by the more advanced countries.
Unequal exchange in international trade causes a loss of national wealth (i.e., a loss of national produced value) for the less advanced countries, regardless of whether the countries experiencing it have trade deficits or surpluses (in monetary terms), as will be shown.
In the next section of the article, the prominent Marxist view of the “mechanism” of unequal exchange and Emmanuel’s seminal contribution to the issue are, briefly, critically discussed. The “roots” of the theory of unequal exchange and its “mechanism” will be traced to Marx’s analysis in the third section. A further analysis of the “mechanism” of unequal exchange that also takes into account the effect of demand will be presented in the fourth section. In the fifth section, the wage effect on the trade balance is discussed. In the sixth section, the quantitative methods of the analysis and the empirical investigation of the article are exposed. In the epilogue of the article, the main conclusions of the analysis are presented.
The Equalization of the Rate of Profit on a World Scale as a Precondition of Unequal Exchange: A Critical Approach
Lenin ([1916] 2010, 74, 110–111) argued in 1916 that one of the “essential features” of imperialism is that: “The export of capital . . . has become extremely important, as distinguished from the export of commodities.” However, according to Mandel (1976, 345–346, 368), while “both before the First World War and in the interwar period unequal exchange [through trade] was quantitatively less important than the direct production and transfer of colonial surplus-profits,” this changed “in the late capitalist epoch,” as “the transfer of value via ‘unequal exchange’” became a main form of imperialist exploitation.
What is, however, the “mechanism” of unequal exchange?
Amin (1974, 118) connects theoretically unequal exchange with the international equalization of the profit rate, arguing that “the equalization of the rate of profit on the world scale . . . constitutes the essence of unequal exchange.” Many Marxists argue that international transfers of value are realized “through the appropriation of value inherent in the system of international prices” (Carchedi 2001, 114), where international prices are international “production prices” (see Carchedi 2001, Chapter 3). This is an “unequal exchange” that results from the “transformation” of values into production prices (see Marx 1991, Part 2), with the international and not the national economy being the reference level. According to this approach, value is transferred from countries with a low organic composition of capital and, generally, a low level of industrial development (less advanced countries) to countries with a high organic composition of capital and, therefore, a high level of industrial development (more advanced countries), in a process of the international equalization of the profit rate and the formation of international production prices.
An alternative theoretical schema was proposed by Emmanuel (1972), who thought value transfers peculiar to foreign trade. What Emmanuel (160–161) suggests is that international value transfers do not “arise from the mere transformation of values into prices of production, when wage rates are the same but the organic compositions of capital are different”—what he calls unequal exchange “in the broad sense.” He argues that this process “is not a phenomenon peculiar to foreign trade.” His theoretical schema on “unequal exchange” is based on three main assumptions:
Mobility of the capital factor—immobility of the labor factor . . . Sufficient mobility of capital to ensure that in essentials international equalization of profits takes place so the proposition regarding prices of production remains valid; sufficient immobility of labor to ensure that local differences in wages, due to the socio-historical element, cannot be eliminated. (Emmanuel 1972, xxxiv)
Wages are “the independent variable of the system” (Emmanuel 1972, 64).
Based on these assumptions, he argues that the “inequality of wages as such”—between more and less advanced countries, with higher wages for the former and lower wages for the latter—“all other things being equal, is alone the cause of the inequality of exchange,” at the expense of the less advanced countries (Emmanuel 1972, 61). This “inequality of exchange” due to the lower wages of less advanced countries is called by Emmanuel (161) unequal exchange “in the narrow sense.”
Despite the theoretical differences (see also the following analysis), both unequal exchange “in the broad sense” and unequal exchange “in the narrow sense” are based on the assumption of the international equalization of the profit rate and the formation of international production prices. Bettelheim (1972, 271), while criticizing Emmanuel’s model, does not question the assumption of the international equalization of profit rates. On the contrary, he considers that the “rejection” of “the idea of ‘unequal exchange’ in the broad sense” “is unjustified theoretically” (285).
However, the theoretical position for the formation of an international uniform profit rate does not meet the conditions set by Marx (at the national level) for the formation of a uniform rate of profit and prices of production.
According to Marx:
[I]t is only the competition of capitals in different spheres that brings forth the production price that equalizes the rates of profit between those spheres. The latter process requires a higher development of the capitalist mode of production than the former. (Marx 1991, 281; emphasis added)
Regarding the specific conditions that accelerate the process of equalization of the rates of profit and the formation of the prices of production, Marx clarifies, among other things, the following:
This constant equalization of ever-renewed inequalities is accomplished more quickly, (1) the more mobile capital is, i.e., the more easily it can be transferred from one sphere and one place to others; (2) the more rapidly labour-power can be moved from one sphere to another and from one local point of production to another. (Marx 1991, 298)
The formation of “production price” and the (tendency toward) equalization of profit rates have as a field of realization “the competition of capitals in different spheres”—i.e., inter-branch competition or inter-branch exchange relations (trade)—and “[require] a higher development of the capitalist mode of production than” the formation of “market value” and “market price,” which refer to “one sphere” of production, i.e., intra-branch competition. At the international level, this “higher development of the capitalist mode of production” would presuppose not only the international mobility of capital “in different spheres,” but also the international mobility of labor “from one sphere to another and from one local point of production to another,” so as to bring about the equalization of profit rates and the formation of international production prices. But Emmanuel’s theory is based precisely on the absence of labor mobility.
According to Mandel (1976, 352), “the hypothesis that there exists international immobility of labour-power and international mobility of capital” and at the same time “international equalization of the rates of profit—in other words, the formation of uniform prices of production on a world-wide scale” leads to a paradox, since
under such conditions capital would normally stream into those countries with lowest wages. Far from explaining structural underdevelopment, this hypothesis implies . . . the impossibility of underdevelopment; it is incapable of showing why countries with high wages undergo industrialization while underdeveloped nations possess relatively little industry. (Mandel 1976, 352)
In addition to the above, the theoretical position for the international equalization of the rates of profit and the formation of uniform prices of production on a worldwide scale ignores “the unevenness . . . in world economy” (Lenin [1916] 2010, 118). Mandel writes in this regard:
The hypothesis of international equalization of the rates of profit . . . is completely contradicted by the law of uneven . . . development, [since it] presupposes perfect international mobility of capital—in effect, the equalization of all economic, social and political conditions propitious to the development of modern capitalism on a world scale. (Mandel 1976, 352)
Although the conditions for the international equalization of profit rates and the formation of international production prices do not exist (“law of uneven development”), the conditions for the formation of international “market values” and “market prices” do exist; the formation of international “market values” and “market prices” presupposes not the export of capital (or the international mobility of labor) but the international competition of unequally developed national capitals in the export of commodities (Busch 1987, 59–60). Based on this assumption, in the next section, the “mechanism” of international unequal exchange is explored in Marx’s analysis.
