Archive for the ‘International Trade’ Category

Where are the Democrats?

July 5, 2018

The short answer is that they are busy criticizing the Trump administration but in a disorganized fashion, as Democrats too are divided. In part this is due to the speed with which Trump switches from one topic to another, from healthcare to NAFTA and trade policy in general, to criticism of NATO countries, to cozying up to autocrats (Putin, Xi, Erdogan, Kim). He changes the channel when criticism starts to bite.

Democrats need to put forward credible candidates for the 2020 elections and to organise to win back the House in 2018. Control of the Senate is unlikely this time and Trump has two more years for his possible replacement. While Republicans are divided between traditional and Tea Party Party members, so are the Democrats but with different fault lines.

In the last election the Democrats put up two candidates, Clinton and Sanders each of whose supporters were not enthusiastic about the alternative. In fact it would not be surprising if Sanders supporters chose Trump when they entered the polling booth in 2015. Voters who felt that Washington had failed to improve livelihoods for many Americans were attracted to Trump’s message about the failures of recent administrations of both parties. The reason Trump governs today is because of the mass of voters who feel this way. Whether his actions in power will get him reelected in 2020 is unknown, but the reason he won in 2016 is now clear. At the time it was not predicted by many pollsters….Michael Moore was an exception.

Opposition to Trump exists in much of the media, but he has supporters in Fox and Breitbart News. It is a mistake to watch only one side. I watch Morning Joe on MSNBC but should watch Fox as well to get a more balanced view. Today leadership of the Democrats consists of Nancy Pelosi and Chuck Schumer; no candidates have come forward as obvious challengers for the 2020 presidential elections despite the actions of Trump.

The following are observations in no particular order of what may be expected between now and November 2018:

  1. Trump will continue to surprise the public with non-conventional moves and statements. Response to criticism will be made with tweets as issues arise that gain his attention. What the tweets will say will be unpredictable because he responds to the headlines of the day. Cable news is his source of information. He does not read and listens to a small coterie of people in person and by phone.
  2. He will continue to boast about the US economy claiming he is responsible for the positive things that happen and blaming others for any bad economic news. So far there has been mainly good economic news, but the the imposition of tariffs by the US and by others in retaliation will reduce trade and more general economic growth, as business delays new investment due to the uncertainty created.
  3. A further damper on economic growth comes from debt created from a long period of low interest rates. As rates rise consumer and business spending will decrease causing a lowering of economic growth. In Canada the Bank of Canada has followed a low interest rate policy and cautioned people from the borrowing which their policy encourages. The Bank changed its policy at the start of 2018. Low interest rates encourage spending but also promote borrowing. Households as well as governments are loaded up with debt. The Province of Ontario is horribly indebted and the new provincial government will soon be telling us that the figures published by the previous government understate the provincial debt. This is common practice for any new government.
  4. The actions of one person, the US President, can do enormous harm to the US and other economies, but the uncertainty created will cause investors in other countries to dampen investment as well. Where this ends up is difficult to predict. But the rise of populist parties in many OECD parties is a sign that developed countries are experiencing a common set of political pressures differentiated by their particular settings.
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What might a post NAFTA world look like?

December 13, 2017

It is time to think about life after NAFTA. Since we don’t know what the details will be, all that can be done is to try to map out the factors, other than the revised terms, which could be no NAFTA, needing consideration. For this I refer to the methodology pioneered by Ronald Coase (Nobel Prize Winner in Economics 1991) focusing on how firms organize factors of production.

 

The term supply chain seems to have displaced vertical integration to outline how firms organize the production of goods and services. In general, firms weigh a make versus buy decision for the various goods and services needed, where make versus buy may involve a cross border transaction. An aluminum smelter may source bauxite and alumina from its own operation abroad or from an independent supplier abroad (or domestically). Both involve a transaction between the two stages of production. One is an intrafirm and one an interfirm transaction. Multiply these alternative opportunities for one stage of the supply chain by all the inputs required at different stages of production, and you get a large number of decisions to be made. A firm’s management has to get input from engineers, tax accountants, shipping specialists and others in order to reach the least cost way to organize the supply chain.

 

A similar situation exists when organizing the production and use of services, as opposed to goods. Input from lawyers and accountants, for example are needed to aim for the least cost way of production and distribution for a firm’s supply chain. For both goods and services, tariffs and non-tariff barriers are ingredients to take into account, hence the importance of the terms written into trade and investment agreements like NAFTA.

