Category: Issues – Trade

Globalisation not a benefit to all: PNG leader

Papua New Guinea’s Prime Minister, Peter O’Neill, said APEC will recognise that not all elements of globalisation are beneficial for all people. Let us hope so.

PNG leader on Globalisation

The following is an extract from Papua New Guinea News Today.
Mr O’Neill went on to say, “Sentiments being expressed by people all around the world today are that globalisation is not necessarily beneficial for everyone. As a result of that, many of the most vulnerable people have been affected by some of the arrangements and agreements that we have put in place over the years. Yes, there has been growth, but there have also been people affected by the loss of jobs and income, and many small businesses and micro businesses have not been able to be competitive when larger multi-nationals come into their markets.”
Mr. O’Neill said this is particularly the case in emerging economies, as well as for some of the developed economies.
Continuing his argument, he said, “Despite some structural reforms that have been underway in our respective economies, and how we manage our state owned enterprises, these issues continue to linger. APEC has a responsibility in ensuring that we work together in enhancing how we move capital, goods and services, and skilled labour right across our economies, so that we can enhance value chains and continue to enable growth within our economies.”
Interesting isn’t it that it takes the leader of a very poor developing nation to bell the cat, as Donald Trump has done, on the false ideology that unbounded free trade will be the saviour of the world. They both know that trade needs to be managed according to the particular needs of each nation.
One thing we know for certain: economists and the left/elite have let the world down on this issue, instead of using their energies to help resolve the distortions that they have helped to create.

 

APEC 2016 in Peru discusses Protectionism

While the national leaders at the APEC 2016 conference in Peru are willing to acknowledge that “some people have been left behind,” there is little agreement on the action required to fix this.

Peru points the way

In an interview translated on SBS TV (in Australia), Peru’s Finance Minister, Mercedes Araoz said, “What they [the discontented voters] are taking issue with is valid in all societies in the face of globalisation, and perhaps a bit of rejection of it. The request is to apply some mechanism to make it more inclusive.”

Nowhere is the need more obvious to make national economies stronger & fairer than in the developing world. Apart from their own entrenched income inequalities, they are also faced with a most daunting prospect: the first-mover-advantage over them of developed nations. Indeed, it was the intention of the TPP to entrench that advantage well into the foreseeable future. For the sake of Peru, and other vulnerable nations, it is fortunate that this treaty has been put on hold. May it be buried forever, and along with it an attempt to game the system in favor of the largest corporations in the world.

Ms Araoz’s plea

Responding to Ms Araoz’s plea, I argue that the required first step is to convince national governments that they can manage their own affairs. Once that concept begins to be reconsidered, then each national government can look at the way in which it can increase the prosperity of its people.

We can look at the USA as an example. Prior to the current obsession with globalization, which started about 30 years ago, the USA domestic sales of goods and service was about 94% of GDP. They made stuff and consumed it themselves. It was a happy and prosperous period, when people served each other and shared a national vision. Now domestic sales are about 84% of GDP, and there is considerable angst throughout large sections of the nation.

Higher exports and imports in the USA have had three results:

  1. Many goods are much cheaper now than before, thus making the consumer (who has a job) better off.
  2. Businesses are more able to compete in the export market because they have access to cheaper labor, such as from Mexico.
  3. Whole cities have been devastated by loss of entire industries, and in many once large and prosperous regions of America the people are desperately looking just to survive. The cheap goods are not much use to them.

So one could ask, “Has the move towards free trade been worth the cost?” The answer has to be both yes and no, depending upon who you ask. Winners have won even more, losers have lost most of what they had before.

A new Economic Mechanism from APEC 2016

When it comes to finding a new economic mechanism at APEC 2016, one doesn’t need to be too concerned about developed nations. They have mature democracies, and the voice of the people will guide their leaders to work through the issues that I have discussed. The role of the leaders of APEC 2016 should be to find a new mechanism that will be useful for developing and emerging nations.

