Category Archives: Trade

Introduction to the Pacific Trade Negotiation

The discussion about the closed process around a trans-Pacific Partership was mildly of concern, though not totally surprising.  In general though there isn’t much in the way of issues raised just:  There might be something bad here…

My cousin has been asking me if I’m up to speed on the dangers of the Trans-Pacific Partnership (TPP). I explained to him that Paul Krugman had just declared that the TPP was no big deal, so I assumed it must be awful, but no–I didn’t really know much about it. After reading some of the information he sent my way, I am glad he alerted me to this important issue; I can see why Dean Baker chastised Krugman for his nonchalance, though Baker and I are worried about (slightly) different aspects of it. In this post, I just want to “introduce” Free Advice readers to the TPP, to make sure you know why more and more people are warning about it.

Here’s Wikipedia’s opening description:

Since 2010, negotiations have been taking place[9] for the Trans-Pacific Partnership (TPP), a proposal for a significantly expanded version of TPSEP. The TPP is a proposed trade agreement under negotiation by (as of August 2013) Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.[10]

The TPP is intended to be a “high-standard” agreement aimed at emerging trade issues in the 21st century.[11] On November 13, 2013, a complete draft of the treaty’s Intellectual Property Rights chapter was published by WikiLeaks.[12][13] This and other leaks have drawn criticism and protest of the negotiations from global health experts, internet freedom activists, environmentalists, organized labor, advocacy groups and elected officials, in large part due to the secrecy of the negotiations, the expansive scope of the agreement, and controversial clauses in the drafts leaked to the public.

The website The New American has a lot of good coverage of the TPP, but this essay from August 2013 is the single best one that gets one up to speed on some of the essential concerns. Here are some key excerpts (bold is mine):

The USTR [U.S. Trade Representative] “Fact Sheet” cites as evidence of its transparency efforts the number of consultations it has held with its selected trade advisory committees and privileged “Civil Society stakeholders.” It states, for instance:

Over the course of the TPP negotiations, USTR has conducted more than 147 meetings with the trade advisory committees. Since June 11, 2010, USTR has posted 110 TPP documents to a website for cleared trade advisors to review and provide comments.

This transparency boast actually exposes a dangerous feature of the TPP process: The TPP documents are not available to the average American citizen, only to “cleared trade advisors.” And who are the “cleared trade advisors”? According to the USTR, these are “representatives from industry, agriculture, services, labor, state and local governments, and public interest groups.” But, apparently, that does not include elected representatives of the American people, since members of Congress have been forced to plead, and threaten in order to get a peep at the secret TPP texts.

For instance, Senator Ron Wyden (D-Ore.), the chairman of the Senate Finance Committee’s subcommittee on International Trade, Customs, and Global Competitiveness, requested copies of the TPP draft documents but was stonewalled by the USTR. When Senator Wyden threatened to propose a measure in the Senate that would force transparency on the proc­ess, the USTR agreed to grant the senator a peek at the documents, though his staff was not permitted to see them. This type of secretive process has no legitimate place in our system of government, and it obviously puts Congress at a distinct disadvantage in the TPP process, since the real work of examining the detailed legal texts normally falls to congressional staff members who are often experts in particular areas of domestic and foreign policy.

Wyden spokeswoman Jennifer Hoelzer…pointed out, “An advisor at Halliburton or the MPAA [Motion Picture Association of America] is given a password that allows him or her to go on the USTR website and view the TPP agreement anytime he or she wants.”

As just one example of the enormous dangers that are lurking in the hundreds (or thousands) of pages of still-secret texts, consider the leaked TPP draft text on intellectual property that would threaten Internet freedom — as well as American sovereignty — with new TPP surveillance requirements. As The New American reported last year, the leaked document would mandate that TPP member nations enact regulations that require Internet service providers (ISPs) to privately enforce copyright protection laws. “Current U.S. law,” noted The New American’s Joe Wolverton, “specifically the Digital Millennium Copyright Act (DMCA), would be supplanted by TPP Article 16.3. This provision in the TPP draft document paves the way for a new copyright enforcement scheme that extends far beyond the limits currently imposed by DMCA.”

The Electronic Frontier Foundation pointed out the TPP threat to Internet freedom:

Private ISP enforcement of copyright poses a serious threat to free speech on the Internet, because it makes offering open platforms for user-generated content economically untenable. For example, on an ad-supported site, the costs of reviewing each post will generally exceed the pennies of revenue one might get from ads. Even obvious fair uses could become too risky to host, leading to an Internet with only cautious and conservative content.

The net effect would be to squeeze out the smaller, independent ISPs, further cartelizing our communications and news media, and eventually wiping out the burgeoning alternative Internet-based news media.