 

With ongoing technological change, it has become easier and cheaper to undertake crossborder transactions for goods and services, but especially for services such as finance, technology, accounting and advertising. The service alternatives available to many firms provide a similar challenge for those monitoring the operations of firms such as tax collectors.

 

What has this all got to do with the outcome of current NAFTA negotiations? Technological change has given firms more ways to organize domestic as well as international operations. The extent to which a NAFTA with new terms will raise costs for individual firms depends on the numerous alternative ways in which the supply chains can be organized.

 

The items to focus on include the ease with which capital, labour and technology can be moved across borders before and after a new international agreement is reached. At one time, Canadian manufacturing industry was protected by tariffs from imports. This lead to US firms hopping the tariff wall by investing in Canada, and more often than not setting up plants on a smaller less efficient scale in Canada, thereby creating what was called the miniature replica effect (plants that were too small to achieve scale economies in production and distribution). With lower tariffs due to NAFTA, imports could flow across the border in both directions. Similar opportunities opened up to Canadian firms selling into the US market as a result of NAFTA. If lower tariffs are removed, firms could be forced back into less efficient (higher cost) means of production.

 

It is highly likely that the abolition of NAFTA would lead to higher production costs and prices in Canada and the US, but the harm may not be as great as would have taken place a decade ago as firms have developed more ways to reduce costs. Where do these new opportunities exist? A combination of inward and outward investment, inflow of cheap labour (temporary foreign workers), and outsourcing abroad of work are areas to monitor and study.

 

When Ronald Coase researched similar issues, he did it by visiting plants and interviewing plant managers and workers on the shop floor who made the decisions about how to produce and ship goods and buy services. Others tend to do this by examining published statistics which is a step removed from the people actually handling the goods and making the decisions. Alfred Marshall, another economist used a similar methodology in research for his major work Economics of Industry (1879).

 

Of course, the cancellation of NAFTA will raise the costs of production for certain firms and industries, but the consequences may not be as dire as some predict.

Cultural Diversity

January 28, 2017

Does protection promote cultural diversity?

In 1997, I was invited to be a member of the Cultural SAGIT (Sectoral Advisory Group for International Trade for the Canadian government). Mostly the members were drawn from the different cultural sectors such as print, audio-visual and live performing arts. Lawyers advising these groups were members as well those representing industry and employee organizations. Each represented a lobby group and did so forcefully. In addition bureaucrats, mainly from Heritage Canada, were in attendance to record the views of the members.

As the lone academic unassociated with any cultural sector, unless you count education, but with an interest in public policy, I found the expressed viewpoints interesting, but almost unanimously concerned with either continuing or increasing financial support and protection for the cultural industries. Subsidies and protection should be maintained or increased was the general tone of the discussion. In international fora France and Canada were strong supporters for continued protection while the US opposed it. I questioned the protectionist viewpoint.

All this took place while two events were occurring. One was a series of trade negotiations where cultural protectionist policies were being challenged by some countries, especially the US, as in the case of subsidies and content policies for the audiovisual sector, especially for film and TV.

The second was the influence of technology on both the production and distribution of cultural content. Audiences for over-the-air programs distributed by established public and private radio and TV networks were declining as new online delivery services were being created. The latter expanded viewer choice, and with the internet allowed audiences to select content from all over the world. At the same time print newspaper distribution and associated advertising were declining and have continued to do so.

In the case of public broadcasting, for example, while financial support was maintained audiences were shrinking. Thus on a per viewer basis the subsidy was actually increasing. For example the federal government has maintained its subsidy to the public broadcaster at around a billion dollars per annum while with declining audiences, especially for English language television, it means that on a per viewer basis the subsidy has increased. It costs more to service Canadian TV audiences. Meanwhile those in favour of public broadcasting still argue for either maintaining or increasing the subsidy. CRTC Annual Monitoring Reports (available online) show the CBC’s share of the English language television market fell from 13.2 percent in 1994 to 7.5 percent in 2000 and to 5.1 percent in 2012.

Technological change has also affected the print media with a sharp decline in the distribution of hard copies of books, newspapers and magazines and the ability of consumers to obtain content from an expanding array of online content providers from around the world.

