Relevant and even prescient commentary on news, politics and the economy.

A Tense Problem

Mark Thoma begins with a hilarious typo, but eventually gets to the Quote of the Decade (if not century) from Alan Blinder:

If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate.

As Rusty can (and will, at length) tell you, the thing that is wrong with that sentence is the tense. We have had free trade agreements for decades, China has had MFN status since the 1990s, and permanently since 2000. The pieces of the former Soviet Union, including the current oligarchy that is called Russia, have had that status since 1992. NAFTA, including its abhorrent Chapter 11, has been in force since 1994.

There has been a generation that has lived under “free trade.” While an economist might successfully argue that the overall social benefit has been great—millions of Chinese parents become estranged from their children to make a better life, as it were—the retraining, redevelopment and all of the other assumptions economists make about ameliorating the transition to a new economy have been eschewed.

The example of Boeing (h/t Felix) bodes large: the valuable work was outsourced, the menial work was kept (or spun off into bankruptcy), and the new “higher-value” jobs and opportunities that were expected by idiots economists never materialized, replaced instead by growing income inequality and the retraining money lined the pockets of the CEOs who produced (to borrow a phrase used by the brilliant McGarrysGhost on Twitter) “failure masquerading as vision.”

And any microeconomist worth his paycheck can tell you that increasing inequality leads to suboptimal production.

Blinder is wrong in only one thing: the tense he uses indicates that the results are still, somehow, in doubt. The ability of Chinese peasants to eat a bit more is nice, but the externalities—poisoned toothpaste, dog food,* defective tires—make it rather impossible to claim that the “advantages of free trade” have trickled down in any way except as a ureotelic (mp3 link).**

The first thing we were told by our veterinarian about the new puppy is that we need to make certain that any food she eats was made in either Canada or the United States. Fortunately, pet food—unlike its human equivalent—is required to be labeled with origin information.

**You better believe I’m doing The Snoopy Dance on having discovered this site, which saves me from trying to find a way to transfer my old cassette to a usable format. But that’s fodder for Skippy, not here.

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Trade policy agreements and capital flows

Yves Smith at Naked Capitalism offers wise words regarding trade policy agreements and capital flows, in addition to pointing us toward a letter signed by several hundreds of economists regarding capital controls and government.:

This letter is at odds with a longstanding project of major financial firms: to allow them to move money across borders with no muss or fuss. This was the dream of Citibank’s Walter Wriston, who perversely was not deterred by the large losses his bank incurred in its sovereign lending misadventures of the late 1970s. It became a matter of policy in the Rubin/Summers Treasury Department.

Although the danger of destabilizing “hot money” inflows has been well recognized since the Asian crisis of 1997, the thrust of US policy has been to continue to push for more capital markets liberalization, particularly in emerging economies. Yet the evidence has continues to mount that a high level of international capital movements isn’t merely a potential threat to developing markets, but to economic stability. As we’ve pointed out repeatedly, the Carmen Reinhart/Kenneth Rogoff work on financial crises showed a strong correlation between high levels of international funds flows and banking crises.

The odd, and telling bit in the debate is the unwitting concession to financiers embedded in the existing terminology: capital controls. It incorrectly implies that money is every and always stateless, and any effort to restrict it is unnatural. But truly stateless commodities are highly transportable, high density stores of value whose content can be readily verified: think diamonds (at least pre the era of synthetic diamonds), gold, platinum. But despite their obvious value, what someone receives in exchange if one transports them across borders is very much in doubt, not just due to price fluctuations but also to the difficulties of finding a trustworthy party who would convert the commodity into local currency at a fair rate.

In other words, we’ve all gotten so used to being able to change money, use credit cards, and suck local currency out of ATMs when traveling abroad that we’ve forgotten that this has been put in place with government support. And it has come more recently in some countries than others. I recall running into a McKinsey colleague in the Hong Kong airport in 1985. He was astonished to see that the foreign exchange booths would exchange Indian rupees. The rupee then was a controlled currency; that sort of operation was in theory impermissible. But Hong Kong was always a bit lawless, and this was probably a small scale enough operation so as to fly under any official radar.

But so far, we have been talking about money, and the conversion of currency in a personal/retail context. By contrast, “capital” carries with it the idea of investment. Money is not being moved simply to get it into another country (well it might be if you are a drug dealer or the leader of a banana republic planning your exit strategy) but to put it to work. That in turn means you expect some sort of legal protection in the recipient country, ideally as good as the natives get (again note we accept the idea of equal protection under the law in some contexts and not others, so this is not a given).

