Tag Archives: free trade

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Pierre Kohler And Francis Cripps — Do Trade And Investment (Agreements) Foster Development Or Inequality?

A recent UNCTAD/GDAE working paper. Abstract:

This paper proposes to revisit the debate on trade and investment agreements (TIAs), development and inequality, looking at the role of Global Value Chains (GVCs) and transnational corporations (TNCs). It first presents stylized facts about trade and investment (agreements), declining global economic growth and rising inequality under the latest round of globalization. It then provides a long-run perspective on the mixed blessings of external opening, summarizing some key contributions of the mainstream literature, which are converging with long-standing research findings of more heterodox economists, and the eroding consensus today. Based on this stock-taking, it takes a fresh critical look at the TIAs-GVCs-TNCs nexus and their impact. Using data on value-added in trade and new firm-level data from the consolidated financial statements of the top 2000 TNCs going back to 1995, it examines whether the fragmentation of production along GVCs led to positive structural change or rather stimulated unsustainable trends in extractive and FIRE sectors. It then turns to the role of TNC-driven GVCs as a vehicle for economic concentration. Finally, it presents evidence linking TIAs and their correlates to rising inequality. Key findings include the fact that the ratio of top 2000 TNCs profits over revenues increased by 58 percent between 1995 and 2015. Moreover, the rise in top 2000 TNCs profits accounts for 69 percent of the 2.5 percentage points decline in the global labour income share between 1995 and 2015, with the correlation coefficient between annual changes in both variables as high as 0.82. The paper concludes by calling for a less ideological policy debate on TIAs, which acknowledges the mixed blessings of external financial and trade opening, especially their negative distributional impact and destabilizing macro-financial feedback effects, which both call for policy intervention. As an alternative to short-sighted protectionism, it further discusses possible options for anticipating undesirable effects arising from TIAs (e.g. rising carbon emissions, economic instability, inequality, etc.) and addressing those in TIAs themselves.

Misinterpretation Of Joan Robinson’s Quote On Dropping Rocks

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In her famous 1937 article, Beggar-My-Neighbour Remedies For Unemployment, Joan Robinson made this famous remark about dropping rocks into our harbours, i.e., imposing tariffs as retaliation:

The popular view that free trade is all very well so long as all nations are free-traders, but that when other nations erect tariffs we must erect tariffs too, is countered by the argument that it would be just as sensible to drop rocks into our harbours because other nations have rocky coasts.6 This argument, once more, is unexceptionable on its own ground. The tariffs of foreign nations (except in so far as they can be modified by bargaining) are simply a fact of nature from the point of view of the home authorities, and the maximum of specialization that is possible in face of them still yields the maximum of efficiency. But when the game of beggar-my-neighbour has been played for one or two rounds, and foreign nations have stimulated their exports and cut down their imports by every device in their power, the burden of unemployment upon any country which refuses to join in the game will become intolerable and the demand for some form of retaliation irresistible. The popular view that tariffs must be answered by tariffs has therefore much practical force, though the question still remains open from which suit in any given circumstances it is wisest to play a card.

6 Beveridge, op. cit., p. 110. [Tariffs: the Case Examined]

[bolding and italics mine]

Joan Robinson

Joan Robinson, left. Picture credit: Nationaal Archief

This quote however gets misinterpreted often as a recent Financial Times article did:

… All these complications are real, but they do not change the fundamental nature of the argument about trade, which was best summarised by the British economist Joan Robinson. In 1937 she pointed out that, except as a narrow negotiating ploy, it made little sense to meet tariffs with tariffs: “It would be just as sensible to drop rocks into our harbours because other nations have rocky coasts.”

This quote makes it look like Joan Robinson was a free trader, whereas Robinson was opposed to it from the very beginning to the end and her stand free trade was far ahead and louder than John Maynard Keynes.

But what Robinson is saying is that according to the arguments of those for free trade, retaliation is wrong. But as Joan says, it has a practical force. Robinson is saying that if you retaliate you don’t believe in free trade.

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M Metin Basbay On Free Trade And All That

In his article, Is A Potential Trade War An Opportunity For Developing Countries?, in TRT World, M Metin Basbay argues how the rules of the international trade, i.e., free trade favours the developed world and that the rising trade war gives developing countries a chance to “better maneuver their political agendas”.