Thinking people must know that, while developing nations have improved their national GDP by exporting to the developed world, this is not a very good long-term strategy. If developing nations look forward to a future as just being a source of cheap imports for the West they are condemning themselves to a future of relative poverty. While there is any nation in the world that doesn’t take control of its own destiny, there will always be a cheaper source of labor upon which the West can depend.

Ms Araoz’s plea at APEC 2016 implies the need to create a mechanism that will enable each developing nation to develop a diverse economy, in which all its people can prosper. Such a mechanism would enable the full talents of its own people to be exercised within that nation, with the more skilled and talented being able to raise the (economic) boat for the entire nation.

Yet the question is, “How can this be done when the West owns almost all of the intellectual property, both that which is patented, and that which is inbuilt into their entire economic, government and educational system?”

A 20% Tariff would Level the Playing Field

The APEC and WTO objective of lowering all tariffs to zero rating is entirely misconceived. Such a strategy will not “lift all boats.” Rather, it will trap developing nations in a permanent dependency on the West. If APEC 2016 doesn’t change direction, the meeting can be considered to be a failure.

One of the strategies that could be adopted by APEC 2016 is to support the introduction of an extra 20% tariff across the board. This would give emerging industries in developing countries a chance to find a modest level of support so that they can find their feet. It never needs to be reduced below 20%, unless there really is a compelling case for goods to be 20% cheaper. What would be argument for that? The wealthy getting luxury goods cheaper?

A Hypothetical Example

Let us assume that there is a country with a population of 10 million people. In this country, the top 10% of the population earn 90% of the nation’s income. Most of the rest are either subsistence farmers or poorly paid factory workers. Let us assume that the national GDP is $40 billion, with the top 10% earning $36,000 each per year and the rest earning $450 each per year. In this country 40% of the national income is from exports, and it spends this on imports.

Now let us assume that a 20% tariff is applied across the board in addition to any current tariff. After this, innovative entrepreneurs are likely to see the opportunity to make many of the goods consumed by the top 10%, which were previously imported. As a result, demand for labor increases and whole new class of more highly skilled workers develops. As a result, a number of those previously in the bottom 90% now find themselves in a new echelon of society. Now the society’s division is 20% who command 80% of the nation’s GDP. While some of the relatively very rich will have lost some of their income along the way, following the disruption brought about by this reform, let us say that the nation’s GDP has now grown to $50 billion. All of this extra goes to the new top 20% of the population, so that their average income is now $23,000. This is lower than the previous average of $36,000, but it is spread over more people. The nation is already better off, but nothing has been done from the remaining 80% of the population.

Because there are now more relatively wealthy people, the service sector in the nation can grow as well, thus pushing up both wages and paid activity. The extra $10 million is now spent in the service sector, increasing the nation’s GDP to $60 billion. Most of this will go to the 80% poorer part of the population. This sector previously earned $450 per year; now these 8 million people share in the extra $10 billion, pushing up their average income by $1,250 per year.

Any reasonable and competent government would work towards ensuring that this virtuous circle continues to lift the income of these lower paid workers, through education, and improved skills at work.

Conclusion

It is cringe-worthy of the Australian Prime Minister, Malcolm Turnbull, to cite 1930s protectionism as if it provides the evidence for embracing free trade. Doesn’t he know that the 1930s were a very difficult period because of the crash of the world economies from over-active speculative activites in the 1920s?

Doesn’t Malcolm Turnbull know that America’s economic powerhouse was built in the 19th century, building its strength behind tariff walls?

Even less excusable, doesn’t Malcolm Turnbull know that the world became a much more prosperous place at the same time as protectionist regimes were in place in most of the nations of the world, namely, in the 1950s, 1960s and 1970s?