Within the past two decades, the developments have been so major that the ability to protect the cultural industries in the traditional ways – a combination of public ownership, restrictions on foreign ownership, Canadian content requirements and subsidies to Canadian producers – has lessened. Protectionist policies no longer work. Technology has undermined them.

The Cultural SAGIT members were presented with these changes, which became more pronounced with time, but chose to ignore their impact arguing that it would, or might, be possible to perpetuate the protectionist policies by negotiating in UNESCO an International Agreement on Cultural Diversity. This came about in 2005 with the UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions.

How the Convention has worked out will be the subject of a future posting. Much is posted on the UNESCO website, but often outsiders are unable to open certain pages related to this Convention.

Brexit or 2016 and all that

June 29, 2016

“Every might at six o’clock Alvar Liddell brought us news of fresh disasters. ….Never you mind the thousands of dead, I said, you put on the kettle and we’ll have a nice cup of tea.” (Beyond The Fringe skit).

What will happen next? The most accurate answer is that no one knows. We are pretty good at reporting what has happened and fairly hopeless at what will happen after some major event. In order to have forecast today’s global economic circumstances, investment advisor John Maudlin writes as follows (from his website for June 25, 2016).

“If I had come on to this stage four years ago and told you … that we were going to have 40% of the world’s governmental debt at negative interest rates, $10 trillion on central bank balance sheets, and $10 trillion worth of dollar-denominated emerging-market debt, and that global GDP growth would average only 2%, unemployment would be below 5%, and interest rates would be negative in much of the world and less than 50 basis points in the US, you would have laughed me out of the room. You would have all hit the unsubscribe button. Today’s world was unthinkable a mere four to five years ago.”

Maudlin causes pause for consideration for those who think that anyone has a good grasp of what is likely to happen in the political-economy sphere over the next five even two years. Economic and political forecasting is far less reliable than weather forecasting and that’s not saying much. The forces of globalization perhaps sums up what is happening, but that overused term needs interpretation and refinement in today’s world.

What appears to be happening?

The Brexit vote is described by some as a tectonic shift in world events. I have my doubts. In the past 110 years there have been two world wars, many smaller ones, as well as a great depression and numerous recessions. Another source of disruption is technological change. It has affected a wide range of activities with the introduction of the steam engine, trains, planes, ships, cars and more recently computers and communications technology. Schumpeterian “creative destruction” took place. Economies were shocked by these technologies, but adapted, sometimes more quickly than others, and life went on. Some people were affected more than others, but in general the standard of living in the world improved. There were winners and losers.

Coinciding with these developments world population was increasing, so that whereas median world income rose there would be more people in the lowest quartile of incomes. It’s a good or a bad news story depending how you spin the statistics. If your income is below the mean today, you are worse off than those above it, but you may be significantly better off than those below the mean twenty or fifty years ago.

With many more people, the current world economy also has more international trade and investment, and more crossborder movement of people as migrants, workers, tourists, criminals and refugees. Developments in communications technology allow people in different countries to have immediate information about conditions around the world, including through the use of social media. In this sense, the world has shrunk, not physically but in the ability of people to be informed about what is happening elsewhere, and in being able to visit and trade with each other. Just listing and mapping trade and investment agreements between countries produces a spider’s web of people and firms connecting around the world.

A similar set of linkages can be mapped by listing the supply chains of firms manufacturing goods and services. The inputs of items like cars come from many countries where part of the value-added is undertaken before shipping to another location in the same or another country. A Japanese car sold in North America may have been made there with few actual Japanese inputs.

Along comes an event like Brexit. Some view it as an unraveling of the movement towards economic and political union in Europe since 1945, and a return to nationalism and the antagonisms between nation states, especially if other countries decide either to leave the EU or weaken their ties to it. Others see it as a restoration of state sovereignty and the desire of countries to shape the social and economic environment within their borders. For reasons similar to why clubs are formed, people want to live beside other like-minded persons, as they do in neighborhoods, clubs and religious communities. Concerns are raised because state sovereignty can lead to nasty nationalism, but this is something that the promotion of human values tries to ameliorate, not always that well as the record of conflict shows.

My take is that things will settle down as people and firms view their options and make adjustments. These will occur in trade agreements, defense alliances, the way industries are structured and organized, .and the ability of people to move between countries.

What is the alternative?