He quotes Ha-Joon Chang to make his point:

In a globalised world, newly emerging (infant) industries have to compete with century-old industrial giants, and more often than not, are crushed before they can even develop the capacity in terms of human capital and know-how for high technology sectors – and reduce the per-item cost associated with large scale initial investments.

…

Cambridge Economist Ha-Joon Chang argued that the infant industries hypothesis is still relevant in the modern context. In his influential book Kicking Away the Ladder, he argued that developed nations force liberalised trade and globalisation upon less developed nations so that they can enjoy both the cheap labour force and the larger market of developing countries. By doing so, they deprive these nations of political instruments like trade protections which they themselves had the luxury of using while in their own infant-state era.

Contrasting Joan Robinson And Paul Krugman’s Views On The Global Rules Of Trade

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Paul Krugman has a new article, Why A Trade War With China Isn’t ‘Easy To Win’ (Slightly Wonkish), in The New York Times, in which he rightly points out Donald Trump’s switching positions on trade with China. Krugman however has a generic point about international trade as some kind of mercantilism:

Admittedly, the political economy of trade is kind of mercantilist, because it’s driven largely by producer interests. Long ago I wrote about “GATT-think”, the view of trade, enshrined in international negotiations, that sees exports as good, imports as bad, so that letting someone sell us stuff, even if it’s better and cheaper than we could make ourselves, is a “concession.” The genius of the postwar international trading system was that it harnessed this special-interest reality, using the ambitions of exporters to offset the protectionism of those competing with imports, to engineer a kind of enlightened mercantilism that vastly expanded world trade.

[italics: mine]

So Krugman is admitting that it is in the interest of big producers, but claiming that his interests aren’t aligned with them and that the rules of trading were made such that it somehow offset them.

The reality is of course different. More successful countries do not need protection at home. At least we can say that they’re are willing to forgo protectionism as the advantage from selling more easily in markets abroad is immense. As Joan Robinson pointed out in a 1977 article (and even before), What Are The Questions?

From a long-run point of view, export-led growth is the basis of success. A country that has a competitive advantage in industrial production can maintain a high level of home investment, without fear of being checked by a balance-of-payments crisis. Capital accumulation and technical improvements then progressively enhance its competitive advantage. Employment is high and real-wage rates rising so that “labour trouble” is kept at bay. Its financial position is strong. If it prefers an extra rise of home consumption to acquiring foreign assets, it can allow its exchange rate to appreciate and turn the terms of trade in its own favor. In all these respects, a country in a weak competitive position suffers the corresponding disadvantages.

When Ricardo set out the case against protection, he was supporting British economic interests. Free trade ruined Portuguese industry. Free trade for others is in the interests of the strongest competitor in world markets, and a sufficiently strong competitor has no need for protection at home. Free trade doctrine, in practice, is a more subtle form of Mercantilism. When Britain was the workshop of the world, universal free trade suited her interests. When (with the aid of protection) rival industries developed in Germany and the United States, she was still able to preserve free trade for her own exports in the Empire. The historical tradition of attachment to free trade doctrine is so strong in England that even now, in her weakness, the idea of protectionism is considered shocking.

[italics: mine]

The last sentence is also important when discussing Krugman. The United States’ balance of payments has deteriorated and needs some protectionism. But economists are attached to the idea of free trade like it’s some dogma.

Dani Rodrik On The Globalisation Backlash And How The Left Is Missing In Action

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Dani Rodrik has a nice interview to ProMarket, the blog of the Stigler Center at the University of Chicago Booth School of Business. Rodrik’s views are dissenting but within the conventional DC wisdom/New Consensus. For example, he said as recently as last year that free trade is fine as long as losers as compensated, which is far from accurate, as free trade leads to loser regions as well. Still he has better views than neoliberals. In this interview Rodrik is asked about the ant-globalisation backlash:

Q: Much of the anti-globalization backlash of the last two years has been xenophobic, racist, authoritarian in nature. What is it about the nature of globalization that led to this kind of response?