Marx on Unequal Exchange in Foreign Trade: Inter-branch International Exchanges and Intra-branch International Competition
Unequal exchange is a phenomenon that had been studied prior to the time Lenin wrote about “the highest stage of capitalism” ([1916] 2010). Marx indicates that unequal exchange had been implicitly expressed through the Ricardian comparative advantage—i.e., in the second decade of the nineteenth century—and had already been further explained by John Stuart Mill.
In Part III of Theories of Surplus Value, Marx writes in connection to Ricardo’s analysis on “foreign trade” and the so-called “comparative advantage”:
Loss and gain [from trade] within a single country cancel each other out. But not so with trade between different countries. And even according to Ricardo’s theory, three days of labour of one country can be exchanged against one of another country . . . Here the law of value undergoes essential modification. The relationship between labour days of different countries may be similar to that existing between skilled, complex labour and unskilled, simple labour within a country. In this case, the richer country exploits the poorer one, even where the latter gains by the exchange, as John Stuart Mill explains in his Some Unsettled Questions. (Marx 1972, 105–106; emphasis in the original)
According to Marx, even if a poorer country “gains by the exchange” with a richer country—in the sense that it obtains the imported good “cheaper” than it could produce it itself (see also below), as Ricardo (1984) argues—it is subjected to exploitation. The exploitation of the poorer country is realized through the exchange of unequal quantities of labor with the richer country: three days of labor of one country (the poorer one) can be exchanged against one day of another country (the richer one). Behind this unequal exchange stand the established differences in labor skills (“skilled, complex labour and unskilled, simple labour”) between different countries, since “a smaller quantity of complex labour is considered equal to a larger quantity of simple labour” (Marx 1990, 135).
These skill differences are expressed in differences in labor productivity, i.e., the labor-time needed to produce a unit of product. Skill differences, consequently, lead to a “loss” (for the less productive capitals) and a “gain” (for the more productive capitals), which, while within “a single country cancel each other out,” lead in international trade to a “loss” for less productive, less advanced, and less competitive countries, i.e., to international transfers of value. Consequently, “the law of value undergoes essential modification,” since the “exchange of equivalents” in “the circulation process” (Marx 1990, 262) is violated in the “trade between different countries.” Unequal exchange in international trade expresses, therefore, an “essential modification” of “the law of value.”
The above analysis as well as the Ricardian “comparative advantage” concern inter-branch international exchanges. In volume three of Capital, Marx examines both international intra-branch competition and inter-branch international trade. Investigating the factors that counteract the manifestation of “the law of the tendential fall in the rate of profit” due to the rising organic composition of capital (Marx 1991), Marx defines “foreign trade” between more and less advanced countries as the fifth of the six counteracting factors (344–347). Thus, “the law of uneven development” becomes one of these factors.
A secondary part of Marx’s analysis of the fifth counteracting factor concerns the export of capital. However, Marx’s emphasis in the analysis of the fifth counteracting factor concerns the trade relations between more and less advanced countries—that is, the sphere of international commodity circulation. In the frame of this analysis, Marx develops his argument for trade relations between more and less advanced countries, which, as he argues, could lead to value transfers that raise the profit rate of the former. At this point, Marx returns (after Theories of Surplus Value) to unequal exchange in international trade.
Marx writes:
Capital invested in foreign trade can yield a higher rate of profit . . . because it competes with commodities produced by other countries with less developed production facilities, so that the more advanced country sells its goods above their value, even though still more cheaply than its competitors. In so far as the labour of the more advanced country is valorized here as labour of a higher specific weight, the profit rate rises. (Marx 1991, 344–345)
Here, Marx refers to international intra-branch competition. In this type of international trade relations, the capitals of the different capitalist countries are involved (as “competitors”) in the production of “similar goods.” Given that “trade between imperialist nations is in similar goods, while, in contrast, trade between imperialist and developing nations is in different goods” (Smith 2016, 243), this type of international trade relations rather concerns trade between more advanced countries (or even between less advanced countries), at different levels of economic development (different levels of “production facilities”).
The “mechanism” for the realization of a “surplus profit” by a country at a higher level of development in international trade in the frame of intra-branch competition could be deduced from Marx’s analysis in volume three of Capital on the formation of “market prices” and “market values.” Based on this analysis, it could be argued that the various national capitals are faced as direct competitors per similar good at the international level. Thus, the international intra-branch competition of national capitals resembles the intra-branch competition at the national level. As a rule, the international value of a commodity is different from its national value.
[At the national level, the value of a commodity or the national “market value”] is to be viewed on the one hand as the average value of the commodities produced in a particular sphere, and on the other hand as the individual value of commodities produced under average conditions in the sphere in question, that form the great mass of its commodities. Only in extraordinary situations do commodities produced under the worst conditions, or alternatively the most advantageous ones, govern the market value, which forms in turn the centre around which market prices fluctuate—these being the same for all commodities of the same species. (Marx 1991, 279)
Correspondingly, at the international level, the international market value is to be viewed as the average value of the commodities produced internationally in a particular sphere. At the national level, “whatever the market value may be, demand and supply must balance out in order for this market value to emerge” (Marx 1991, 293). This market value constitutes the national “market price” (291–292), while this balance is expressed within the frame of intra-branch competition: “What competition brings about, first of all in one sphere, is the establishment of a uniform market value and market price out of the various individual values of commodities” (281). This “uniform market value and market price” for a similar good corresponds—at the branch level—to “the socially necessary labour-time required for its reproduction” (238). Correspondingly, at the international level, what international intra-branch competition brings about is the establishment of a uniform international market value and international market price out of the various national values of commodities. At the national level, “market price means that the same price is paid for all commodities of the same kind, even if these are produced under very different individual conditions and may therefore have very different cost prices” (300–301). This “involves a surplus profit for those producing under the best conditions in any particular sphere of production” (300–301). The same applies at the international level, and thus a country at a higher level of development “can yield a higher rate of profit” by selling “its goods above their value”—valorizing its labor “as labour of a higher specific weight.” As “the profit rate rises,” these additional “gains” would then allow this country to sell “more cheaply than its competitors,” i.e., the price of a similar good would be squeezed below the international average (international market price), albeit above the national level, resulting in increased demand for the more advanced country’s products and trade surpluses.
Obviously, this analysis does not take into account international trade protection measures and distinct national currencies (exchange rate protectionist policy), which can mitigate the productivity disadvantage of the countries at a lower level of development and limit the additional “gains” of the countries at a higher level of development.
Marx relates international intra-branch competition with international inter-branch exchange relations, arguing:
The same relationship may hold towards the country to which goods are exported and from which goods are imported: i.e., such a country gives more objectified labour in kind than it receives, even though it still receives the goods in question more cheaply than it could produce them itself. (Marx 1991, 345)
While international intra-branch competition is basically not conducted between more and less advanced countries, inter-branch international trade mainly concerns the relations between more and less advanced countries. These relations are based on the unequal exchange of quantities of labor-time “objectified” in commodities at the expense of the less advanced, i.e., non-privileged (developing), countries. As Marx writes, while criticizing the Ricardian theory of comparative advantage in Theories of Surplus Value (Marx 1972), this unequal exchange occurs, “even though” the non-privileged country “still receives the goods in question more cheaply than it could produce them itself.”