Rather than protectionism being ridiculous, as Obama and Turnbull seem to think, the arguments presented here are just standard economics. Unfortunately, free trade advocates, many of whom are gathered at APEC 2016 seem to have stopped thinking from first principles, and have adopted a convenient, if bogus, theory.

A “protectionist scenario” has been replayed in every developed nation: it is now being played out in China. Why shouldn’t the rest of the developing world be encouraged to follow the same pattern?

 

Protectionism – A Rational Economic Framework

A rational re-adoption of protectionism is the key to returning economic strength to every nation and to the world as a whole.

Radical Protectionism

In an ideal world, every country would impose a 20% tariff on all imported goods and services, across the board. This would require no policy decision making on individual industries, and every sector would share in the same level of protection from cheap imports. This would allow every nation to develop new industries, with at least a modicum of protection, to help them get started. This would be the help that developing nations to succeed in the face of hot competition from the developed nations, who are presently living off the “wealth” of their first-mover-advantage. Such an approach would certainly not lead to a trade war.

However, this idea is far too radical for most politicians and economists, and would require a Trump-like revolution to bring it about.

Rational Protectionism

Rational protectionism would be much easier to sell, being targeted at the difficult spots in each economy, leaving the current arrangements in place for all other sectors.

In the USA, Donald Trump’s proposal to put a higher tariff on US companies re-importing goods into the USA is a case in point. His proposal impacts on companies that have moved their plants off US soil to utilize low labor costs elsewhere.

Actually it is a more reasonable way to protect US intellectual property, rather than trying to bully other nations via a TPP. Ideas that are developed in the USA, using all the resources and experience of the USA, in a way actually “belong to the USA”. Thus there is a rationality to imposing the kind of tariff that Donald Trump has proposed. It could be extended to cover any products made in foreign countries, and imported into the USA, which substantially incorporate expertise developed in the USA, whether patented or not.

The concept would also make sense in Australia, which has developed many great ideas, but for which the market here is too small to properly exploit. The Cochlear implants are an obvious case in point.

Another rational use of tariffs in Australia would include horticultural products. Here we have a natural advantage in our developed agricultural methods, but this is offset by an actual disadvantage in labor in Australia being much more expensive per hour than elsewhere. Since Australia has a emotional and rational attachment to producing its own food, it would be a good first case for the doctrine of “rational protectionism” to be adopted.

A similar case applies to the foreign outsourcing of labor services. The current outsourcing framework is far from rational. In Australia, we have payroll tax (also crazy) and a superannuation levy (rational), but suppliers of outsourced labor in India do not have to face such cost hurdles. Also India’s labor cost per hour is a simple fraction of Australia’s cost per hour. Unless something is done, more and more jobs will be outsourced to foreign countries, leaving even high skilled Australians with no jobs that they can fill.

Conclusion

Protectionism is not a “danger” to the world, but if adopted rationally it will restore economic health to every nation, and actually help to build up developing nations.

A Trade War? Pull the other one!

Imposing a moderate level of tariffs, even on ALL goods entering a country, will not result in a trade war.

Trade War – a Phony argument

I recently heard a respected (and paid) Australian economic commentator saying that if Donald Trump continues with his “Protectionism” agenda it could bring about a trade war, such as the world had in the 1930s.

Surely we should be beyond such childish commentary on trade policy. The world had quite high levels of tariffs in the 1950s. There was no trade war. They continued in the 1960s. Still no talk of a trade war, with the same applying the 1970s. There is no reason that a moderate and well applied tariff regime should lead to a trade war in the 21st century. It is more likely that not invoking protectionism will lead to an increasing level of discontent.

Tariffs

Since the 1980s tariffs have been progressively coming down, with significant benefits in regard to lower prices being available for many goods. At the same time, jobs in the industrial sector have also declined from two causes. The first is that competitive pressure has made business much more concerned about costs, leading to efficiency improvement, mostly via more automation. Union leaders also realized that pushing for relatively outrageous wage and conditions was impacting on their members’ future prospects, so they led a movement to change their members’ expectations. The second reason is that jobs were exported as the replacement goods were imported. Not every part of this was a bad outcome.