I think a lot of it has to do with the fact that the left has been missing in action. Twenty years ago, when I was fretting that globalization would create a backlash, I would have guessed that the main beneficiary of this might have been the left, because it would capitalize on the economic and social grievances that these divisions create. Indeed, when we think about the populisms of the late 19th century—in the US or for that matter Latin America, with its long history of populism—they were by and large not racist and xenophobic, ethno-nationalist populisms, but left-wing populisms that focused on financial elites, on corporate elites, and pushed for social reform and more regulation of the economy.

Today, here and in Europe, we’re seeing much more of a right-wing ethnonationalist backlash. I think it’s partly that the left has been missing in action and that the center-left and the social democrats have essentially been complicit in many of these changes since the 1990s. New Democrats in the US and New Labour in the UK were at the very forefront of this push for hyperglobalization, so they couldn’t easily disassociate themselves from this complicity. I think Hillary Clinton’s ill-fated campaign showed that very well.

There were other shocks that made it easier. For example, immigration made it easy for right-wing nativists to provide a much more nativist, ethnonationalist frame for economic and social grievances to which I think one might have responded very differently.

This is a fairly accurate description of what has happened. As I have mentioned many times, the absence of a strong political alternative gave enough opportunities for the far right to come to power. It had an appeal—which the left lacked—although no real solution.

Although we see a lot of left-wing activism these days, it is mainly restricted to cultural issues. People still hold right wing economic ideas while sounding faux left wing.

The 2017 Trade And Development Report by UNCTAD is a good place to start. It argues for a global new deal:

Austerity measures adopted in the wake of the global financial crisis nearly a decade ago have compounded this state of affairs. Such measures have hit the world’s poorest communities the hardest, leading to further polarization and heightening people’s anxieties about what the future might hold. Some political elites have been adamant that there is no alternative, which has proved fertile economic ground for xenophobic rhetoric, inward-looking policies and a beggar-thy-neighbour stance. Others have identified technology or trade as the culprits behind exclusionary hyperglobalization, but this too distracts from an obvious point: without significant, sustainable and coordinated efforts to revive global demand by increasing wages and government spending, the global economy will be condemned to continued sluggish growth, or worse.

The Trade and Development Report 2017 argues that now is the ideal time to crowd in private investment with the help of a concerted fiscal push – a global new deal – to get the growth engines revving again, and at the same time help rebalance economies and societies that, after three decades of hyperglobalization, are seriously out of kilter. However, in today’s world of mobile finance and liberalized economic policies, no country can do this on its own without risking capital flight, a currency collapse and the threat of a deflationary spiral. What is needed, therefore, is a globally coordinated strategy of expansion led by increased public expenditures, with all countries being offered the opportunity of benefiting from a simultaneous boost to their domestic and external markets.

Paul Krugman’s Shifting Views On International Trade And Globalisation

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Recently Paul Krugman wrote up an article, Globalization: What Did We Miss? for the IMF globalisation conference last fall. The paper is a large concession to the points some economists have been making on international trade and globalisation. Krugman concedes that:

soaring imports did impose a significant shock on some U.S. workers, which may have helped cause the globalization backlash.

He also draws this chart, coming to the view that the US trade has led to a weakness of manufacturing.

The New Consensus narrative is that loss of employment is due to productivity rises and not due to international trade. Now Krugman has accepted the view that it is the latter.

Further, he also says:

Until the late 1990s employment in manufacturing, although steadily falling as a share of total employment, had remained more or less flat in absolute terms. But manufacturing employment fell off a cliff after 1997, and this decline corresponded to a sharp increase in the nonoil deficit, of around 2.5 percent of GDP.

Does the surge in the trade deficit explain the fall in employment? Yes, to a significant extent. A trade deficit doesn’t produce a one-for-one decline in manufacturing value added, since a significant share of both exports and imports of goods include embodied services. But a reasonable estimate is that the deficit surge reduced the share of manufacturing in GDP by around 1.5 percentage points, or more than 10 percent, which means that it explains more than half of the roughly 20 percent decline in manufacturing employment between 1997 and 2005.

Again, this is over a relatively short time period and focuses on absolute employment, not the employment share. Trade deficits explain only a small part of the long-term shift toward a service economy. But soaring imports did impose a significant shock on some U.S. workers, which may have helped cause the globalization backlash.

And trade deficits are, as I said, part of a broader story of adjustment issues.

Manufacturing is important partly because of increasing returns to scale and partly because it’s easier to export manufactures, although services are catching up.