Moreover, Marx states that the same relationship with intra-branch competition may hold toward the country to which goods are exported and from which goods are imported, that is, in the frame of inter-branch international exchange relations, indicating that international intra-branch competition is a substrate of international unequal exchange realized in the frame of international inter-branch exchanges. This underlines that international inter-branch exchanges are carried out at prices determined in intra-branch competition.
This is more obvious when Marx also points out that the way through which the more advanced country “can yield a higher rate of profit” in international trade—through inter-branch international exchange relations—resembles the practice of an innovating manufacturer seeking a “surplus profit,” in the frame of intra-branch competition, by writing:
In the same way, a manufacturer who makes use of a new discovery before this has become general sells more cheaply than his competitors and yet still sells above the individual value of his commodity, valorizing the specifically higher productivity of the labour he employs as surplus labour. He thus realizes a surplus profit. (Marx 1991, 345)
As a result, for both international intra-branch competition and international inter-branch exchange relations, “The privileged country receives more labour in exchange for less, even though this difference, the excess, is pocketed by a particular class, just as in the exchange between labour and capital in general” (Marx 1991, 345–346).
At this point, Marx compares the unequal exchange in the sphere of international circulation, i.e., the unequal exchange of labor already “objectified” in commodities (objectified versus objectified labor), with the unequal exchange in the sphere of capitalist production, i.e., “the exchange between labour and capital in general.” In the first case, already produced value (surplus value) by the working classes of the less advanced (non-privileged) countries is transferred to the bourgeoisie of the more advanced (privileged) countries. In the second case, i.e., in the capitalist production process, an exchange of “unequal quantities” of labor is hidden behind the “apparent” “exchange of equivalents,” despite “the differences in forms” (living labor versus “labour . . . which has already been objectified” in variable capital) (Marx 1990, 676, 729–730; see also Marx 1972, 96). In this unequal exchange within the capitalist labor process, the surplus value produced by the working classes is appropriated by the capitalist class. The working classes of the less advanced countries are exploited both directly, by the capitalists of their countries, and indirectly (in the sphere of international commodity exchange), by the capitalists of the rich countries. And this is the meaning of Marx’s position concerning the exploitation of the poorer by the richer countries. The capitalists of the poorer countries are not exploited, although they are losing surplus value in favor of “a particular class,” which is the bourgeoisie of more advanced countries.
In both types of trade relations (either intra-branch or inter-branch) “the labour of the more advanced country is valorized . . . as labour of a higher specific weight,” as the capital of the more advanced country valorizes the labor it employs “as surplus labour.” And this is the basis of “surplus profit.” The common base of this development—that is, the deeper cause of unequal exchange, as Marx argues in Theories of Surplus Value (Marx 1972, 96)—lies in the established differences in the skills of labor (“skilled, complex labour and unskilled, simple labour”) between different countries, which are expressed in differences in labor productivity, i.e., the labor-time needed to produce a unit of product (different socially necessary labor-time at the branch level). These skill differences are reflected in the “best conditions” under which the more advanced countries produce, thus obtaining “a surplus profit” for a given international market price “in any particular sphere of production,” forming the basis of the “essential modification” of “the law of value” in international trade.
The level of labor skill in a country is positively related to the industrial development and the technical composition of its capital, while “the branches with the highest capital intensity” are also those with “the greatest proportion of highly skilled labor” (Emmanuel 1972, 139). Consequently, the level of labor skill in a country is related to its overall economic development.
Marx’s view that the deeper cause of unequal exchange lies in the established differences in the skills of labor between more advanced (richer) and less advanced (poorer) countries presupposes that, in the world market, the formation of the international market value as the average value of the commodities produced internationally in a particular sphere does not eliminate but, on the contrary, is based on these national skill differences.
Mandel writes in this regard:
When seen statically and in isolation, it may seem largely inessential whether the world market or the national market is considered as the determinant of value. (Theoretically, for Marx, the second is the correct framework). In the former case, no transfer of value occurs in the real sense of the word, since labour not remunerated or acknowledged on the market, i.e., socially squandered labour, does not after all create value. In the second case it can be said that labour which is socially necessary on the national scale (performed under conditions of the social average productivity of labour) is less acknowledged internationally, but is still in fact fully creative of value. (Mandel 1976, 359)
This means that in the formation at an international level of the market value of a similar good (and of the corresponding market price), the different labor-times objectified in this good at the national level—that is, the different socially necessary labor-times—are not reduced to a common labor-skill base, i.e., either simple or complex labor. Only under this precondition is it revealed that the labor of the less advanced countries “is less acknowledged internationally” or that, according to Marx’s analysis, “the labour of the more advanced country is valorized . . . as labour of a higher specific weight” (Mandel 1976, 359). In this way the “differential” national labor productivities (“differential” national socially necessary labor-times) are not obscured but placed at the center of unequal exchange.
In a similar theoretical direction to that set forth previously regarding the formation of international market prices, Mandel writes:
If a country with an average level of labour productivity below the world average is caused to produce certain goods . . . for export, then the value of these exported goods is not determined by the actual specific quantities of labour expended in their production, but by a hypothetical average (i.e., by the quantities of labour which would have been expended in their production had it been carried out with the average international level of labour productivity). In this case the country in question suffers a loss of substance through its export—in other words, in exchange for the quantities of labour expended in the production of these goods, it receives back the equivalent of a smaller quantity of labour. (Mandel 1976, 73)
Therefore, without resorting to the misleading theory of international production prices, the “mechanism” of unequal exchange can be determined on the basis of the “law of value”:
Unequal exchange hence leads to a transfer of value (transfer of quantities of labour, i.e., economic resources) not contrary to but in consequence of the law of value—not because of an international equalization of the rates of profit but despite the absence of such equalization . . . this analysis of the sources of unequal exchange is in accordance both with Marx’s theory of value and with the actual historical process. It enables us to understand and explain the existence side-by-side of higher rates of profit and lower wages, capital accumulation and labour productivity in the underdeveloped countries, and the relative enrichment of the metropolitan countries . . . by transfers of value resulting from the exchange of unequal quantities of labour on the world market. (Mandel 1976, 360–361; emphasis added)
However, value transfers in favor of the more advanced countries, through international trade transactions, generate a slight trend of equalization of profit rates, assuming (as Mandel also argues) that the profit rate of the more advanced countries is lower than that of the less—due to the function of “the law” of the tendential fall in the profit rate.
An Arithmetical Example of Intra-branch and Inter-branch Unequal Exchange
Let us suppose:
A product z is produced by N countries on a world scale.
The market value of a unit of product z in the world market (and correspondingly its market price) is determined by a labor-time of 250 hours.