I’ll be returning to this topic in the future, but I wanted to at least make my readers aware of the controversy. The Obama Administration is seeking to restore “fast-track approval” powers on this, which would allow an up-or-down vote on the whole TPP without discussion of its individual components.

As a final point in this introductory post, let me say this: The problem with these “free trade” agreements is that some critics rely on centuries-old protectionist fallacies; they are afraid of “cheap imports.” Anyone familiar with Bastiat understands why such worries are misplaced.

However, those of us who believe in genuine free trade shouldn’t trust government officials when they title something a “free trade” agreement. It doesn’t take years of backroom negotiations to reduce tariff rates. No, something is really fishy with this TPP and other such deals.

Introduction to the TPP
Bob Murphy
Thu, 26 Dec 2013 22:38:01 GMT

Two foreign policy initiatives contrasted

 

Michael Giberson

Two foreign policy initiatives, both began in mid-March, one a year old and the other started ten years ago, have had dramatically different effects on the world. Eric Shierman celebrates the wiser of the two efforts:

I have considered writing about the Iraq War on the tenth anniversary of our collective, bi-partisan decision to make one of the greatest strategic mistakes in American military history, but it’s just too depressing to put words into sentences describing the cost in lives and treasure we paid….

Thus the most encouraging anniversary to reflect on is not our invasion of Iraq ten years ago this week, but the wise implementation of our free trade agreement with South Korea one year ago. … From that body of peer reviewed literature [on foreign relations] there has emerged little empirical evidence of a correlation between peace and the pursuit of ever greater military strength among states, but there is overwhelming evidence that the single most powerful pacific force in foreign policy is trade….

The empirical evidence is just overwhelming, … the more exposed people are to complex trading economies with a higher degree of specialization and division of labor, the more empathy they employ in their decision making and the more rational they are in seeking their own selfish ends through the voluntary cooperation of others. It’s not enough to know what you want; successful exchange requires a focus on what others’ want as well. This paradigm spills over into other aspects of our lives even when we are not aware of it.

Of course this is not the primary goal of free trade agreements, economic growth is. The pacifying effects of trade are merely a positive externality….

Worth reading the full thing.

Two foreign policy initiatives contrasted
Michael Giberson
Fri, 22 Mar 2013 13:41:06 GMT

The NYT is Upset that Wages in China Are Rising

 

Wow this is really getting incredible, yet another piece about how China is going to be suffering because it has a declining labor force. The big problem seems to be that we may not be able to count on cheap tee-shirts from China. The prescription is that Chinese people should have more kids so that we can have more cheap labor. The downside is that it will take 20 years before the kids born today will be able to join the labor force. 

That is only a slight caricature of the blogpost by the usually insightful Vikas Bajaj. The obsession with the declining labor force in China, and the nearly universal conviction that it is bad, displays a seriously confused view of economics.

Let’s say that China’s labor force declines at the rate of 1 percent annually for the next four decades. So what? This means that the price of labor will rise and the least productive jobs will go unfilled. This is what happened in the United States when people left the farms for better paying jobs in manufacturing. Farmers no doubt felt there was a labor shortage, but that is how market economies work. Less productive businesses go under, do Bajaj and his fellow China worriers want to stop technological progress?

In terms of being able to support a rising population of dependents, it is important to keep productivity growth in this picture. China’s economy had been growing at the rate of 10 percent a year. Even if this slow to 7 percent as many predict, it will allow workers to enjoy much higher after tax income even if an increasing portion of their wage is diverted to supporting China’s elderly population.

The arithmetic here is simply. If wages rise in step with productivity growth, then after 20 years wages will have risen by 287 percent. Even if the tax burden on workers increased by 20 percentage points over this period they would still have far more after-tax income than they had when the dependency rate was lower and the economy was less productive.

What is especially bizarre is that the obsession with the prospect of a declining population takes no notice of the horrible pollution problem that China faces in Beijing and other major cities and also the problem of global warming. A declining population will help to directly address both problems. The fact that China slowed its population growth was an enormous service to humanity. 

The NYT is Upset that Wages in China Are Rising
Sat, 19 Jan 2013 21:49:34 GMT

Free Trade Helps Governments Afford Progressive Policies–Does the Obama Administration get this?

Though I support the President, he does have too much interest in redistribution versus increasing economic opportunity.  I get where he wants to go:  more spread around wealth and income, and a rising tide raising all boats.  That said, I think he often wants to bring those at the top down, more than see those at the bottom do better.  His emphasis on new taxes focused narrowly on the wealthy instead of shared sacrifice to balance the budget for shared prosperity shows that I think.