Further, he quotes the work of Autor, et. al.:

This is where the now-famous analysis of the “China shock” by Autor, Dorn, and Hanson (2013) comes in. What ADH mainly did was to shift focus from broad questions of income distribution to the effects of rapid import growth on local labor markets, showing that these effects were large and persistent. This represented a new and important insight.

To make partial excuses for those of us who failed to consider these issues 25 years ago, at the time we had no way of knowing that either the hyperglobalization shown in Figure 1 or the trade deficit surge shown in Figure 2 were going to happen. And without the combination of these developments the “China shock” would have been much smaller. Still, we missed an important part of the story.

But concessions of previous held orthodox views are hardly straightforward. Despite this large concession, Krugman still wants to defend free trade and is against any tariffs. One may critique selective protectionism but there is also the option of imposing tariffs non-discriminately, i.e., non-selective protectionism.

More importantly, as Joan Robinson often stressed the thesis of free trade ought to also come with the answer to the question: what is the mechanism for resolving imbalances? Free traders always avoid this question, sometimes claiming—as Milton Friedman did—that floating exchange rates does the trick. But we know that it’s hardly the case. In the absence of any market mechanism, we need an official mechanism.

Wynne Godley And Non-selective Protectionism

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With Donald Trump threatening to impose tariffs and even retaliate on threats of retaliation, talks of protectionism is everywhere. It’s ironical that it took Trump to do this.

The usual criticism of selective tariffs is that they featherbed some industries. This was the motivation for Wynne Godley’s proposals for non-selective protectionism. With the claim that free trade is the best for everyone, also comes the implicit claim that there’s a market mechanism to resolve imbalances. Wynne didn’t believe there’s any such mechanism.

Here in this post, I will quote from all of his Strategic Analysis reports written for the Levy Institute in the years 1995-2005 which discuss this.

From, A Critical Imbalance In U.S. Trade:The U.S. Balance Of Payments, International Indebtedness, And Economic Policy, September 1995:

In-view of the potential seriousness of the problem, it is not too early to explore the possibility of using temporary, nonselective import restrictions at some stage, in accordance with the relevant provisions of the General Agreement on Tariffs and Trade (GATT) as adopted and modified by the new World Trade Organization (WTO) as another means to achieve the required switch. Any such policy is to be sharply distinguished from illegal, protectionist measures used selectively to protect sectoral interests at home or against particular countries abroad.

…

Contrary to much popular supposition, the articles of the GATT, which have been adopted with some modification by the new WTO, sponsor the use of import controls if there is a conflict between the objectives of full employment and balance of payments equilibrium. Article 12 states in its first paragraph that contracting parties “in order to safeguard [their] external financial position and . . . balance of payments, may restrict the quantity or value of merchandise permitted to be imported.” Later, paragraph 3(d) makes it clear that import controls may be justified if “the achievement and maintenance of full . . . employment [generates] a high level of demand for imports involving a threat to its monetary reserves.” It seems that for the GATT, as for the WTO, the principles of nonselectivity and nondiscrimination are as fundamental as that of free trade as such. In particular, the use of nonselective controls for balance of payments reasons, as envisaged by Article 12, is a totally different kettle of fish from the discriminatory imposition of prohibitive tariffs on imports (for example, on goods imported to the United States from Japan) in support of sectoral interests. Such tariffs have recently been under active consideration by the U.S. government, in flagrant violation of the spirit and letter of the WTO agreements to which it is a signatory. Article 12 has recently received a new gloss in the understanding reached in 1994 as part of the Uruguay Round. Whereas the original Article 12 sponsors the use of quantitative controls (such as quotas) that lead to endless administrative hanky-panky, the new understanding expresses a welcome preference for “price-based” measures, by which it means “import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods.”

Obiter Dicta

If price-based import controls of the kind sponsored by the WTO (say, a uniform, nondiscriminatory tariff on all imports of goods and services) were used to reduce the US. propensity to import, it might be possible, indeed it might be necessary, to cut general taxes (or increase public expenditures) for as long as the tariff was in force. The scale of any tax reduction would depend on the extent to which the tariff was absorbed by foreign suppliers and on the United States’s price elasticity of demand for imports.

