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Trade

Why we\’d all really rather not have a trade policy at all

But on trade policy formulation, it seems that the right hand doesn’t always know what the left hand is doing. Last year, while magnesium imports from China were subject to U.S. antidumping duties, the Obama administration launched a WTO case against China for its restraints on exports of raw materials, including magnesium. That’s right. The U.S. government officially opposes China’s tax on exported magnesium because it imposes extra costs of U.S. consuming industries, but it insists on enforcing its own antidumping duties on magnesium imported from China despite those costs.

Even if Ja Hoon Chang and the rest were right, that infant industry protection works (they\’re not) then we\’d still have whatever the trade policy is being created and enforced by the idiots in the government.

And that just ain\’t gonna work, is it?

(We have some interestingly similar hijackings of EU import tariffs: there\’s only one EU producer of rhenium and yes, there\’s an import tax on it. And no, they\’re not an infant industry nor do they face unfair competition. Just have a good lobbying office in Brussels. )

I endorse this view

We are very happy to have Matt Ridley here, to talk about what I think is the foundational issue in economics. The very first paragraph of the second chapter of Adam Smith\’s Wealth of Nations says that economic prosperity rests on the:

division of labour… not originally the effect of any human wisdom… [but] the necessary… consequence of a certain propensity in human nature… to truck, barter, and exchange one thing for another…

The fact that human group sociability and solidarity is based on exchange rather than, as with chimpanzees, grooming each other or, as with dogs–well, I don\’t think I should go there–has, Adam Smith thought, extraordinary consequences. I think Smith was right. So does Matt Ridley. He is here to tell us about them.

Of course, the nutters over at the nef take exactly the opposite view.

That we should stop being sociable in this uniquely human manner and reverse the division of labour and go off and do everything (or at least more things) for ourselves.

Which is why they\’re nutters, they\’re advocating for humans exactly the opposite of what makes us humans.

African free trade

A free trade area for Africa, to help the impoverished continent match the spectacular growth of Far East economies, emerged as a distinctive British initiative at the G20 summit today.

The anti-poverty strategy, which is partly the brainchild of former Labour minister turned G20 adviser Baroness Vadera, has been developed with Jacob Zuma, the president of South Africa.

David Cameron, speaking at a business summit in Seoul today, said: \”We should explain that free trade is good for the poorest parts of our world as well, and one thing the British have been very active in trying to insert into this G20 is a free-trade area for Africa.

\”Africa should be a growing part of the world economy: we should be lifting more people out of poverty in Africa. But we will not do it with all the trade barriers that exist between African countries.\”

A damn good idea.

Despite the fact that both political sides seem to support it, usually proof that a proposal is horribly, wildly, stupid.

For it isn\’t true that \”free trade\” between the industrial nations and the developing is the only good thing about free trade. There\’s hugely, vastly, more benefit to come from intra African trade. For trade between those at roughly the same level of development still allows that division of labour and its specialisation, which is the very definition of the Smithian creation of wealth.

There\’s a passage in Michela Wrong\’s (very good by the way) \”In the Footsteps of Mr. Kurtz\” that describes the licences, allowances and taxes (plus of course huge bribes demanded and the arbitrage done by those, the disabled, who are tax free) that choke trade across the Congo River between Congo Brazaville and DRC. Wiping away all of those would, as with the EU (about which I know I complain but free trade is still free trade: the complaint is that the EU only allows intra EU free trade, not quite getting the point that if intra is good, so is inter) quite simply boost growth and wealth creation.

Miserably stupid twats

The European Union will block access for Chinese companies bidding for publicly funded contracts unless businesses from Europe get the same access in China, under new proposals tabled in Brussels.

The point of having someone coming in to bid for a public contract is so that that public contract gets done more cheaply/better than if it were done by government directly. And the more people we have bidding on such contracts the better we think the deal we\’ll get is. The less the taxpayers will have to shell out to get more of whatever it is.

This is true wherever the bidders originate from: more of them is better. For what we actually care about is how much do we have to pay to get our bridge/tunnel/bag of bureaucrats\’ pencils delivered to us.

We should therefore welcome Chinese companies bidding on such contracts: for we don\’t in fact care where they come from, only for what they will deliver to us.

That China doesn\’t allow their own citizens to benefit from what we can do more cheaply/better for them makes Chinese taxpayers poorer but not us.

The EU here really is committing the great mercantilist sin. They really are saying that because you won\’t let us save your taxpayers\’ money then we, in a fit of Gallic arrogance of quite monumental stupidity, will not allow you to save our taxpayers\’ money.

Fuck \’em. So who has the key to that warehouse where we put the tumbrils after the events of 1794?

Well of course

The Chinese need to compromise to secure Doha. So do the Indians, South Africans and Brazilians. But the West should be leading the charge when it comes to freeing-up world trade – not in the name of charity or \”development\”, but as a result of cool, dispassionate analysis combined with naked economic self-interest.

For of course the purpose of trade is imports.