Among the countries that produce this product are country A and country B. Since the focus is on international intra-branch competition, it could be supposed that both countries are advanced; however, country A is at a higher level of economic development than country B.
The socially necessary labor-time at a national branch level for the production of a unit of product z in country A is 100 hours, while in country B it is 300 hours.
By selling the product of 100 national hours of labor-time at an international market price of 250 hours of labor-time, country A “gains” 150 hours of labor-time. On the other hand, by selling the product of 300 national hours of labor-time at an international market price of 250 hours of labor-time, country B loses 50 hours of labor-time.
Supposing that the labor of country B is simple while the labor of country A is complex, in the proportion that 1 hour of complex labor = 2 hours of simple labor, if 300 hours of simple labor of country B had been converted to 150 hours of complex labor, the loss of labor-time (value) from country B would have been hidden.
Let us also suppose:
There is another product y produced internationally by a group of countries U that countries A and B obtain through international inter-branch trade transactions.
The market value of a unit of product y in the world market (and correspondingly its market price) is determined by a labor-time of 500 hours.
The international exchange relation between product z and product y is determined by the values-prices (in terms of labor-time) that have been formed at the international intra-branch level; international inter-branch exchanges are carried out at prices determined in intra-branch competition.
The exchange relation is:
zy=12 , i.e., 2z = 1y or 2×250 (hours of labor-time) z = 500 (hours of labor-time) y.
In this exchange relation, country A gives 200 hours of labor-time and receives 500, that is, it gives less objectified labor in kind than it receives (a gain of 300 hours of labor-time); while country B gives 600 hours of labor-time and receives 500, that is, as Marx writes, such a country gives more objectified labor in kind than it receives (a loss of 100 hours of labor-time).
The countries of group U experience, respectively, a loss of 300 hours of labor-time from country A and a gain of 100 hours of labor-time from country B.
Therefore, this example illustrates how international intra-branch competition operates as a substrate of international unequal exchange between more and less advanced countries realized in the frame of international inter-branch exchanges.
Demand and Unequal Exchange
The international competitiveness of the more advanced countries arises from their level of economic development and therefore it is not predominantly dependent on “price” (or “cost”) factors, expressed by unit labor costs (“price” or “cost competitiveness”). Instead, for these countries, international competitiveness is mainly based on “structural” factors, such as technological opportunities, technical infrastructure, and production capacities, which constitute the productive structure and the related “externalities” of a national economy and mirror its development level (“structural competitiveness”). The more advanced countries mostly produce and export commodities of a higher technological level and higher income elasticity of demand compared to those produced by the less advanced countries. Thus, there is a dissimilarity in the structure of production-trade between the more and the less advanced countries, which is reflected in the different “relative” income elasticities of demand (i.e., income elasticities of demand for an economy’s exports against those for its imports): higher for the more advanced and lower for the less advanced countries—i.e., the less advanced countries experience “unfavorable” “relative” income elasticities of demand. This dissimilarity is the reason why trade relations between more and less advanced countries are conducted mainly in the frame of inter-branch exchange relations. Consequently, as income increases, the demand for products from the more advanced countries becomes higher than that for products from the less advanced countries (the so-called “Engel’s Law”). This is expressed as an upward trend in the international market prices of the products of the more advanced countries above international (average) market values and, correspondingly, a downward trend in the international market prices of the products of the less advanced countries below international (average) market values. This results, ceteris paribus, in faster-rising (monetary) prices for the products produced by the more advanced countries, that is, the terms of trade change against the less advanced countries. Simultaneously, the high income elasticity of demand for imported goods in less advanced countries is combined with low price elasticity of demand for these goods—since substitution by domestic production is limited. Thus, ceteris paribus, economic growth for the less advanced countries is accompanied by increasing import payments, i.e., trade deficits, which create pressure for increasing capital inflows (i.e., external debt) in order to finance a growing current account deficit. The high income elasticity of demand for technologically advanced products, which characterizes the exports of developed countries, reflects the greater diversification of domestic production, compared to the production of the countries with low income elasticity of demand. Greater diversification of a national economy’s productive structure means a more complete, articulated, and interdependent economic structure, and it is related to industrial and technological development (therefore a higher technical composition of capital) and greater domestic sectoral productive linkages. Therefore, compared with an internationally more advanced and more competitive national economy, a less advanced and less competitive one is characterized by a relatively low level of industrial and technological development, strong specialization, and relatively weak productive linkages (see Economakis, Markaki, and Anastasiadis 2015, 425–428; Markaki and Economakis 2021, 197–200).
From the model of Prebisch (1959) it is inferred that since the less advanced countries (periphery) experience “unfavorable” “relative” income elasticities of demand compared to more advanced countries (center), ceteris paribus, they must reduce their growth rate in order to avoid trade deficits.
As Thirlwall argues on the basis of Prebisch’s model,
suppose we rule out the possibility that relative prices measured in a common currency can change as an adjustment mechanism, the only adjustment mechanism left (barring protection) is a reduction in the periphery’s growth rate to reduce the rate of growth of imports in line with the rate of growth of exports . . . In these circumstances both the relative and the absolute gap in income between periphery and centre will widen. (Thirlwall 1999, 184)
According to Thirlwall (1991, 26): “This is the basic result of center-periphery models of growth and development.”
Therefore, countries “producing under the best conditions”—that is, the more advanced countries—could gain in international trade, not only as a result of their higher labor productivity, but also as a result of the mix of products they produce and export. On the contrary, the less advanced countries possibly experience losses in international trade, not only as a result of their lower labor productivity, but also as a result of the mix of products they produce and export; moreover, a less advanced country “will be constrained in its growth by the balance of payments relative to the industrial country,” i.e., the more advanced country (Thirlwall 1991, 26).
From the above point of view, demand and income elasticities of demand are not “independent variables of the system” but dependent on the overall economic development of a country: the technical composition of capital, industrial and technological development, the degree of diversification of domestic production, the strength of domestic sectoral productive linkages, and the level of labor skill (the level of labor productivity), all of which result in “favorable” or “unfavorable” “relative” income elasticities of demand.
The impact of demand and of income elasticities of demand on international market prices is a manifestation of monopoly pricing. The rising of the price of a commodity above its value as a result of rising demand leads to a monopoly price causing value transfers at the expense of other producers. “A monopoly price for certain commodities simply transfers a portion of the profit made by the other commodity producers to the commodities with the monopoly price” (Marx 1991, 1001).
How can demand (and monopoly pricing) affect the “mechanism” of unequal exchange? The following arithmetical example attempts to answer.
An Arithmetical Example of the Effect of Demand on Unequal Exchange
Given the previous arithmetical example, it is supposed additionally that:
The money international market price of a unit of product z is $250 and of product y $500.
Initially, in money terms, the exchange relation remains unchanged: 2z = 1y.
Let us now suppose that—given the world supply of product z and all else constant—as the world income rises there is a bigger increase in the demand for product z, leading to a doubling of its international market price, to $500 (high income elasticity of demand, larger than 1, luxury good), while the international market price of product y remains unchanged (zero income elasticity of demand, necessity good).