Tariffs can be considered to have been previously introduced to offset an inherent competitive advantage in the exporting nation. This still continues to be the case. Yet now we realize that tariffs are not a one-way street to success. If they are set too high, this can embed business inefficiency, lead to noncompetitive wage rates, and unnecessarily result in paying higher prices for all goods and services.

Contrary to current economic thinking, tariffs are not a “curse word.” Indeed, the clear rationale for tariffs in the 21st century is to attempt to achieve a rational trade-off between lower prices and “full employment.”

A truly rational trade policy would set a moderate level of tariffs for those sectors of the economy that the government of the nation decides it wants to keep and is in danger of losing. Such a policy would not create a trade war, especially since no nation in the post-Trump world will be able to resist its compelling logic.

Not a Trade War – A Healthier World Economy

Who really thinks that a sick West helps the East? We all know that China’s exports are declining. Why is that? It is simply because the EU is not buying as many goods from China. This is because the EU is being run by ideologues who have no idea about the benefits of ensuring that all parts of the European economy are running on full-steam.

I suggest that EU economists, and those elsewhere, like the Australian economic commentator mentioned above, read George Cooper’s book, Fixing Economics (2016), to gain an understanding of the importance of a wide-spread of a nation’s wealth as a means of increasing national prosperity.

Who really can argue that impoverishing farmers in Mexico, via NAFTA, is in the long-term interests of that nation? Is Mexico a happier and more cohesive society after NAFTA? I doubt it. Reforming NAFTA is very much in Mexico’s interests, just as it is in the interests of the workers in the industrial cities of America.

We can also look at Australia as a case in point. Sure, we are still ideologically committed to Free Trade (a world-leader in this phony ideology in fact), yet those who really understand the economy, like the former Reserve Bank governor, knew that the $A had to fall in order to improve Australia’s competitiveness after the resources boom. This much vaunted period of prosperity was actually disastrous for Australia manufacturing industry, with much viable manufacturing being lost (probably forever). “Fortunately” the Australian terms of trade took a catastrophic fall, thus saving us (as far as can be done) from our own folly. Tariffs were an impossible concept for us, but a falling $A did not offend the ideologues running economic policy here.

Maintain cohesion in the nation should be a government’s #1 aim in peace time. Policies that achieve this are in everyone’s long-term interests, even if the “winners” have to take 10% off their spoils from economic success.

Go Donald Trump!

TPP – A Way to Preserve First-Mover-Advantage

The TPP is presented as opening up trade between the Pacific nations, but the sub-text is preserving first-mover-advantage.

TPP – Staying at the Top

The main thrust of the TPP is intended to extend the rule of law to cover intellectual property. A secondary purpose is to stop nations from passing laws that hurt an already established advantage in the market place. In other words, to preserve whatever first-mover-advantage has already been earned (or achieved by whatever means).

It may not have been the clearly thought through intention of the legislators, but the outcome is to ensure that nations that are already poor remain relatively poorer than the richer nations.

In Australia, we have the naive dream that we will be a supplier of intellectual goods to Asia. If this dream is realized, what is the result for Asia? Are all Asian supposed to be satisfied with supplying cheap consumer goods to Australia, while the Australians supply the more expensive and more profitable intellectual goods to Asia? At least, if the TPP deal is agreed in the USA, then Australians will be able to hang onto whatever first-mover advantage it has, and the Asians will be the poorer as a result.

The USA is beginning to feel the first winds of change resulting from the availability of cheap Asian goods. Its leaders also have a dream of hanging onto their hard-won first-mover advantage, which they hope will ensure that alternative jobs will become available from those that are lost. This, of course, is a forlorn hope, as current experience with structural unemployment in the USA has already shown.