We shouldn\’t care one tiny bit what other people do to prevent their citizens getting access to our lovely cheap and wonderful produce. We should only care that we ourselves don\’t put barriers in the way of we ourselves getting access to all those lovely cheap and wonderful products made by the various different flavours of Johnny Foreigner.

The only logical stance to take on trade is unilateral free trade: for it\’s the imports which are going shopping and exports are only the dreary shit we have to do to pay for them.

Yes, I\’d go with this

On the other side if there is no agency problem then deregulation should remain the order of the day.  Trade restrictions create arbitrageurs – and the arbitrageurs ensure the trade restrictions don’t work anyway.

Sensible policy.

A very strange question indeed

There we have it, thirty years ago the world’s centre of economic activity was in the mid Atlantic, today it is around Turkey, in thirty years time it will have reached India and China. This is the new globalization and I’d like to hear how Western politicians plan on dealing with it.

Why should politicians deal with it? Quite apart from whether politicians can or that we\’d even trust them to deal with matters economic, why on earth should they?

Who gives a shit where the centre of economic activity is ?

All we care about is that we can trade with it.

After all, it\’s not like we\’ve not been here before. China has been the world\’s largest economy in 19 out of the past 20 centuries.

Yes, yes, I know that the question is being asked because Duncan labours under the delusion that politicans can do something about everything and under the even worse one that they should do something about everything but really. Think about what is actually happening here to move this centre. The 1.5 billion or so of South Asia and the further 1.5 billion or so of East Asia are both producing and consuming more (that\’s what economic activity means, see?).

In what way is this a problem that needs something doing about it? Either they produce and consume their own stuff (fine, so what?) or they produce stuff for us to consume and we make stuff for them.

Lovely, where\’s the problem?

The cost of the Jones Act

The Jones Act is that little bit of US protectionism which says that not US owned, not US crewed and not US union rule recognising ships cannot operate either between US ports or in US waters.

And here we see some of the costs:

Four of the world\’s largest oil companies are creating a strike force to stanch oil spills in the deep waters of the Gulf of Mexico in a billion-dollar bid to regain the confidence of the White House after BP PLC\’s disaster.

Certainly, this isn\’t a silly thing to be doing however:

The companies will evenly split an initial investment of $1 billion in the nonprofit venture, which they are calling the Marine Well Containment Co. But the tab to build the system and have crews on alert for years could run in the billions of dollars.

The containment system will be designed to deal with well blowouts and is expected to be ready within 18 months, Exxon said. The response team should be able to start mobilizing within 24 hours of an oil spill, and be fully in place within weeks, said Sara Ortwein, vice president of engineering for Exxon Mobil Development Co.

It is costly.

But what has this to do with the Jones Act?

Well, y\’see, something much like this already exists, over here in Europe. Indeed, that European system, skimmers, barges, oil tankers able to scoop from the surface and so on, was offered to BP at the start of the Macondo crisis. But it couldn\’t be used because of the Jones Act.

So, now we\’ll have two such systems in place, one for Europe and one for the Gulf. And the expense of the second is clearly down to precisely and exactly the Jones Act.

All of this is to protect the 153 large ships that meet the Jones Act criteria. In just this, this alone, we see a cost of $6.5 million per ship.

About time for a little more free trade, don\’t you think?

More economic silliness

Another email from a protectionist containing this gem of a line:

Service industries do not produce wealth.

No, seriously, they do believe this. They go on:

There are a limited number of ways a society can become wealthy.
1. Hunting
2. Gathering
3. Fishing
4. Farming
5. Manufacturing (along with that go the exploitation of natural resources: mining, oil production and timber)
In the context of the US they are therefore saying that agriculture (8% or so of GDP) and manufacturing (12%) are the only things that produce wealth. All of everything else, 80% of US GDP, isn\’t in fact wealth at all.
In fact, they\’re stating that all the lawyering, medical care, insurance, banking, restaurants, hotels, supermarkets, well, just about everything in fact, do not add to the wealth of those who consume their products.
Which is sufficiently weird as a belief to explain their similarly odd ideas about trade really.

Protectionist arguments that don\’t stack up

Second, the total balance of trade deficit went from (0.9 billion to 0.2 billion). In other words, the United States was losing less money because of Smoot-Hawley. It was in aggregate better off.

(From an organisation called \”Citizens for Immigration Control\” via email)

Imports are going shopping. Exports are simply the shit that we do so we can go shopping.

So, doing less shit so that we can go shopping less makes us better off does it?

Reminding ourselves of the basics

Note that Adam Smith pointed out more than 240 years ago that \”Consumption is the sole end and purpose of all production\” and that the measure of a country\’s true wealth, is the total of its production and commerce. That is, a country\’s wealth is what the people of that country can consume. The great 19th century French economic pamphleteer Frédéric Bastiat wrote, \”Consumption is the end, the final cause, of all economic phenomena, and it is consequently in consumption that their ultimate and definitive justification is to be found.\” Note also that exports are things that we produce and send to other (overseas) people. That is, they are goods and services that we produce but do not consume and thus they lower our welfare. Imports on the other hand, are goods and services that other counties produce and send to us to increase our consumption. This means imports increase our welfare. So imports are welfare increasing and exports are welfare decreasing. Therefore \”imports are good; exports are bad\”

But this does raise the question of why do we bother to export and not just import? The obvious answer is that exports are the way we pay for our imports. If we want people to send their goods and services to us we have to send our goods and services to them in exchange. Adam Smith also noted that in any free exchange, both sides must benefit. The buyer profits, just as the seller does, because the buyer values whatever he gives up less than the goods he obtains. That\’s why we trade at all.