We maybe seeing a similar blind spot in seeing what pays for progressive policy in the choice for World Bank President according to this.

Jagdish Bhagwati provides an argument for more trade liberalization that should be embraced by progressives, and in doing so makes the case against Obama’s World Bank nominee:

In fact, it is the rapid acceleration of economic growth in the major emerging countries that has reduced poverty, not only directly, through jobs and higher incomes, but also by generating the revenues governments need to undertake the public-health, education, and other programs that sustain poverty reduction – and growth – in the long term….

The problem with Kim, and presumably with the Obama administration’s development experts, is that they do not understand that successful development requires big-payoff pro-reform, pro-growth policies, not just small-payoff micro-level policies….

Kim is hardly likely to understand this dynamic. A decade ago, he cheered on the tirades against “neoliberal” reforms that, in fact, were the harbingers of higher growth and lower poverty around the world. The World Bank presidency should not be an apprenticeship.

Bhagwati suggests Ngozi Okonjo-Iweala and Laura Tyson as better choices.

Filed under: Uncategorized

Free Trade Helps Governments Afford Progressive Policies
Adam Ozimek
Fri, 06 Apr 2012 02:43:59 GMT

Reilly and Dobbs to Obama: Be More Socialist

Can anyone tell me what contemporary “conservatives” have as guiding principles?  It doesn’t seem to be freedom in any real sense.  It seems to that belligerent nationalism the main focus and hence:  endless desire for weapons and war, hostility to immigrants, imports, economic nationalism like exhibited here.

(February 24, 2012 08:29 PM, by David Henderson) I’m sitting in my hotel room in Chiang Mai, Thailand watching The O’Reilly Factor. I might as well have been watching Amy Goodman’s Democracy Now! The content was almost indistinguishable. O’Reilly and Dobbs were saying that Obama should be taking… (9 COMMENTS)

O’Reilly and Dobbs to Obama: Be More Socialist
David Henderson
Sat, 25 Feb 2012 04:29:05 GMT

Looking at China’s Real Estate Boom Before it Busts

NoOneOfAnyImport shared this.

I’ll just post the video, which was fascinating. I’d heard of China’s real-estate bubble before, but the scope of a booming but overbuilt real-estate sector is amazing.  The video really made that starkly real.  It’s the result of a centralized economy.

A few observations:

1. Clearly allocation of productive workers and resources is still not so good in a communist countries.  Strong conservatives gleefully point this out.

2. If more of Chinese labor was occupied in manufacture for export the competition with US workers might be even more painful for us.  Hooray for communism after all?  Strong conservatives might be less gleefully about this.  Overall though and in the long-run better use of Chinese productive capacity would benefit produce more benefits than costs.  But workers in US manufacturing would be hurt.

3. This is a kind of stimulus on steroids.  Keynesianism can produce full employment of a sort.  People are employed, but not in making anything there’s any voluntary demand for, except for speculation.  A point that isn’t useful to any one ideology.

4. Note though that apparently private investors are buying these empty pieces of real estate.  In the end apparently, this may wipe out much of the new Chinese middle class.  What happens if that happens?

5. China is still remarkably poor.  At least partially a failure of socialism.

More on the subject here:

Marginal Revolution

via Nouriel Roubini on Austro-Chinese business cycle theory.

China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth.

Gains and Losses from Trade with China

A new analysis of this is available.  It supports that many people are works are hurt by trade with China.   These impacts are not just reduced wages, also some people dropping out of the labor market due to reduced opportunities.

It’s important to note this looks at the effects on labor only.  Low cost imports can and do benefit consumers, increase profits and benefit some laborers.

It is easy to show trade if beneficial, but while gains exceed loses.  There are losers, and for trade with China labor appears to be a loser overall.  the policy issue is how mitigate those loses since society as a whole is better off.

From the conclusion to a provocative paper by David Autor, David Dorn, and Gordon Hanson, entitled The China Syndrome: Local Labor Market Effects of Import Competition in the United States:

our study suggests that the rapid increase in U.S. imports of Chinese goods during the past two decades has had a substantial impact on employment and household incomes, benefits program enrollments, and transfer payments in local labor markets exposed to increased import competition. These e¤ects extend far outside the manufacturing sector, and they imply substantial changes in worker and household welfare.

…. The relationship between employment and (instrumented) import exposure is illustrated in Panel B of Figure 3.

autor0.png
Figure from Autor, Dorn, and Gordon (2011).