In money terms, the exchange relation now changes to: 1z = 1y.
This change in the (monetary and thus real) terms of trade means that 250 hours of labor-time of product z are exchanged for 500 hours of labor-time of product y.
In this new exchange relation, country A, which produces a unit of product z in 100 hours of labor-time, “gains” 400 hours of labor-time, while country B, which produces a unit of product z in 300 hours of labor-time, “gains” 200 hours of labor-time. Therefore, as a result of increasing demand, due to the high income elasticity of product z, country A increases its labor-time “gains” from the countries of group U (from 300 to 400 hours of labor-time), while for country B, labor-time losses in favor of the countries of group U (100 hours of labor-time) are converted into “gains” (200 hours of labor-time).
Thus, the countries of group U, which produce product y, experience (additional) losses of labor-time as a result of the changing terms of trade due to demand effect. On the basis of the previous analysis, it could be said that the countries of group U are less advanced (developing or “peripheral”) countries.
As a result of the change of the monetary terms of trade in favor of countries A and B, these countries gain in labor-time (i.e., value) terms and real terms (they give a unit of product z, instead of two, for a unit of product y), while, respectively, the countries of group U lose in labor-time (i.e., value) terms and real terms.
Given the above, it could also be inferred that a country like country B—i.e., an advanced country at a lower level of economic development compared with a more developed country like country A—limits its productivity disadvantage through monopoly pricing enabled by the high income elasticity of demand for the products it exports.
“Cost Competitiveness” and Wages: A Note
Marx writes that: “In contrast. . . with the case of other commodities, the determination of the value of labour-power contains a historical and moral element” (Marx 1990, 275).
As seen in the previous analysis, Emmanuel attributes specific importance to “the socio-historical element” of wages. As he argues, the “local differences in wages” (higher in the more and lower in the less advanced countries) are “due to the socio-historical element.”
Concerning “the socio-historical element” in the determination of wages, Emmanuel also argues:
The value of labor power is, so far as its determination is concerned, a magnitude that is, in the immediate sense, ethical: it is economic only in an indirect way, through the mediation of the moral and historical element, which is itself determined, in the last analysis, by economic causes. (Emmanuel 1972, 109; emphasis in the original)
Considering wages as “the independent variable of the system,” Emmanuel maintains that there is a causal relationship between the low wages and low organic composition of capital of the less advanced countries: the low wages of the less advanced countries lead to a low organic composition of capital. He writes:
the low cost of labor power makes it unprofitable to carry out the relative increase in fixed capital that would result from the adoption of higher techniques and methods tending to economize human labor. Thus, the average organic composition of capital in the poor country is kept below the world average, and still further below the average in the industrialized countries. (Emmanuel 1972, 131)
According to Bettelheim’s critique of Emmanuel’s analysis concerning the treatment of wages as “the independent variable of the system,”
The “historical element” included in the price of labor power does not refer to an absolute absence of determination of wages, enabling the latter to be treated as an “independent variable,” but refers only to “relative absence of determination.” (Bettelheim 1972, 288; emphasis in the original)
As Marx (1990, 770) argues, “the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable.” Based on Marx’s view, Bettelheim maintains that the level of wages depends on the articulation of two determinations: (1) primarily by the development of the productive forces, through a positive relation; (2) but also by the “historical and moral element” peculiar to each “concrete social formation.” From the latter, however, it follows that “the wage level ‘proper’ to each social formation” is determined by the historical “specific combination of productive forces and production relations characteristic of each social formation” (Bettelheim 1972, 296)—that is, by the “effects of class struggle” in a historic social formation.
The technical composition of capital, the industrial and technological development, the degree of diversification of the domestic production, the strength of domestic sectoral productive linkages, the level of labor skill (level of labor productivity), the related “relative” income elasticities of demand for the products that a country exports and imports, and the level of wages are interconnected and mutually reinforcing “effects of class struggle” in a historic social formation—something that in Emmanuel’s scheme of wages as “the independent variable of the system” is obscured. These “effects” determine whether the international competitiveness of a national economy depends on “structural” factors or on “price” (or “cost”) factors.
Although the international competitiveness of the more advanced countries arises from their level of economic development and is therefore mainly based on “structural” factors, it is the case that “price” (or “cost”) factors, expressed by unit labor costs (“price” or “cost competitiveness”), play a significant role in world trade for the less advanced and less competitive countries. “Cost competitiveness” based on lower wages is the “weapon” of poor countries in international trade, given that, as Emmanuel correctly supports, due to the “sufficient immobility of labor,” “local differences in wages” (higher in the more and lower in the less advanced countries) “cannot be eliminated.”
As Prebisch (1959, 258) argues, “exports of less relative productivity will be made if the level of wages is proportionately lower,” that is, if the lower level of wages overcompensates the lower labor productivity. However, this overcompensation results in unequal exchange, as will be shown below.
An Arithmetical Example of “Cost Competitiveness” and Unequal Exchange
Let us suppose:
Country E and country P can produce two different products, c and w.
In country E, the production of a unit of c requires the labor of 10 workers for one day, while the production of a unit of w requires the labor of 20 workers for one day.
In country P, the production of a unit of c requires the labor of 60 workers for one day, while the production of a unit of w requires the labor of 30 workers for one day.
All other costs except labor costs are the same in these two countries for the production of each product; for simplicity, they are assumed to be zero. Transportation costs and trade or exchange rate protectionist policies are not taken into account.
Consequently, country E exhibits an absolute productivity advantage toward country P.
Following higher labor productivity, the daily wages of labor in country E are three times the daily wages of labor in country P, i.e., WE = 3WP = > WP = WΕ/3 = > WE/WP = 3.
The cost of production for a unit of each good is the remuneration of labor.
In country E, the cost of production of a unit of product c = 10WE, while the cost of production of a unit of product w = 20WE.
In country P, the cost of production of a unit of product c = 60WP, while the cost of production of a unit of product w = 30WP.
The relative productivities between these two countries in product w and c are respectively:
and
The relative daily wages are:
Therefore, the relative daily wages lie between the relative productivities
and thus it is cheaper for country E to import product w from country P and it is cheaper for country P to import product c from country E.
More precisely: if country E produces product w, its costs equal 20WE. If country E imports w from country P, its costs equal 30WP = 30WΕ/3 = 10WE. Since 10WE < 20WE, country E will import product w from country P. If country P produces c, its costs equal 60WP. If country P imports c from country E, its costs equal 10WE = 10(3WP) = 30WP. Since 30WP < 60WP, country P will import product c from country E.
Thus, countries E and P develop inter-branch exchange relations (trade) producing and exporting the product in which they have a “comparative advantage” (according to Ricardo’s theory—see Krugman, Obstfeld, and Melitz 2015, 53–61).