But what about movement of funds between countries? How exactly is this a matter of rights? For individuals, as with our drug lord example, the reason for trying to move it abroad is almost certainly not legitimate; it’s to escape prosecution and taxation. The US takes the view that the income of its citizens, no matter where earned, is subject to US taxation. Governments lose significant amounts of money due to corporate gaming of tax regimes. Nicholas Shaxson, in his new book Treasure Islands, argues that poor African nations are actually capital exporters. They lose more in tax revenues via arranging their affairs so as to show income in low tax jurisdictions (often with little in the way of real operations there) than they gain in foreign aid.

Now as the letter above acknowledges, international treaties have effectively given investors the right to move funds without restriction into certain types of instruments. But look at the implicit logic, and it’s one that actually goes back to discussions early in the history of the US over whether Congress should charter a bank (yes, Virginia, pre-revolutionary America thrived without banks). The debate centered around differing ideas of what “freedom” meant.

The opponents of the bank charter were concerned about potential abuses that could result from concentrated power. To them, “freedom” meant the right of citizens to take action and use democratic processes to move their government and society in directions that they could hopefully agree on and would produce better outcomes.

The bank advocates, most notably Robert Morris, took a very revealing position: they argued that the government had the right to grant privileges, but not to take them back. It amounted to arguing that economic interests extended to private actors somehow became their property, and that any reversal of these grants was not simply an act of bad faith, but was despotic theft.

Yet we routinely accept the rescinding of government privileges of various sorts; consider the 1990s “end of welfare as we know it” or the expected reductions in pensions of state employees. But when large commercial interests obtain valuable economic rights, reining them back when they are found to impose undue costs on others is depicted in a completely different light. Restricting them isn’t framed neutrally, as, say, a revision, but as a “control” when the prevailing ideology treats that as a “c” word.

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Confusions and policies…let’s keep the players in mind all around

Chinese Confusions
by Paul Krugman

These days, China seems to play the same role in much of our discourse that Japan did two decades ago. We look at our own follies — which are immense — and then look at the Chinese, and ascribe to them all the virtues of foresight and determination we lack.

But just like the Japanese, the Chinese are human, and their policy makers are subject to the same kinds of confusion and inability to make hard choices that are part of the human condition. And Chinese macroeconomic policy is in the process of becoming a cautionary tale.

Basic economics says that by deciding to keep the renminbi undervalued, the Chinese put themselves under inflationary pressure; and sure enough, inflation is rapidly becoming a serious problem.

But political considerations seem to be ruling out all the reasonable responses. They won’t revalue, because that would hurt politically influential exporters. They’re reluctant to raise interest rates, because that would hurt politically influential real estate developers. They’re trying to impose quantitative limits on credit, but are finding that borrowers have enough influence to circumvent the limits. And now they’re trying price controls — which will inevitably come apart at the seams unless they do something about the underlying pressures.

It’s an edifying spectacle.

Now, schadenfreude should not lead to any complaceny on our part; China may be corrupt and unable to make sensible short-run choices, but in terms of fundamental inability to deal with long-term problems, we still have them beat hands down. Still, it’s worth remembering that all giants have feet of clay.

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China’s Industrial Policy vs. US Random Behavior…Firedoglake

Rdan

Firedoglake presents a well written piece on US and Chinese trade policy:

China’s Industrial Policy vs. US Random Behavior

The U.S. China Economic and Security Review Commission has issued its annual report {giant .pdf}. Robert Borosage of the Campaign for America’s Future hosted a conference call for the Co-Chair of the Commission, Carolyn Bartholomew, and Clyde Presotwitz of the Economic Strategy Institute, who was U.S. Trade Representative under Reagan. The call offered these experts an opportunity to talk about China’s industrial policy.

Prestowitz said something that focused the entire issue for me. He pointed out that labor is not a significant factor in chip manufacture. Why then are so many chip manufacturing facilities located in China? He says it’s because the Chinese wanted these as part of their industrial policy, so they seized the land, built the infrastructure, provided low-cost loans, granted energy and water subsidies, trained a work force, and gave the manufacturers tax breaks. Now they offer more subtle incentives, funding for research and development, refunds of the value added tax and space in industrial parks. As Prestowitz said, the plants are there for financial reasons.

This is Chinese policy. They want to grow their economy by attracting foreign capital and foreign technology. They intend to maintain state control over crucial industries.

China’s overall industrial policy … is characterized by three main parts: (1) the creation of an export-led and foreign investment-led manufacturing sector; (2) an emphasis on fostering the growth of industries such as high-technology products that add maximum value to the Chinese economy; and (3) the creation of jobs sufficient to reliably employ the Chinese workforce, thereby allowing the Chinese Communist Party to maintain control.