While there are losses along several dimensions (employment, wages, deadweight losses associated with transfers), there are also gains. Putting these together, the authors conclude:

 

Gains and Losses from Trade with China
Menzie Chinn
Tue, 05 Apr 2011 05:22:34 GMT

"The World Economy Goes East"

 

Bill Easterly:

The World Economy goes East: should the West get hysterical?, by William Easterly: Danny Quah of LSE has a new article “The Global Economy’s Shifting Center of Gravity“. Here’s the shift, where black dots denote the easterly shift that has already happened 1980-207, and red dots the projected shift 2010-2049:

alt

The future shift extrapolates current trends. This is iffy given how individual country growth is mean-reverting, but I will leave that for another day.

If the Economy indeed continued East this way, is this really bad for the West? Professor Quah does not address this in the article, but … the … answer is: Of course not. Economic growth is not an elimination tournament like the current NCAA basketball madness, where one team wins and the other goes home. When a previously poor part of the world gets richer, everybody wins.

Temporarily and illegimately assuming the role of official spokesman for the West,… the richer are our trading partners, other things equal, the more demand for our products, the more and better jobs created thereby, the more gains from trade, the more innovation as the extent of the world market grows, and the more we can benefit from the additional human capital and innovation happening in the East.

And then temporarily and illegimately becoming development spokesman: higher growth in the poorer East means catching up to the richer West. Isn’t that what we always wanted?

In sum, what’s not to like?

"The World Economy Goes East"
Mark Thoma
Tue, 22 Mar 2011 04:27:00 GMT

Q&A: Eichengreen on the End of Dollar Dominance

 

Barry Eichengreen, an economist at the University of California, Berkeley, and author of “Exorbitant Privilege: The Rise and Fall of the Dollar and the International Monetary System,” fielded questions from The Wall Street Journal’s David Wessel earlier this week. An edited excerpt:

In your book ,you predict that we, our children and grandchildren will live in a world in which the dollar is not the predominant world economy. Why should I believe that either the euro or the Chinese renmimbi, of all things, will grow up in the next decade to rival the dollar?

Eichengreen: People have been predicting the demise of the dollar for half a century. I do think the world is changing now in a couple of fundamental ways.
First, our children and grandchildren will live in a world where the Chinese economy is larger than the U.S. economy. Demographics, if nothing else, dictate that. It will make no sense for the dollar to be the only true global currency in a world where the U.S. accounts for 15% or 20% at most of real economic activity.
Second, the technology of finance is changing. Once upon a time, you could make the argument that there was only room in the world for one true global currency. The arguments in favor of the dollar were stronger than the arguments favoring the alternatives. I think the technology of finance is becoming more open. In a world where you can compare currency values on your smartphone, it’s easier for several true international currencies to coexist. So the question is which ones?

What would the Chinese have to do over the next decade in order to make the renminbi a serious rival or competitor to the dollar as an international currency?

Eichengreen: Step number one would be to encourage their firms and foreign firms to do their cross-border settlements – to settle their trade in China’s own currency. And you’re beginning to see that now, from a year ago when there were virtually no firms that did that. There are upwards of 40,000 firms now that are doing cross-border settlements in China’s currency.
Secondly, you would have to give firms that acquire Chinese renminbi through that means a way of investing them. China would gradually have to open its financial markets to foreign investors. They experiment with that in Hong Kong… a petri dish for financial innovations that they bring onshore. Subsequently, they would have to gradually open financial markets in Shanghai to offshore investors.
And the caboose on the train, the final step, would be to encourage foreign central banks to hold deposits and bonds denominated in China’s currency.
So the first step is happening now – the trade settlements. The second one, bond issuance in China’s own currency, is happening in Hong Kong. And I think in a matter of a few years they’ll experiment with that onshore. Ten years from now I continue to think is a realistic horizon for thinking about their currency being widely used in all manner of international transactions.
Will it be used as widely as the dollar? Probably not. We have a head start and we have the advantage of those deep and liquid markets. There’s another side to that coin, if you will: that we in the United States have to do the right things in order to preserve that advantage.

Is this a good thing for the U.S. if the dollar’s role in the world economy shrinks relative to Europe and China?

Eichengreen: It’s a mixed blessing. On the one hand, it has always been a considerable advantage – convenience to U.S. businesses and banks and individuals travelling abroad, that they could do their business in dollars. …
The other side of the coin is that I think it will also be a safer financial place for, among others, Americans. We had a period in the middle of the last decade when foreigners lent to us very freely. We were prone to financial excess: We engaged in frenzied real-estate speculation and they gave us more rope because they had an appetite for our dollars in order to finance their transactions – in order to hold those dollars as a form of insurance.
So I think in the future, they will not lend to us so freely. Market discipline will be felt more intensely in the United States. And if we’re again inclined to climb out on some financial limb, foreign investors won’t permit us to do that so freely.