Therefore, in international trade transactions between country E and country P, the cost price of a unit of product w = 10WE = 30WP, while the cost price of a unit of product c = 10WE = 30WP.
Let us suppose that, for a given demand, the international trade transactions between country E and country P generate a slight trend of equalization of profit rates, so that the exchange relation between product c and product w is determined primarily by the production costs and these costs determine the international market prices at branch level for each product. Then the exchange relation is:
In this exchange relation, country P gives to country E a labor-time of 30 working days in exchange for a labor-time of 10 working days. That is, country E extracts 20 working days from country P in their trade transactions. This simple example demonstrates how unequal exchange at the expense of the less advanced country is hidden behind “cost competitiveness”: “such a country gives more objectified labour in kind than it receives, even though it still receives the goods in question more cheaply than it could produce them itself,” as Marx (1991, 345) argues.
Let us suppose additionally:
The money international market price of a unit of product w equals the price of a unit of product c and is $1,000.
Country E exports 1,000 units of product c to country P, while country P exports 2,000 units of product w to country E.
In the bilateral inter-branch trade between countries E and P, country P exhibits a trade surplus of 2,000×$1,000−1,000×$1,000=$1,000,000 , and correspondingly country E exhibits a deficit of $1,000,000.
In labor-time terms, country E exports labor-time of 10 working days ×1,000 = labor-time of 10,000 working days, while it imports 30 working days ×2,000 = labor-time of 60,000 working days. That is, country E exhibits a surplus toward country P of 50,000 working days and correspondingly country P exhibits an equal-sized deficit in working days toward country E. Therefore, the trade surplus in monetary terms is converted into a deficit in labor-time terms. The monetary trade surpluses of a less advanced country, which bases its international competitiveness on “cost competitiveness,” may hide the unequal exchange. On the other hand, a more advanced country may exhibit monetary trade deficits while it “gains” labor-time in international trade transactions with a less advanced country.
Quantitative Methods of the Analysis and Empirical Investigation
Recent academic debate recognizes that the total value of goods and services exported by a country inadequately mirrors its international competitiveness. This is because gross exports may include the value of imported intermediate inputs that are incorporated into the production process without contributing to the domestic produced value. In this context, it is critical to measure the domestic value added in exports for each country’s exports. The domestic value added in exports quantifies the value added throughout every production stage, encompassing the last stage responsible for producing the final goods or services and the domestic value added during the creation of inputs and intermediary components. In this way, all labor, living and dead, incorporated into exports is counted; thus, the transfer of value via unequal exchange can be measured (Koopman, Wang, and Wei 2012; Timmer et al. 2016).
In the modern economic system, countries often specialize in distinct production phases, making the accurate calculation of domestic value added dependent on determining the value added at each national stage of production. This complex task is achievable through the utilization of input–output analysis (IOA). IOA facilitates the disaggregation of value added at each stage of the production process, considers inter-sectoral dependencies, and distinguishes between domestic and imported inputs. Consequently, the estimation encompasses the calculation of diverse multiplier effects within an economy. The compilation of multiregional input–output tables underpins the implementation of IOA, allowing for accurate estimates of value added at both national and sectoral levels. This methodology offers insights into the distinctive contributions originating from diverse sectors and countries to the value added of a global value chain (Antràs and Chor 2022; Aslam, Novta, and Rodrigues-Bastos 2017; Markaki and Papadakis 2023).
Furthermore, IOA is compatible with the theoretical approach developed in the previous analysis, as it can be used to estimate the value of the product in labor-time, considering living and dead labor inputs, while also facilitating the identification and estimation of imported objectified labor, enabling the precise determination of value generated solely within the economies under examination. For a mathematical presentation of the approach, refer to Markaki, Papadakis, and Putnová (2021) and Papadakis and Markaki (2019).
As analytically discussed in Economakis and Markaki (2023), IOA can assess a country’s position in international competition and provide strong evidence on value extraction via unequal exchange. This study employs IOA to investigate the patterns of unequal exchange among the EU27 nations through an empirical examination.
In order to investigate the possibility of unequal exchange between two countries, namely country i and country j, it is crucial to analyze and compare the labor-time embodied in their bilateral trade. To ensure the accuracy of the findings and avoid any influence from the volume of bilateral trade, the labor-time per unit of export is measured. Equation (1) defines the method for estimating the domestically produced value of exports in labor-time for country B, which is divided into n sectors and exports to k countries (analytically in Economakis and Markaki 2023):
where DLT is the 1×k vector with elements expressing the domestic labor-time in exports of country B for the exports to country j, (I−A)−1 is the n×n Leontief inverse matrix for country B, X is the n×k vector with elements expressing the sectoral structure of exports from country B to other countries, and t is the 1×n vector with elements expressing the ratio of working time to gross output for each sector of country B.
To comprehensively grasp the dynamics of intra-European trade, one must consider the bilateral trade structure between countries, resulting in a total of 702 bilateral relations (27 countries interacting with each other). Analyzing such a large amount of data is challenging, considering the presence of 26 value exchanges per country. Therefore, a more practical and effective approach is to develop a country-level indicator that consolidates information from 26 bilateral relationships into a single measure. This indicator would allow for a comprehensive understanding of the data in a more efficient manner, with reduced complexity, leading to a deeper understanding of the underlying patterns and dynamics of the intra-EU27 trade. To fulfill the objective of this article, we introduce the Value Extraction Index (VEI).
The first step is to embark on the process of aggregating sectoral data, leading to the construction of a 27×27 double-entry matrix, where each element at the position ij represents the labor-time requirement for country i’s exports to country j. Conversely, this can also be interpreted from the reverse perspective, signifying the labor-time required by country j’s imports from country i. In this matrix, the rows signify the labor-time necessary for each country’s exports, while the columns signify the labor-time needed for each country’s imports. The summation of the elements in row i provides the total labor hours required for the exports of that country i (LHX), while the summation of column i offers the total labor hours needed for country i’s imports (LHI).
The second step is estimating the ratio of LHX to LHI, which provides the VEI in Equation (2):
The VEI that is introduced in Equation (2) can serve as a useful tool for conducting comparative analyses of value extraction among the EU27 countries.
If VEI>1 , it would take more labor-time for country i to produce its exports than the labor-time required in the trading partners (the EU27 countries, in our case) to produce country i’s imports of goods and services (and vice versa if VEI<1) .
The Hierarchy of Value Extraction in the EU27
This research uses the OECD Inter-country Input–Output (ICIO) tables for 2018 (last year available), which provide the inter-country and inter-sectoral flows of intermediate and final goods and services. The ICIO tables include data for 66 countries (and all the EU27 countries) and 45 industries, covering 93% of global gross domestic product (OECD 2022).
Table 1 displays the VEI results for all EU27 member states for 2018.