Many Chinese subsidies violate the requirements of the World Trade Organization, and the US has sought sanctions, but the Commission says that the WTO rules are meant to deal with narrow issues, not the broad national practices of China. The WTO rules require consultations as well as litigation, and even after a victory, they are able to delay. By the time the US and Canada won a WTO ruling barring favoritism in manufacture of auto parts, many manufacturers had moved production to China, so those jobs were lost.

Don’t think that we will be able to compete with our high tech products. China uses industrial policy to achieve technology transfer. Here’s an example from the call. China had not mastered several crucial issues in the manufacture of jet propulsion blades.

Several thoughts come to mind:

1. Appeals to the notion that command economies fail is not re-assuring at best and grossly misleading at worst. Since 1992 Chinese leaders took a different turn from our old notions of ‘command’ economies of cold-war stories.

2. China is wrenching a pre-industrial economy into the 21st century, at a speed that is breathtaking. The US is struggling with shedding 20th century notions of what we think we are…

3. There is no reason to think that ‘green shoots’ industries are assured in the US as a jobs policy. Such industry building is already occurring in China (and Germany).

4. We insist China re-direct its drive to a domestic consumer orientation, and talk about how the government deliberately keeps the economy as an export platform, but if many times more money is made currently exporting due to high prices for exports than if sold domestically, would you change direction in a hurry? Who is getting the bargain overall? Many Chinese businesses are still learning new standards.

5. Chinese leaders are taking a big gamble. And Chinese society is taking a big hit overall, with great disruption in people’s lives. The US is also experiencing great change…slower perhaps, but we haven’t really accepted the fact nor figured out that we have change to no matter what.

6. Some of the unease on right and left is due to some sort of view of this change. Is it along the lines we are used to, and/or simply myopic?

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Free, freer, and trade…what flavor cool aid?

rdan

Trade policy and actual trade are related but different matters. This post from last year caught my eye, partly due to the discussion on tires from China. While any blog post has to be simplified due to the nature of a short post and comment format, such discussion at times seems amazingly simplified beyond recognition of what trade entails…

Cafe Hyek Don Boudreau offers a thought on tariffs, but more broadly on what is free about trade. I assume he knows something of the rules of the WTO and trade restrictions imposed by these agreements.

So, how does one deal with claims of a theoretical ‘free’ trade versus what?, ‘restricted’, ‘constricted’, ‘protectionist’ trade? Do multi-national companies not have rules? Trade always has rules.

Is there a difference between ‘free’ and ‘freer’? ‘Free’ reminds me of lunch, and who picks up the tab. And even that simple example becomes rather convoluted. Is it even a useful term, or simply propaganda?

Persons who, fancying themselves observant realists, insist that “free trade doesn’t exist” have their visions and brains distorted by political boundaries.

It is quite true that national governments almost universally erect barriers that hinder their citizens’ freedom to trade with citizens ruled by other national governments. Some governments erect higher barriers than do other governments. But, indeed, it’s rare to find a national government that doesn’t indulge the greed of politically powerful interest groups, as well as the prejudice and economic ignorance of much of its population, with trade barriers.

And yet free trade is ubiquitous. Freedom to trade generally reigns within political borders. For example, the 50 U.S. states are united on one very large and very successful free-trade zone.

Karol, Thomas, and I live in Burke, Virginia. We are free to trade not only with cabbage growers in Culpeper, Virginia, but with cabbage growers in California. We trade freely with residents of any state, from the Atlantic to the Pacific, from the U.S. border with Canada to the U.S. border with Mexico. That is, whatever taxes and burdens Uncle Sam might impose (however wisely or foolishly) on economic activity within the U.S., those burdens are nation-wide. No special space-specific burdens are placed on my and my family’s ability to trade with other Americans; no extra tariff or restriction applies to our exchanges with an Alaskan or with a Floridian simply because we do not live in those states.

Practically speaking, therefore, there is free trade throughout the United States. My family and I routinely buy wine from California and Oregon, oranges and lemons from Florida, computer software from Washington state, maple syrup from Vermont, peaches from South Carolina, television newscasts from New York and Atlanta, lumber from Alabama, spicy sauces from Louisiana, crabs from Maryland. The list is long.