But we’ve just been through an enormous recession where we were able to do huge fiscal stimulus and borrow gobs of money, largely from Asia, at low interest rates. If something went wrong here, if we had a Japanese-style natural disaster, wouldn’t we be handicapped, less able to borrow cheaply?

Eichengreen: We would be less able to borrow cheaply. We still would be able to borrow in response to a disaster if we had our fiscal and financial house in order when we entered it — a big “if” and another argument for why putting our fiscal and financial house in order is important….
At the same time, I think you have a point. There was the irony in the financial crisis, after Lehman Brothers failed in the autumn of 2008, the dollar actually strengthened. So we had created, in the U.S., the mother of all financial crises and yet there was capital flight toward the dollar as a safe haven. The future is going to be one in which there will be alternatives to the dollar. And unfortunately, we’re not going to be able to count on that effect.

In your view of the world, if things go right – if the euro gets its act together, if the U.S. gets its fiscal house in order, if the Chinese learn how to run a modern, capitalist, internationally engaged economy – this could be a gradual transition to a new world order. But my reading of history – much of it comes from your work – is that things don’t tend to happen as neatly as we hope. So what could go wrong? What do you worry about?

Eichengreen: Well, in terms of a dollar crash, I worry first and foremost about our own economic policies in the U.S: that there will come a point several years from now – “several” is an imprecise phrase – where there could be a crisis of confidence in the dollar. And a rush out of U.S. Treasury bonds – a sharp fall in the dollar – could be seriously disruptive. We had something on a smaller scale that looked like that back in 1994. Take that and magnify it. That would not be good news.
While my best-case scenario, the one to which I attach the highest likelihood in Europe, is European leaders getting their act together, they could fail to do that. There could be a disorderly debt default, political recrimination and a crisis of confidence in the euro.
And finally, in China, I would worry about a sharp growth slowdown with unknown financial and social consequences.

What difference does it make to the yen and the Japanese economy that they’ve just had this horrible earthquake-tsunami-nuclear power disaster?

Eichengreen: Japan has a very sophisticated, interconnected economy that’s deep into global supply chains. So I think the kind of even localized supply disruptions that they’re likely to experience will be quite negative for their economy in the short run. The authorities also have limited room for maneuver. They are committed to fiscal consolidation. They come into their post-earthquake crisis with an awful lot of public debt. It is said that the repatriation of earnings by overseas Japanese individuals and corporations will be good for the yen, maybe in the very short run. But I think once the longer term consequences of the crisis sink in, they have to be yen-negative.

You’ve been both very supportive of the euro as a project and very critical of the way European leaders have handled the crisis. Do you think they’ve fixed what ails them or do they still have a lot more to do?

Eichengreen: They still have a lot more to do. A lot of the euro doom and gloom that we’ve been hearing is overdone: The euro area is not going to collapse Neither Greece nor Germany are going to reintroduce their national currencies. European leaders have not solved their problems. I, for one, continue to think that the Greeks are going to have to restructure their debts and the need for debt restructuring may not stop there. European leaders have not addressed that eventuality. Addressing that will mean fixing their banking systems, first and foremost. …. European leaders are being dragged, kicking and screaming, almost against their will, but inevitably, in the direction of deeper cooperation, euro-area governance and limited fiscal transfers from the strong to the weak countries.

To be optimistic about the euro as a currency, what three things have to happen?

Eichengreen: Number one: Fix the banking system. Number two: Put in place a sensible emergency financing facility for countries that get into trouble down the road. And number three: Strengthen the surveillance, the oversight of national policies.
Part of that has to be done at the level of the union: Transfer more responsibility to the European Commission. Part of it needs to be done at home by strengthening fiscal arrangements, enhancing fiscal transparency, giving finance ministers and prime ministers more agenda-setting power over the budget.
Europe is a complicated place. And I think neither reform at the European level nor reform at the national level alone will be enough. ….It’s taken too long. I think there still is denial in some circles. But I am reassured that we’ve seen more evidence that when their backs are against the wall, European leaders understand that they have to deepen their union because the alternative is too dire to contemplate.

Q&A: Eichengreen on the End of Dollar Dominance
WSJ Staff
Wed, 16 Mar 2011 15:05:05 GMT

China Takes Giant Step Towards Making Yuan the World’s Reserve Currency

I think is probably correct, and it will reduce the flexibility we have for our own monetary policy.  But I think it’s being portrayed a little direly in many places as well.

The Big Picture

via China Takes Giant Step Towards Making Yuan the World’s Reserve Currency.