VEI—2018
| VEI for intra-EU27 trade | UVEI for intra-EU27 trade (per $1000) | Export-to-import ratio for intra-EU27 trade in US$ | Median hourly wage in € | Percentage of highly skilled employment | |
|---|---|---|---|---|---|
| Austria | 0.602 | 0.632 | 0.966 | 15.27 | 44.4% |
| Belgium | 0.736 | 0.800 | 0.923 | 17.97 | 49.4% |
| Bulgaria | 3.529 | 3.290 | 1.077 | 2.40 | 32.9% |
| Croatia | 1.757 | 2.133 | 0.889 | 5.37 | 35.7% |
| Cyprus | 0.836 | 1.057 | 0.792 | 8.39 | 39.2% |
| Czech Republic | 1.206 | 1.515 | 1.164 | 6.17 | 40.2% |
| Denmark | 0.438 | 0.571 | 0.767 | 27.24 | 50.0% |
| Estonia | 1.565 | 1.525 | 1.026 | 6.52 | 47.1% |
| Finland | 0.588 | 0.781 | 0.754 | 17.49 | 48.3% |
| France | 0.676 | 0.794 | 0.851 | 15.34 | 48.7% |
| Germany | 0.648 | 0.635 | 1.024 | 17.23 | 46.7% |
| Greece | 1.184 | 1.463 | 0.810 | 7.00 | 32.5% |
| Hungary | 2.007 | 2.051 | 0.985 | 4.37 | 38.9% |
| Ireland | 0.538 | 0.447 | 1.204 | 17.97 | 47.6% |
| Italy | 0.763 | 0.898 | 0.855 | 12.61 | 36.0% |
| Latvia | 1.222 | 1.558 | 0.785 | 4.92 | 45.2% |
| Lithuania | 1.283 | 1.343 | 0.956 | 4.41 | 46.7% |
| Luxembourg | 0.440 | 0.322 | 1.368 | 19.59 | 65.9% |
| Malta | 1.206 | 1.508 | 0.816 | 9.96 | 42.6% |
| Netherlands | 0.866 | 0.595 | 1.458 | 16.56 | 54.2% |
| Poland | 2.858 | 2.355 | 1.215 | 4.98 | 42.0% |
| Portugal | 1.418 | 1.820 | 0.780 | 5.37 | 42.1% |
| Romania | 1.768 | 2.126 | 0.834 | 3.74 | 28.4% |
| Slovakia | 1.582 | 1.477 | 1.078 | 5.64 | 38.6% |
| Slovenia | 1.490 | 1.304 | 1.236 | 8.04 | 47.3% |
| Spain | 1.271 | 1.141 | 1.115 | 10.05 | 35.9% |
| Sweden | 0.549 | 0.658 | 0.835 | 18.17 | 57.5% |
Source: Own calculations based on OECD (2022) data. The median average hourly wage data are sourced from Eurostat (2021).
The VEI ranges from 0.438 in Denmark to 3.529 in Bulgaria. Greece, for example, has a VEI of 1.184, meaning that it requires 18.4% more labor hours to produce goods and services for export to EU27 countries compared to the labor hours needed to import goods and services from EU27 countries.
Among the EU27 member states, 12 have a VEI below 1, 12 have a VEI between 1 and 2, and the remaining three countries have a VEI above 2. This implies that a significant number of EU countries (15 out of 27) experience value extraction through intra-EU27 trade, as they require more labor hours to produce their exports than the hours needed to produce their imports.
Figure 1 shows the geographical distribution of these results across the EU27 member states and classifies them into three groups.
Choropleth Map of the Geographical Distribution of VEI across the EU27 Member States in 2018
- (1)
Countries with VEI<1 extract value through intra-EU27 trade. These countries predominantly include the core member states of the EU, primarily located in the northern and western regions of the EU.
- (2)
Countries with 1<VEI<2 experience value extraction through intra-EU27 trade, because they exchange more (but less than 100%) labor hours for their exports compared to their imports from their trading partners’ economies in the EU27. Mediterranean countries, such as Greece, Spain, Portugal, and Malta, as well as several former Eastern Bloc countries that have recently become EU members, fall into this category.
- (3)
Countries with VEI>2 . Countries in this group experience value extraction through intra-EU27 trade, because they exchange more than 100% of their labor hours for their exports compared to their imports from their trading partners’ economies in the EU27. These are former Eastern Bloc countries located at the southeastern border of the EU.
Therefore, a hierarchical structure of unequal exchange exists within the EU27, divided at three levels. At the top of this pyramid of unequal exchange, we find the countries that extract value through trade from their trading partners within the EU27. The differences in labor productivity, as they are expressed by the deviation of the total domestic labor hours required for the exports of a country (LHX) from the total foreign labor hours needed for a country’s imports (LHI), are the apparent cause of this unequal exchange. The productivity deficit of the countries experiencing loss of value through intra-EU27 trade is most evident if we take into account the Unit Value Extraction Index (UVEI), which subtracts the mass of exports and imports by reducing the ratio of labor hours required for a country’s exports to the labor hours needed for a country’s imports per $1,000 (see Table 1). The correlation between the VEI and the UVEI equals 0.951, with a 95% confidence interval between 0.895 and 0.978. 1
Wages, Income Elasticities of Demand, and Unequal Exchange
Figure 2 shows the relationship between the VEI and the median hourly wage for 2018 (see Table 1), revealing a significant negative correlation, with a strong correlation coefficient of—0.765. To assess the reliability of this correlation, a 95% confidence interval was calculated, resulting in a range from—0.887 to—0.542. 2
The Relationship between VEI and the Median Hourly Wage for 2018.
Note: Scatter plot illustrating the correlation between the median hourly wage (in euros) on the horizontal axis and VEI on the vertical axis for the EU27 member states for 2018. The round markers indicate countries with a ratio of highly skilled employment lower than the EU27 average and the diamond-shaped markers indicate countries with a ratio of highly skilled employment higher than the EU27 average.
Source: Own calculations based on OECD (2022) data. The median average hourly wage data are sourced from Eurostat (2021).
It can be inferred that the significant disparity in workers’ hourly wages across EU countries—ranging from €2.4 in Bulgaria to €27.4 in Denmark—is inversely related to the country’s position in intra-EU27 trade. Countries with relatively low wages tend to experience value extraction, while those with high wages tend to extract value from others. However, this does not constitute a confirmation of the Emmanuel model. According to our theoretical framework, while the international competitiveness of the more advanced countries arises from their level of economic development and is therefore mainly based on “structural” factors, “cost competitiveness” based on lower wages is the “weapon” of the less advanced countries of lower labor productivity in international trade, in order to limit their loss of value to the more advanced countries. The sufficient immobility of labor, as Emmanuel argues, secures these local differences in wages.
To emphasize this observation, it is noteworthy that countries with higher wages typically exhibit a greater proportion of skilled labor, as illustrated by the data in Table 1 and Figure 2. Analytically, among the 13 relatively low-skilled countries, only Italy and Cyprus gain value within intra-EU27 trade. Conversely, among the 14 relatively high-skilled countries, only Latvia, Lithuania, Estonia, and Slovenia (all former Eastern Bloc countries) exhibit value losses within intra-EU27 trade. Furthermore, all former Eastern Bloc countries undergo value extraction, along with the majority of the Mediterranean countries. The research findings are consistent with the findings in Economakis, Markaki, and Anastasiadis (2015) and Economakis and Markaki (2023), which show that unequal exchange is established in the differences in labor skills between different countries.