On a random note, I am also reminded of Orrin Hatch’s amendment to the Baucus health bill that excludes any state beginning with the letter U from the excise tax on fancy plans. It seems government can be merely a part of a business plan. Do we ever approximate a ‘free’ market, or are there more usefull approaches and language? (Before the terms are co-opted, that is)

Update: I was reminded in comments that I should have included these links to aid discussion and definition from previous posts. There were more than I remembered.
See these posts:
and directly this one on buy America and the question of how does one do that anymore with vertical specialization, which is not a sexy title??
Vertical specialization
Trade policy for mid-terms 2010
WTO rulings
American jobs are not the same as American companies
Tariffs not for labor, but good for banks and pharma

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Travels of a Cheap Tire in the Global Economy

Tom Bozzo

agrees with Ken (but observes that even Garth Brazelton falls for the ‘Pareto fallacy’ [*]), and sees Brazelton’s (so far) one anonymous comment, which takes issue with Brazelton’s hypothesis that the Obama administration is giving us a backdoor safety-enhancing Pigovian tax:

This is probably incorrect. Tires like many other things need to meet standards. Tiers [sic] for America must meet American standards etc.

Indeed they do, but there’s the econoworld of frictionless international trade in widgets and then there’s the sausage making of actual trade in manufactured goods. Let’s set the Way-Back Machine just two years ago to the case of Foreign Tire Sales below the jump.

Here’s the lede of the NYT account:

Federal officials have told a small New Jersey importer to recall 450,000 radial tires for pickup trucks, sport utility vehicles and vans after the company disclosed that its Chinese manufacturer had stopped including a safety feature that prevented the tires from separating.

[snip]

[NHTSA’s] top officials were “outraged” that Foreign Tire Sales’ executives waited more than two years to pass on their suspicions about problems with the tires. The company first suspected problems in October 2005. Almost a year later, in September 2006, the Chinese manufacturer, Hangzhou Zhongce Rubber, a former state-owned company based in eastern China, acknowledged that a gum strip that prevents the tread from separating was left out of the manufacturing process.

Now Foreign Tire Sales did not intend to import substandard tires:

The tires were supposed to exceed federal safety standards, partly by including a gum strip between the plies to prevent separation, and ultimately passed a road test in which they were driven 40,000 miles…

Nevertheless, a few years into the relationship with its factory, problems started to appear:

In October 2005, the company said it became concerned because of a sharp increase in customer complaints about the Hangzhou Zhongce radial tires. In investigating the complaints, Foreign Tire Sales’ officials became suspicious that Hangzhou Zhongce was manufacturing the tires without the gum strips or with inadequate gum strips, but the Chinese company denied it.

Tests of tire segments conducted by an outside firm were not conclusive but “seemed to indicate that there were no gum strips or insufficient gum strips in the inspected tires,” Foreign Tire Sales wrote in its June 11 report to the National Highway Traffic Safety Administration.

Foreign Tire Sales’s ability to monitor its contract manufacturer and get to the bottom of the quality problems was surely compromised by the fact that it was a seven-person office that never actually touched the tires it brought into the country.

For the money shot:

Hangzhou Zhongce admitted in September 2006 that it had “unilaterally decided to omit the gum strips” in the tires, the report says. The Chinese company was “generally unresponsive” when asked how many tires were involved and what they were going to do to resolve the problem, the report says.

With little or no monitoring and financial returns to cutting corners, amazingly corners are cut. Lo, incentives matter! But that’s not all!! Foreign Tire Sales, being asset-light, lacked the wherewithal to actually shoulder its obligations in the event of a large-scale recall. An account at the Huffington Post says that they were spared bankruptcy by virtue of most of the recalled tires having stayed on the road, sparing F.T.S. the expense of actually replacing them with tires more-or-less known to be up to standard.

The anonymous commenter makes a follow-up point:

There used to be a term Jap Crap for Japanese stuff. Now Japan sets the standard for manufactured items. China will do the same eventually.

This post was written on a Chinese-assembled laptop computer which, at age 3, is still working pretty well, so it’s not that Chinese stuff necessarily is crap. Of course, Apple’s handle on the product quality lead of its supply chain may be better than that on its contract workplace conditions. Certainly Korean products have improved radically since, say, Hyundai’s entry into the U.S. auto market.

Perhaps if we could just trade with the Aspirational China with its fast trains, gleaming 500-meter skyscrapers, massive renewable energy investments, and middle class, some of the conditions might actually hold to justify the U.S. economist hand-wringing. Meanwhile promotion of trade should not be a suicide pact.

[*] I.e., because a policy may be Pareto-improving after the losers are compensated, it is worth implementing from a social welfare perspective even if we all know that the losers won’t be compensated.

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$295 Million Would Buy A Lot of T-Shirts

Ken Houghton notes that the first thing anyone learns from Pietra Rivoli’s The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade is how pernicious the U.S. subsidy of its cotton industry is.* Now the WTO has discovered the obvious:

American goods will face [$294.7] million in annual sanctions as a result of the United States’ failure to eliminate illegal subsidies to domestic cotton growers, the World Trade Organization ruled Monday.