But what about free trade and its benefits? What about inefficiency caused by the featherbedding of domestic industries that are being kept on their toes by foreign competition? And wouldn’t the restriction of imports be neutralized by retaliation on the part of other countries?

The criticisms regarding featherbedding and inefficiency apply with full force to the kind of protectionist measures that the United States has been threatening to impose on Japanese cars and components. It cannot be too strongly emphasized that totally nonselective, price-based measures taken because of a strategic conflict between the need for balance of payments equilibrium and the achievement of full employment have an entirely different character from selective measures taken to protect sectoral interests. Nonselective “macroprotection” (it might as well be called) does not reduce imports below where they would otherwise have to be in the long run, so it does no harm to the United States’s trading partners; the important difference is that imports are brought to an acceptable level at higher levels of domestic output than would otherwise be the case.

As for retaliation, the measures considered here are only those nonselective measures that are in accordance with the provisions of the articles of the WTO and GATT. If, as a consequence, retaliatory measures were taken selectively against the United States, it would be the countries taking such measures that would be acting illegally and the United States could validly complain.

From, Seven Unsustainable Processes, January 1999 : 

Policy Considerations

The main conclusion of this paper is that if, as seems likely, the United States enters an era of stagnation in the first decade of the new millennium, it will become necessary both to relax the fiscal stance and to increase exports relative to imports. According to the models deployed, there is no great technical difficulty about carrying out such a program except that it will be difficult to get the timing right. For instance, it would be quite wrong to relax fiscal policy immediately, just as the credit boom reaches its peak. As stated in the introduction, this paper does not argue in favor of fiscal fine-tuning; its central contention is rather that the whole stance of fiscal policy is wrong in that it is much too restrictive to be consistent with full employment in the long run. A more formidable obstacle to the implementation of a wholesale relaxation of fiscal policy at any stage resides in the fact that this would run slap contrary to the powerfully entrenched, political culture of the present time.

The logic of this analysis is that, over the coming five to ten years, it will be necessary not only to bring about a substantial relaxation in the fiscal stance but also to ensure, by one means or another, that there is a structural improvement in the United States’s balance of payments. It is not legitimate to assume that the external deficit will at some stage automatically correct itself; too many countries in the past have found themselves trapped by exploding overseas indebtedness that had eventually to be corrected by force majeure for this to be tenable.

There are, in principle, four ways in which the net export demand can be increased: (1) by depreciating the currency, (2) by deflating the economy to the point at which imports are reduced to the level of exports, (3) by getting other countries to expand their economies by fiscal or other means, and (4) by adopting “Article 12 control” of imports, so called after Article 12 of the GATT (General Agreement on Tariffs and Trade), which was creatively adjusted when the World Trade Organization came into existence specifically to allow nondiscriminatory import controls to protect a country’s foreign exchange reserves. This list of remedies for the external deficit does not include protection as commonly understood, namely, the selective use of tariffs or other discriminatory measures to assist particular industries and firms that are suffering from relative decline. This kind of protectionism is not included because, apart from other fundamental objections, it would not do the trick. Of the four alternatives, we rule out the second–progressive deflation and resulting high unemployment–on moral grounds. Serious difficulties attend the adoption of any of the remaining three remedies, but none of them can be ruled out categorically.

From, Interim Report: Notes On The U.S. Trade And Balance Of Payments Deficits, January 2000:

  1. Policy responses in principle come down to:
    1. Reducing domestic demand
    2. Raising foreign demand
    3. Reducing imports and increasing exports relative to GDP, preferably by changing relative prices.
  2. The danger is that resort (perhaps by default) will be had to remedy (a), in other words, that chronic and growing imbalances between the United States and the rest of the world come to impart a deflationary bias to the entire system, with harmful implications for activity and unemployment. Remedy (b) reads hollow when neither appropriate institutions nor agreed upon principles exist, but should not be dismissed out of hand. As for remedy (c), currency depreciation is the classic remedy. But, in view of the way global capital markets work, depreciation has ceased to be a policy instrument in any ordinary sense, and “floating” cannot be counted on to do the trick. Policymakers should be aware of the possibility of using nonselective (nondiscriminatory) control of imports in extremis in accordance with the principles set out in Article 12 of the WTO. Such a policy is to be sharply distinguished from “protectionism” as commonly understood.