If Brexit had not occurred something else would have to relieve the pressures caused by a combination of the crossborder movement of persons whether as refugees, illegal migrants or others, the debt situation outlined in the Maudlin quote, and the environmental movement.

The last does not seem part of the Brexit debate. It takes place in other circles but will likely become part of the dialogue. My take on this is that there are obvious visible signs of environmental problems such as air pollution in Asian cities, and water pollution in rivers, lakes and oceans. The plastic junk pictured in the Pacific and other oceans is a visible cause of concern with viable alternatives available to address the situation. The link between human activity and global warming is, in my mind, an interesting hypothesis but not one where the facts collected so far confirm the linkage, but that is for another day.

As far as Brexit is concerned, it will cause adjustments to be made. If the vote had gone the other way, the pressure for change would still have been there and would have become manifest in other ways. The pressure for change exists in continental European countries for reasons similar to that in the UK. In the current US presidential campaign, the desire for change is manifest by the widespread support of Trump on one side and Sanders on the other, together with a visceral dislike for Clinton by some. But for now as the opening quote said about the WW2 bombing of Britain,

“Never you mind……you put on the kettle and we’ll have a nice cup of tea.”

Supply Chains Need Policy Attention

April 10, 2016

 Supply chains – trade, investment and IP agreements

 A constant refrain in the developed world is that their economies have become service economies with the loss of good manufacturing jobs. In 2016, the Canadian labour force is assigned almost eighty percent to services, and ten percent to manufacturing, (agriculture is less than two percent)….see http://www.statcan.gc.ca/pub/71-001-x/2016003/t002-eng.pdf. The conclusion reached by some is that the country is losing good manufacturing jobs and gaining lower paying service sector jobs.

This is only partly the case. What is also happening is a restructuring of employment in firms assigned to particular industries. An example would be an automotive firm, which employs in-house lawyers and accountants and has an advertising department, deciding to contract out these services to independent law, accounting and advertising firms. In the first instance these people are counted as part of a manufacturing firm’s labour force, and in the second case as service sector workers.

This is happening in North America and in other industrialized economies. The production of many goods and services are being reorganized, with the use of the term supply-chain management reflecting these changes. For example, at one time the parts and other inputs required to produce a car might all be done in one firm in one location, with the stages of production taking place onsite in a vertically integrated firm. Today, the industry is often made up of numerous firms, which provide the inputs (body, transmission, engine, brakes, design, advertising, financing and sales). These parts are now broken up and undertaken by different firms, which then trade with each other within or between countries. Outsourcing is another name for this process, which has a number of policy implications. It is not just of interest to industrial organization policy wonks. This is another case of Orwell’s warning about not paying attention that to what is going on in front of one’s nose.

A major implication is that a country, which fails to sign on to multilateral agreements affecting trade, investment and intellectual property in goods and services, may experience adverse economic consequences. See the Conversable Economist posting for March 14, 2016.

http://conversableeconomist.blogspot.ca/search?updated-max=2016-03-16T08:00:00-05:00&max-results=7

and Richard Baldwin, “The World Trade Organization and the Future of Multilateralism,” Journal of Economic Perspectives, Winter 2016, who writes as follows:

“[T]he rules and procedures of the WTO were designed for a global economy in which made-here–sold-there goods moved across national borders. But the rapid rising of offshoring from high-technology nations to low-wage nations has created a new type of international commerce. In essence, the flows of goods, services, investment, training, and know-how that used to move inside or between advanced-nation factories have now become part of international commerce. For this sort of offshoring-linked international commerce, the trade rules that matter are less about tariffs and more about protection of investments and intellectual property, along with legal and regulatory steps to assure that the two-way flows of goods, services, investment, and people will not be impeded. It’s possible to imagine a hypothetical WTO that would incorporate these rules. But in practice, the rules are being written in a series of regional and megaregional agreements like the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union. The most likely outcome for the future governance of international trade  is a two-pillar structure in which the WTO continues to govern with its 1994-era rules while the new rules for international production networks, or “global value chains,” are set by a decentralized process of sometimes overlapping and inconsistent megaregional agreements.”

“What all this suggests is that world trade governance is heading towards a two-pillar system. The first pillar, the WTO, continues to govern traditional trade as it has done since it was founded in 1995. The second pillar is a system where disciplines on trade in intermediate goods and services, investment and intellectual property protection, capital flows, and the movement of key personnel are multilateralised in megaregionals.”