Nevertheless, despite the weakness of the case for even more free trade, the intention of the TPP is to ensure that the developing and emerging nations will remain on the teat of the West for intellectual property for as long as this can be sustained, thus keeping them relatively poorer than the West.

First Mover Advantage

Any newly emerging nation would know that an existing first-mover-advantage is very difficult to overcome. It was an issue faced in the USA during the 19th century, when the cloth and clothing manufacturers on the US east coast found that they could not compete on a “level playing field” with the British manufacturers. Those politicians in the US who wanted to build up a US manufacturing industry argued for the imposition of tariffs. Eventually the advocates of the so-called American System, which involved introducing tariffs, won the political argument, and the USA went on to become a manufacturing power-house. As a consequence, UK manufacturing dominance came to an end. It was a hard-fought fight, even though it is obvious to us now that the advocates of the American System were in the right.

China has its own strategies for overcoming first-mover-advantage. This involves a combination of tariffs, subsidies and other protective measures to support its developing and established industries. It is also claimed that the Chinese use industrial espionage and the blatant stealing of secrets to leap-frog the hurdles standing in the way of developing high-tech industries. The TPP is designed to counter both of these, at least within the developing nations that are signatories to this deal.

So, if tariffs and cheating are not open as a means of overcoming first-mover-advantage what are the options for developing nations? If anyone knows what they are, please comment on this post.

Fraudulent Arguments for Free Trade

Advocates for Free Trade often argue that it lifts poor nations out of poverty. This is only partially true; and has a very limited impact. The wages in Bangladesh for textile workers have increased from $1 day to $2 day as a result of increased exports of finished garments. Yet any attempt to push wages higher, towards Western standards, is met the fierce resistance from the textile manufacturers. They probably use the argument that an increase in pay like that will make them noncompetitive. So unless Bangladesh can come up with new industries in which they can compete, so that there are other opportunities for the Bangladeshi people to gain work at higher pay, it looks like the future for wages in Bangladesh is likely to stop at a maximum of $5 day.

Also, the advocates of Free Trade are unlikely to be the workers who will be the first to be displaced in Western nations. If Western nations can claim to be virtuous by opening their industries to fierce competition from Asia (and from Mexico and South America), it is not the advocates of this policy that will bear the cost: it is the ordinary workers on those nations. These are the workers who are unlikely to get jobs in the “winner-takes-all” high tech jobs, such as in Apple and Google.

Another fraudulent argument for Free Trade is to cite China as a shining beacon. Certainly it has benefited from the opening of trade in Western nations. But it has made the most of this situation by protecting its own industries at the same time. With this protectionism (and possibly cheating as well), it is unlikely that China would have been able to move hundreds of millions of workers from farms to the cities. It is not Free Trade on its own that has helped China to develop. It also required the Chinese government to look after the interests of its own people.

TPP is a Moral Fraud

The TPP is advocated on the basis that it will help developing nations to develop. In fact, what it is designed to do is to entrench privilege. This is not the privilege of entire nations, but rather the privilege of corporations. It is not privilege of all corporations that is being protected: it is the privilege of those corporations that have an edge that makes them the best in the world.

I don’t want my world to be come a place in which only the “very best” or most successful have a reasonable share in its abundance. I want a world in which everyone has a fair chance of success, and a reasonable opportunity for each to share in the success of his or her own nation. That is why agreements like TPP are an anathema to me, along with anything that reduces the power of democratic governments to shape their societies according the needs and aspirations of their own peoples.

Do you agree?

EU Tariffs on UK goods are not scary

After BrExit, the EU and UK could impose complementary tariffs on each other’s exports at a non-discriminatory level, say 10%. EU tariffs, and balancing UK tariffs would help, not hurt, the macro-economics of both.

EU Tariffs in UK Trade

Both the EU and the UK economies are unbalanced. Some parts of these economies are going very well, but other parts are struggling. Trade is the main cause of this imbalance. Reducing trade makes it more likely that a national government could regain control of its own economy.