…

Policymakers should not forget that under Article 12 the WTO sponsors the use of nondiscriminatory import controls if there is a conflict between the objectives of full employment and balance of payments equilibrium. Article 12 insists that the methods used to control imports should be nondiscriminatory with regard both to the countries and to the products affected and is therefore to be sharply distinguished from “protectionism,” which I understand to mean the use of selective controls to protect individually suffering enterprises. The provisions of Article 12 after revision as part of the Uruguay Round in 1994 expressed a preference for “price based” measures such as “import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods.”

Notwithstanding the deplorable advertisement, and the awful danger that the principle of nondiscrimination might be breached by powerful special interests, nondiscriminatory control of imports must stand as a realistic policy in extremis. The great advantage of import controls, as Keynes once said, is that they do stop imports from coming into the country.

From, As The Implosion Begins … ? Prospects And Policies For The U.S. Economy: A Strategic View, July 2001:

A substantial expansion of net export demand is easier spoken of than achieved. The classic remedy would be to bring about a dollar devaluation. However, by our reckoning, the size of the devaluation required — under the strong assumptions that world demand is unaffected and that the gesture is not neutralized by higher inflation — is very large, in the region of 20-25 percent. Unfortunately, there is no presumption whatever that market forces will automatically bring about the required adjustment in a timely way. In today’s world of free international capital movements, devaluation of the currency has ceased to be a policy instrument in any normal or direct sense.

Another possibility is that other countries, which have so far depended on the United States through her growing external deficit to provide a locomotive force for their own economies, should be encouraged to engage in some form of coordinated reflation. Unfortunately, there exist neither the institutions nor the agreed-upon principles needed to bring such a thing about. In the very last resort, the United States should not forget that nondiscriminatory measures to control imports (not to be confused with “protectionism”) are permitted under Article 12 of the successor to the GATT.

From The United States And Her Creditors, Can The Symbiosis Last?, Sep 2005:

  • Protection directed selectively against countries with large trade surpluses against the United States—China, in particular—would not solve the problem and would be a very retrograde step in terms of global trading arrangements. If there must be protection (which we are not recommending), the U.S. government might prefer to follow the principles laid down in the World Trade Organization’s (WTO) Article 12.
  • A resolution of the strategic problems now facing the U.S. and world economies can probably be achieved only via an international agreement that would change the international pattern of aggregate demand, combined with a change in relative prices. Together, these measures would ensure that trade is generally balanced at full employment. But there is no immediate pressure to bring such a change about because of the “symbiosis” to which our title refers. The short-term advantage of the present situation to the United States is that she is consuming 6 percent more goods and services than she produces, with high employment, low interest rates, and low inflation. The advantage to Japan and Europe is that their exports to the United States have helped fuel their mild aggregate demand growth, while China and other East Asian countries are building a mighty industrial machine by exporting growing quantities of manufactures and simultaneously accumulating a huge stock of liquid assets. This syndrome brings the word “mercantilism”2 to mind, with U.S. securities acting as the modern equivalent of gold. Those hoping for a market solution may be chasing a mirage.

…

… increasing penetration of U.S. markets by foreign exports is having a devastating effect on what remains of the U.S. manufacturing industry, and this damage has already given rise to a great deal of protectionist pressure. But imposing a heavy tariff or quota restrictions selectively (e.g., on textiles imported from China), apart from the deplorable effect it would have on global trading arrangements, would hardly be effective as a way of rebalancing the U.S. and world economies as a whole.

Nonselective Protection

If pressure for selective protection threatens to become irresistible, the U.S. government might consider a less damaging alternative. It is not always remembered that the articles of the General Agreement on Tariffs and Trade (GATT 1947), which were adopted with some important modifications by the WTO, sponsor the use of import controls if there is a conflict between the objectives of full employment and current account equilibrium. Article 12 states in its first paragraph that contracting parties “in order to safeguard their external position and . . . balance of payments, may restrict the quantity or value of imports permitted to be imported.” The original Article 12 specified that any import controls should take the form of quantitative restrictions,12 but the new WTO version expresses a welcome preference for “price-based” measures, by which it means “import surcharges, import deposit requirements, and other equivalent trade measures with an impact on the price of imported goods.” In view of the potentially serious and intractable strategic predicament that looms in the medium term, it is appropriate that the possibility of introducing nonselective, price-based import restrictions—call them “Article 12 Restrictions” or “A12Rs” for short—should be calmly considered without fear that we or anyone else will be accused of political incorrectness or treason to the economics profession.