However, as noted in the previous analysis, the level of labor skill in a country is related to its overall economic development, since it is positively related to the industrial development and the technical composition of its capital, while “the branches with the highest capital intensity” are also those with “the greatest proportion of highly skilled labor,” as Emmanuel (1972) argues. Hence, in accordance with our theoretical scheme, the relations of unequal exchange as expressed by the VEI within the EU27 are related to the different labor skills among EU27 countries, while the latter are reflected in the levels of wages.
At the same time, the more advanced countries, of higher labor skills and technological development, as already noted, mostly produce and export commodities of higher income elasticity of demand compared to those produced by the less advanced countries. This results in the rising of the price of commodities produced by the more advanced countries above their value and leads to monopoly pricing, which causes value transfers at the expense of the less advanced countries. These value “gains” for the more advanced countries are added to those due to labor productivity differences.
Value Extraction and Trade Balance
As noted, the monetary trade surpluses of a less advanced country, which bases its international competitiveness on “cost competitiveness,” may hide the unequal exchange, while a more advanced country may exhibit monetary trade deficits and, at the same time, “gain” labor-time in international trade transactions with a less advanced country. To investigate this case, we will examine a country’s export performance, quantified by the ratio of exports to imports (X/M) in monetary terms, in conjunction with the VEI.
Both measures (X/M and VEI) are unitless, with the value 1 denoting whether the result is positive or negative: when VEI is greater than 1, the country is subject to value extraction, while when VEI is less than 1, the country extracts value from its trading partners. In the case of the X/M index, a value greater than 1 indicates a trade surplus, while a value less than 1 signifies a trade deficit.
From the above analysis, it becomes evident that a country with VEI less than 1 and X/M greater than 1 performs well in terms of both labor-time and monetary units, whereas if VEI is greater than 1 and X/M is less than 1, the country is not performing well in either case. There are also two other cases: VEI > 1 and X/M > 1, indicating value extraction from the country alongside trade surpluses; and VEI < 1 and X/M < 1, signifying value extraction by the country along with negative monetary balances.
Figure 3 shows the relationship between VEI and the exporting performance of the EU27 member states in monetary terms, expressed by the ratio of exports to imports in intra-EU27 trade (see Table 1). Figure 3 enables the categorization of the EU27 member states into four distinct categories, based on both value extraction, measured in labor-time, and exporting status, measured in monetary values.
The Relationship between VEI and the Exporting Performance of the EU27 Member States in Monetary Terms.
Note: Scatter plot depicting the relationship between VEI on the horizontal axis and the ratio of exports to imports (X/M) in monetary terms of intra-EU27 trade on the vertical axis for 2018. This plot illustrates how changes in VEI correspond to variations in the X/M ratio.
Source: Own calculations based on OECD (2022) data. The median average hourly wage data are sourced from Eurostat (2021).
- (1)
Category 1 includes countries with a VEI and X/M ratio in monetary terms greater than 1, namely Bulgaria, Poland, Estonia, Slovakia, Slovenia, the Czech Republic, and Spain. These countries experience losses of value within intra-EU27 trade, despite displaying a positive trade balance.
- (2)
Category 2 includes countries with a VEI less than 1 but an X/M ratio in monetary terms greater than 1. This category includes the Netherlands, Luxembourg, Ireland, and Germany. These countries exhibit “gains” in value in their trade transactions, both in labor-time and monetary value.
- (3)
Category 3 includes countries with VEI and X/M ratios in monetary terms less than 1, namely Austria, Belgium, Italy, Sweden, France, Finland, Denmark, and Cyprus. These countries extract value within intra-EU27 trade and simultaneously display a negative trade balance.
- (4)
Finally, Category 4 includes countries with a VEI greater than 1 and an X/M ratio less than 1, including Hungary, Lithuania, Malta, Croatia, Romania, Latvia, Portugal, and Greece. These countries are subject to value extraction with negative trade balances.
Categories 2 and 4 represent the “pure” and/or extreme versions, where the VEI is reflected in the country’s export performance in monetary terms. In Category 2, countries with value “gains” show a surplus trade balance, and in Category 4, countries with value losses experience deficit balances. Notably, Category 2, the most favorable category, includes only four countries (with Germany among them), all of which exhibit a proportion of highly skilled employment above the EU27 average. These countries are at the top of the imperialist pyramid of the EU27. Furthermore, Category 4, the least favorable category, comprises eight countries, with only two displaying relatively highly skilled employment (Latvia and Lithuania).
Categories 1 and 3 represent intermediate versions, where the VEI is not directly reflected in the country’s export performance. In Category 1, countries with value losses show surplus trade balances, and in Category 3, countries with value “gains” experience deficits. From the seven countries in Category 1, only two show a proportion of highly skilled employment above the EU27 average (Estonia and Slovenia). Given that countries with higher wages typically exhibit a greater proportion of skilled labor and vice versa, Category 1 is the typical case, where unequal exchange is hidden behind monetary trade surpluses that are based on lower wages. It is worth noting that Bulgaria and Poland are among the countries in this category, exhibiting a VEI > 2—that is, they are among the countries that experience the highest extraction of value. On the contrary, from the eight countries in Category 3, only two exhibit a proportion of highly skilled employment below the EU27 average (Cyprus and Italy).
A Concluding Note
In this article, we have investigated the “mechanism” of unequal exchange based on Marx’s analysis, according to which the deeper cause of unequal exchange lies in the established differences in the skills of labor between more and less advanced countries, which bring about an “essential modification” of “the law of value” in international trade. Following Emmanuel’s seminal contribution to unequal exchange and on the basis of Lenin’s “law of uneven development,” it is argued that value transfers in favor of the more advanced countries are realized despite the absence of an international equalization of the rates of profit. In this framework, it is revealed that behind the Ricardian “comparative advantage” an unequal exchange at the expense of less advanced countries of lower wages is hidden.
Our empirical investigation has focused on unequal exchange within the EU27 for the year 2018. In this way, we have shown that unequal exchange does not merely indicate a dividing line between the “Global North” and the “Global South,” but rather penetrates the world economy, and specifically the imperialist EU, by generating a hierarchy of economic performance that is realized in value extraction through trade transactions between more and less advanced countries.
According to the findings of this study, there is an economic pyramid of value extraction (unequal exchange). At the top of this are countries that extract value from other EU27 countries in the context of intra-EU27 trade and at the same time exhibit monetary surpluses in their trade balance. At the bottom of the economic pyramid are countries that experience value extraction by other EU27 countries in the context of intra-EU27 trade while they may run monetary surpluses or deficits in their trade balance.