The NYT attempts to spin this as a loss for the complainants:

The result was disappointing for Brazil, which has won a series of rulings against the United States over the last seven years. The Latin American country had sought to target American goods and drug patents for $2.5 billion worth of economic retaliation.

But gets to the order-of-magnitude-other-way-part a few paragraphs later:

Washington had argued that the award should not exceed $30 million.

So no one is happy, but it’s a start:

“The subsidies paid by the United States to its 25,000 cotton farmers exceed the entire gross national income of virtually every cotton-exporting country in West and Central Africa,” Mr. McGivern said. “Despite several rounds of litigation and ministerial-level negotiations, this issue remains unresolved.”

The cotton case was the first agricultural case started by a developing country in the group’s history.

The issue of generic drugs and trade is dealt with in this Health Affairs piece (of which maybe more later).

Meanwhile, those interested in a certain absurd claim previous dealt with by Susan of Texas (see here and here, for instance) and others, check out this press release from Health Affairs from last week. Good thing those countries don’t have a system that supports pharmaceutical innovation and investment better than the U.S. one.

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Trade policy debate to begin for mid-term elections?

rdan

Trade policy debate begins in Pennsylvania?

America’s economy is now struggling to recover from the Great Recession. But even when the economy was said to be humming, it did not work for most Americans. Wages were stagnant or declining and the costs of basics – health care, housing, college – were soaring. Growth was built on unsustainable debt, as the country borrowed $2 billion a day from abroad and Americans spent more than they earned. Wall Street captured fully 40 percent of the country’s profits.

President Obama has stated that we can’t go back to the old economy, and shouldn’t want to. We must make more, sell more and consume less. The question is: What is our economic strategy in a global economy?

“The fight for American manufacturing is the fight for America’s future,” Obama has declared. That fight will require a fundamentally different economic strategy, one that will ensure a sustained prosperity that is widely shared, one that will leave the American dream within reach of those who work hard.”

So how do we actually start?

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"Battles" Does Not Mean What You Think It Does

Headline from the Christian Science Monitor: “As G-20 battles protectionism, a cautionary tale in Ecuador” [emphasis mine]

Subhead for that same article: “The country has put steep tariffs on an array of goods. Seventeen of the world’s 20 largest economies have broken recent promises not to take protectionist measures.” [emphasis mine]

Presumably, the other three were smart enough not to make such a stupid promise in the first place.

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How many "Free Trade" Economists will thank the Union?

I’ve said before that the “Buy American” provisions in the stimulus bill were not exactly a major issue. (I believe the phrase was roughly, “could drive a broken Mexican truck through the holes, even if dead drunk.”) Many economists (hi, Barkley) disagreed, even while some acknowledged that the income effect from “buying American” would be mitigated by the substitution effect on the FX rate, while others noted that reprisal threats just might not be credible.

But time went by, and Barry O. “yielded,” adding an explicit provision that “buy American” would follow current trade agreements—which the more aware economists later noted was basically an indication that we will support “free trade” only if the other guy does. (Sorry, China.)

So now is the time for credit-taking. And while the usual suspects want to be credited, the reality of what they asked for and what they received belies that claim.

Who came to the support of “free trade for free traders”? Why, the United Steelworkers Union, of course:

The news came only hours after the United Steelworkers pleaded Canada’s case to lawmakers from steel-producing states.

A written submission to the congressional steel committee from the Steelworkers’ president, Canadian Leo Gerard, asked that legislators exempt Canada from the provision.

“Because we are an international union, and because Canadian and U.S. manufacturing is so integrated, we encourage you and other members of the steel caucus to approach your counterparts in Canada to discuss a co-ordinated approach,” Gerard’s submission read….

The Steelworkers have said it’s Chinese steel, not Canadian, that’s the intended target of “Buy American.” American steel-makers have long accused China of employing unjust policies that give its steel manufacturers a competitive advantage.

Anyone wonder why they might believe that?

And, needless to say, EconomistMom’s organization is right in the middle of the fooforaw:

The steel company executives who showed up for Wednesday’s caucus hearing were skeptical of the “Buy American” warnings.

Dan DiMicco, chief executive of Nucor Corp., dismissed as “garbage” a recent study by the Peterson Institute for International Economics that “Buy American” could cost, not save, thousands of U.S. jobs.

“The American people are with us and with you on this issue,” he told the steel caucus members.

And they’re right. The American people support free trade—with countries that allow us free trade.

It seems that only some economists cannot tell the difference.

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