A devaluation of the currency, the proper remedy for imbalances, is virtually equivalent, in its effect on the current account and in all other respects, to the imposition of a uniform tariff on all imports accompanied by a subsidy of equivalent value on all exports. The main difference resides in the fact that a tax/subsidy scheme does not imply any revaluation of overseas assets and the income they generate. It is, accordingly, difficult to see why the introduction of a uniform surcharge on all imports, which may be seen as half of a devaluation, should arouse such passionate opposition, so long as the surcharge is completely nondiscriminatory with regard both to product and to country of origin. The significant difference between devaluation and A12Rs is that the former tends to result in a deterioration in the terms of trade for the devaluing country while the latter tend to improve them—but this difference is not likely to be of great quantitative importance.

Ignore, for a moment, the extreme difficulty of ensuring total nondiscrimination and the extremely bad impression that would inevitably be created internationally by the use of A12Rs. First, unlike devaluation, which is only remotely possible as a policy option, the U.S. government can impose A12Rs almost at will.13 They could conceivably take the form of an auctioned quota scheme,14 which would use a market mechanism to ensure that the (ex-tax) value of imports is relatively quickly restricted to what can be paid for by exports. Under such a scheme, all imports would need to be licensed, with the number of licenses restricted—with respect to the value of imports permitted—to correspond with some (high) proportion of exports in a recent period. The price of licenses to importers would then be determined by supply and demand.

To satisfy ourselves that the use of nondiscriminatory tariffs could generate an improvement in the trade balance and to explore various other properties of such a venture, we introduced a tariff scenario into our formal model. Starting from our baseline projection, it was assumed that a uniform tariff would be imposed at the rate of 25 percent on all non-oil goods at the beginning of 2006, generating additional revenue of $370 billion for the government. The second assumption related to the rate of pass-through, which is the extent to which the cost of tariffs would be passed along to U.S. consumers. The rate of pass-through was assumed to be 50 percent, implying a rise of 12.5 percent, including taxes, in the price of imports and in consequence a 2–2.5 percent fall in their volume. These changes are relative to what otherwise would have happened. It was further assumed that retaliatory surcharges (at an average rate of 10 percent) would be imposed by foreigners on U.S. exports, with effects on U.S. export prices and volumes matching those assumed for imports.

2 According to www.britannica.com, the underlying principles of mercantilism are “1) the importance of possessing a large amount of the precious metals; 2) an exaltation a) of foreign trade over domestic, and b) of the industry which works up materials over that which provides them; 3) the value of a dense population as an element of domestic strength; and 4) the employment of state action in furthering artificially the attainment of the ends proposed.”

…

12 This was drafted by James Meade, who informed one of the authors that against his very strong personal opinion he had been compelled by the U.S. delegation to specify quantitative controls. He would have been pleased by the new version adopted in 1994 as part of the Uruguay Round.

13 It is not suggested that the United States actually invoke Article 12, just that it follow Article 12 principles.

14 Such a scheme has already been suggested by Warren Buffett (2003).

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Good Video On Imperialism And Free Trade

A YouTube channel named “Bad Mouse Productions” has a great video titled, Debunking the Economic Freedom Map. Although, the title seems to advertise talking of talking how misleading the freedom map is, the video is much more than that.

The narrator argues that for some countries freedom is not even a choice. Poor nations need nurture but instead the international establishment through the IMF and the World Bank impose “structural reforms” on them which leads to more economic destruction.

[the title is the link]

Noah Smith Writing For Bloomberg View On Free Trade Vs. Automation

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Free trade is the most sacred tenet of Economics. So economists go at length to defend it. In doing so, they also ironically seem to talk like “Luddites”, i.e., claiming that automation is the cause of job losses.

Noah Smith has an article Don’t Blame Robots for President Trump for Bloomberg View. The article is a large concession from orthodoxy. It says:

As Mishel and Bivens point out, estimates by Acemoglu and Restrepo imply that the effect of Chinese competition on U.S. manufacturing-job losses has been three times the effect of robots. So even researchers who are alarmed about robots think that so far, trade has been a much bigger shock to U.S. workers.