The continuing pressure to reduce comparative costs means that there is a growing trend for more concentration of manufacturing activity. This results in some parts of the each region booming, but other parts are left destitute. Yet “Cheaper prices for everything” is a mantra, not a complete policy. This is because it results in widespread and irreparable unemployment. It is only half a policy. A complete policy would attempt to balance employment and prices over time. 100 years of unemployment, as happened as a result of the Enclosure Movement, is not acceptable in a democracy, nor is it acceptable to most clear thinking adults.

Agricultural Subsidies cause hurt

The EU is infamous for its agricultural subsidies. These reduce the prices of agricultural goods, but make farmers dependent upon government handouts, and therefore on the tax contributions of other taxpayers. It also is in flagrant breach of the spirit of the WTO rules on trade.

If the UK did not grant its own agricultural producers EU-style subsidies, the UK could help its own farmers by introducing tariffs on all imported agricultural goods from every other nation.

In addition, if the EU continues with their agricultural subsidies, the UK would be entitled to invoke anti-dumping penalties. With that prospect hanging over their heads, the EU may be prepared to consider allowing discriminatory tariffs to be imposed on EU exports of agricultural goods into the UK, over-and-above the tariff on agricultural goods from other nations.

Tariffs are better than Quotas

Quotas can have a place in food production since it is natural objective of every nation to maintain a large measure of self-sufficiency in food for cultural and defence reasons. Yet tariffs are more economically efficient than quotas. This is because they allow the market to establish a close-to-optimal division of labour between economic sectors.

Quotas are not economically efficient. They can result in much higher prices of now-scarce goods, even leading to a doubling of prices. They can also result in super-profits for importers who have a licence to import up to the quota level, since they are now dealing in scarce goods.

 

Hillary Clinton Can Win Presidential Election

If Hillary Clinton moves away from free trade advocacy she is more likely to win US Presidential election.

Free Trade – an imaginary construct

We cannot escape the fact that nations are in competition with each other. Whoever does not acknowledge this is living in an imaginary world. Indeed, no-one lives in a world that can be realistically governed as if national borders do not exist. In addition, most people value many of the unique aspects of their own national culture and situation. Free trade theory assumes that national borders are of no account. Try winning an election with that 100 kg weight around your neck!

Ending un-restrained free trade will NOT end globalization, or world trade. It will regulate that process and restore economic control to the US congress. It will mean that the Congress no longer has to sit on the sidelines while jobs are lost up and down the country.

Tariffs for Developed Nations

The economies of all western nations are out of balance, with currently unresolved structural imbalances and difficult to resolve unemployment issues. Free trade theory has meant that the word “tariffs” has become a curse-word for economists and the US Congress. Yet tariffs should be in first line of defenses for the US Congress in seeking to advance the economic interests of its own people, particularly when faced with chronic unemployment. Hillary Clinton, tell your own economists to do a bit of thinking outside of the circle.

Tariffs for Emerging and Developing Nations

Any emerging nation that wants to build a diverse economy will use tariffs to help its new industries to develop. China is doing it with great success, and so did Japan, Taiwan and South Korea.

Any developing nation that avoids implementing tariffs, so that its elite can buy imported luxury goods for cheaper prices, will remain the workhouse for the West.

It is impossible for emerging and developing nations to overcome the inherent “first mover advantage” of the western nations without tariffs and other means of assistance.

What Hillary Clinton can do

  1. Acknowledge that current trade policies have hurt many of the poorer people in the USA.
  2. Accept that only a change to trade policies, so that they are not constructed primarily to help the already successful, will remedy the problems caused by the current trade policies.
  3. Argue that every nation needs some measure of protection against cheap imported goods, including USA.
  4. Undertake to discuss current trade policies with the nation’s trading partners, seeking to find a way to change them so that they work better for all nations, and not seeking only sectional advantages for one nation over another.