Shorter version: Imports are going shopping. Exports are just the shite that we do so we can go shopping.

Lordy almighty, things really are bad

Paul Krugman (yes, Paul friggin\’ Krugman) is advocating a trade war.

In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

Smoot Hawley here we come……

Paul Krugman hands in his economist\’s secret decoder ring

I\’m seriously having a difficult time digesting this.

Yes, I know, he\’s the Nobel Laureate in international and trade economics and I\’m just a lowly blogger.

But he seriously seems to be advocating a protectionist trade war against China.

WTF?

Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full … all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.

The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I’d urge China’s government to reconsider its stubbornness. Otherwise, the very mild protectionism it’s currently complaining about will be the start of something much bigger.

And Smoot Hawley worked so well, didn\’t it?

This globalisation shtick

OK, so this is about second hand photocopiers but the lesson stands for all goods.

The global cost of shipping has never been as cheap as it is now, according to Stephen Armistead. \”We ship our fax machines to China for the same price as delivering a consignment from Penrith to the south coast of England.

You\’ll recall that the EU was set up in the same year that the first container ship set sail. As far as trade is concerned the EU was set up on the idea that countries that were geographically close to each other should be trading with each other, not with the far flung corners of the globe.

That\’s why we have no tariffs or technical barriers (often much more important) to intra EU trade while we do have tariff and technical barriers to ex-EU trade. And yes, these do apply to exports just as much as imports (you can shift dead electronics around the EU but not outside the EU, only working but used machines are freely exportable).

However, that very invention of the container ship made the economic geography different. If you\’re a node on the container shipping lines then transport to any other such node is cheaper than transport of the same goods to a place vastly closer, but not a node on that system.

In other words, the new technology entirely eviscerated the justification for the trade stance. As far as the new economic geography is concerned, Penrith and Shanghai are closer to each other than Penrith and Brighton (or at least the same distance). And so if we\’re not to have trade barriers between Penrith and Brighton, nor should we between Penrith and Shanghai, in either direction.

The EU are like the anecdotal Generals, always ready to fight the last war.

Not the most convincing argument

Yet he has defended the indefensible by saying that sanctions will remain in place until the communist government in Cuba frees political prisoners and improves human rights, just like his predecessor.

Yes, I think the embargo is a very stupid policy and one which props up the Castros.

However, I don\’t see the above as being a particularly convincing argument: \”you\’re bastards for insisting we have a little freedom and liberty in Cuba\” just doesn\’t quite cut it.

Oh, and, full marks for spotting, as you obviously have done, that exactly the same argument is used in reverse in Sri Lanka. No more trade goodies with the EU unless you stop being beastly to the Tamils…..a policy fully supported by similar lefties.

Lord Davies and Adam Smith

It has been a challenging and rewarding first ten months as minister for trade. Even doing this job at such a difficult time for the global economy and for UK businesses, I’ve been constantly impressed by the ambition, tenacity and success of UK firms.

I’ve been disappointed, however, by the fact, that although we are a nation of small and medium-sized businesses, we are not yet a nation of exporters.

Umm, if any of the civil service type bods in the UKTI would like to dig out a copy of Wealth of Nations (it\’s available free online if the taxpayer doesn\’t want to spring a tenner for it) for the Minister?

That businessmen prefer home to foreign business was explained all the way back in 1776. It\’s actually the only use of the phrase \”invisible hand\” in the book. Given the difficulties of dealing with Johnny Foreigner, language, law, distance, time, capital turnaround, even if the total profits over time are slightly greater in foreign trade, businessmen \”will be led as if by an invisible hand\”* to prefer domestic trade.

It\’s also true that there\’s no particular joy in exporting: we only need to export sufficient to pay for what we import, no more. The idea that he who exports most wins is what underlies mercantilism and is, to put it mildly, a very stupid idea.

There is another point to be made here as well. Our biggest net exporter is actually The City. That very part of the economy that Lord Turner is insisting should shrink. Is this the joined up government we were rpomised?

Finally:

UKTI provides excellent value for money; adding £16 in additional profit for British companies for every £1 of taxpayer spend.

Don\’t believe you. With corporation tax to be paid on such profits, that would mean the taxpayer gets back, what, £4 for every £1 spent? Sorry, simply do not believe that any government has found such a magic money machine. If it had, really, you\’d be screaming to spend £100 billion on such to dig us out of this fiscal hole, would you not? You\’re not so of course not even you believe the figure.

* Maybe not exactly the right quote, from memory.