It’s easy to see all this is using simple Keynesian economics. In open economy macroeconomics, international trade affects the expenditure multiplier. So output is dependent on exports and imports and the actual output needn’t be the full employment output. Expenditure multiplier depends on both fiscal policy and the private expenditure function and so fiscal policy can be relaxed to achieve a higher output. But this process can be unsustainable.

Except that there may be a market mechanism to resolve imbalances in international trade. By that, what is usually meant is that stock-flow ratios converge and don’t keep rising (or falling if negative) without limits. In fixed exchange rate regimes, there is none. But free trade is not a new idea but an old one and orthodox economists used to argue for mechanisms. The problem with these is that they rely on Monetarism, which is deeply flawed. In floating exchange rate regimes, one could imagine adjustments of the exchange rate in doing the miracle. But it has not been seen in practice. In stock-flow coherent models, one does see adjustment of exchange rates leading to imbalances resolving but this is under simple simple assumptions on expectations of exchange rates. One can’t show this in general.

In reality, instead of convergence of fortunes of nations, what happens is polarisation. The nations who get a head start get more and more competitive and keep winning at the expense of the ones left behind. So we need a solution through actions of all governments.

A closely related claim is that manufacturing employment has reduced because of rise in productivity and not due to international factors. The Bloomberg article concedes that this orthodoxy is not true.

Some Post-Keynesian authors such as Wynne Godley had been stressing the importance of international trade on US employment. In his 1995 essay, A Critical Imbalance In U.S. Trade: The U.S. Balance Of Payments, International Indebtedness And Economic Policy, he said (page 16):

It is sometimes said that manufacturing has lost its importance and that countries in balance of payments difficulties should look to trade in services to put things right. However, while it is still true that manufacturing output has declined substantially as a share of GDP, the figures quoted above show that the share of manufacturing imports has risen substantially. The importance of manufacturing does not reside in the quantity of domestic output and employment it generates, still less in any intrinsic superiority that production of goods has over provision of services; it resides, rather, in the potential that manufactures have for expansion in international trade.

An Important Note By The United Nations On The IMF And The World Order

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I recently came across a phrase, social silence, which Gillian Tett of FT describes:

As Pierre Bourdieu, the French anthropologist and intellectual, observed in his seminal work Outline of a theory of practice, the way that an elite typically stays in power in almost any society is not simply by controlling the means of production (i.e. wealth), but by shaping the discourse (or the cognitive map that a society uses to describe the world around it.) And what matters most in relation to that map is not just what is discussed in public, but what is not discussed because those topics are considered boring, irrelevant, taboo or just unthinkable. Or as Bourdieu wrote: “The most successful ideological effects are those which have no need of words, but ask no more than a complicitous silence.”

Very few talk of the world order and how it operates. The current world order can be described as a neoliberal. It is a system of free trade (or more generally globalization), tight fiscal policy, deregulation and privatization.

The IMF is one institutional which has been responsible for maintaining this world order. Since governments need exceptional financing, they are arm-twisted by the IMF.

A recent United Nations General Assemby note, Promotion Of A Democratic And Equitable International Order, has recognized this and criticizes the IMF strongly. Many economists and pundits deny there’s something called neoliberalism but the note is open about the ideology and the word.

In fact, IMF advocacy of structural adjustment has privileged powerful corporate interests and created a vicious cycle of dependence for borrower countries. As noted by Peter Dolack:

Ideology plays a critical role here. International lending organizations … consistently impose austerity. The IMF’s loans, earmarked … to pay debts or stabilize currencies, always come with the same requirements to privatize public assets (which can be sold far below market value to multi-national corporations waiting to pounce); cut social safety nets; drastically reduce the scope of government services; eliminate regulations; and open economies wide to multi-national capital, even if that means the destruction of local industry and agriculture. This results in more debt, which then gives multi-national corporations and the IMF, which enforces those corporate interests, still more leverage to impose more control, including heightened ability to weaken environmental and labour laws.

and also:

IMF still appears more committed to the obsolete neoliberal economic
model.

The report is 18 pages long and critical of the IMF from the start to the end. Please read. You won’t find any discussion of the report in the mainstream media.