Saturday, January 31, 2009

A Reckless Optimist Writes

Pete Murphy posts on Five Short Blasts Forum HERE:
His recent post is on “Clumsy Trade Policy” and it expounds a new theory of ‘safe’ protectionism by weighting tariffs on manufactured goods by an index of the population of a country – the larger a country’s population the more the imposed tariff. It's not difficult to work out who he is aiming at.

His assurances are also predicated on a ‘hope’ and ‘assumption’, but not much more, namely that countries (I see Germany is included!) affected by a substantial fall in their exports to the USA would not retaliate.

History shows that there is no fire-safe way in which imposing tariffs is ‘safe’ from retaliation, and retaliation is more likely when there is economic distress, of which all affected parties are aware. It called a ‘beggar thy neighbour’ strategy. Moreover, all US trading partners will be aware of the aims of the policy – they read the US press, watch Fox News and CNN, and their diplomats keep tabs of Congressional Debates.

The open and obvious aim of such a tariff policy is to improve the fortunes of the US while necessarily worsening the economic performance of those upon which the weighted tariff policy would be applied.

Pete Murphy includes these assertions in his post:

The problem is that we’ve held fast to our free trade policy for decades, in spite of the mountain of evidence that something is wrong - culminating in global financial collapse, without ever questioning why. We’ve taken the 18th century theories of Adam Smith, David Ricardo and others, fathers of free trade theory, at face value without ever researching factors that may limit their application - like population density, for example. And without an understanding of what makes free trade work in some instances while producing horribly skewed results in others, we then have a tendency to lash out at all trade. At least the blunt force application of protectionism would restore a balance of trade, but the U.S. Chamber of Commerce is correct in warning of backlashes.”

And:

Any policy that moves us toward a balance of trade and restores manufacturing jobs is better than what we have now, but an elegant approach that’s rooted in logic can avoid the unnecessary collateral damage of a trade war that would only buttress arguments for a pendulum-like swing back to the opposite end of the clumsy trade policy spectrum.”

Comment
The trade policies of the US (which are not free trade) are not there because of what Adam Smith wrote in 1776 or David Ricardo wrote in 1817 (that gives far too much credit to them); they take their current forms because it is in the interests of the US to apply such policies.

I should think that international trade policy is the most researched area of economics imaginable, from all sides of the arguments about it, from people of significant standing in the subject, plus not a few ‘scribblers’ who believe they have spotted some missing element the theory and practice of internation trade (I remember as a student almost only having time to read the titles of all the books and articles written on the topic, never mind their contents) backed by endless econometric analyses, in what thousands of these lifetime-scholars did not manage to spot, in two or more hundred years.

International trade is highly political, and has been since medieval times. European countries went to war many times with neighbours over all kinds of issues, including the trivial and the momentous, and trade relations were often the cause of, first ‘jealousy of trade’, then angry resentment, and almost always in the spirit of mere speculation by scribblers about which side would ‘win’ as a result of the contest of arms, or a contest of those surrogate arms, called tariffs and retaliatory prohibitions. Trade wars are not a one round game.

Pete Murphy describes his proposal as “an elegant approach that’s rooted in logic”, which he assures readers “can avoid the unnecessary collateral damage of a trade war”.

It’s a safe bet he is wrong.

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14 Comments:

Blogger tom said...

"they take their current forms because it is in the interests of the US to apply such policies."

They take their current forms because politicians at certain times thought they were in their best interests.

7:17 pm  
Blogger Don said...

"His assurances are also predicated on a ‘hope’ and ‘assumption’, but not much more, namely that countries (I see Germany is included!) affected by a substantial fall in their exports to the USA would not retaliate."

I think that he's on to something. The Spender Country / Saver ( Exporter ) Country Symbiosis is going to be hellishly hard to break apart without serious social dislocation and disruption. I expect to see some form of agreed upon default by the Spender Countries. The choices include:
1) Let the Spender Countries export more
2) Allow some debt cancellation
3) Allow the Spender Countries to inflate their currency
I'd like to be proven wrong, but getting the Chinese, savers who've just seen the negative consequences of spending to spend, is a difficult task.

Don the libertarian Democrat

9:28 pm  
Blogger Gavin Kennedy said...

Tom
I stand corrected. Of course you are right. I normally do not identify particular leaders with the interests of the country they lead.

However, there is a consistency in the intepretations of their country's interests in the US and the UK. ASs I usually takes pains to remind readers it is the 'legislators and those who influence them'. Lobbying was not invented in modern times.

But thanks for reminding me to take care in my expressions.

11:34 am  
Blogger Gavin Kennedy said...

Don
I have already commented on this post of yours on another post.

3:01 pm  
Blogger Don said...

Gavin,

I looked for the post under your tags, but couldn't find it. Can you refer me to it? Have I asked this before? I can only find one other question that I've asked, which is on the Invisible Hand?

Don the lD

PS I appreciate your taking the time to respond.

5:09 pm  
Blogger Gavin Kennedy said...

Hi Don

Apologies. I wrote a response but must have deleted it before posting. Ny PC has been on and off today as I have had family chores and I always switch it off when absent.

I wrote something like this:

I don’t think this is a runner, as my racing friends would say.

The issue is any arrangement that worsens some trading partners at the expense of others is bound to provoke retaliation by edict, which once started becomes uncontrollable. This started the decline in world trade in the 1930s once the depression was underway, i.e., reciprocal ‘beggar thy neighbour’ trade wars, making the depression deeper and longer lasting.

For ‘spenders’ to export more, the question is to whom are they exporting more and of what?

Who allows what ‘debt cancellations’, for how much and for how long?

Inflation is a monetary phenomenon – a currency is worth what I is worth in terms of other currencies.

Chinese savers can act in China only; their government decides its exchange rates.

I am inclined to think that there will be “serious social dislocation and disruption”, especially from what Pete Murphy proposes.

The US is not a free-trade economy, neither is Europe, nor China and India, or Brazil. Becoming even less free is a high-risk ‘solution’ for which the precedents are not kind to optimists.

7:41 pm  
Blogger Don said...

Gavin,

Thanks,

Don

10:07 pm  
Blogger Pete Murphy said...

Gavin, I welcome the kind of constructive criticism and discussion provided by your post and those who have commented. I would just like to point out that I am not a protectionist basher of free trade in general. In most cases, free trade is the right policy.

However, I've discovered a factor that, in some cases, makes free trade tantamount to economic suicide and, I believe, is responsible for completely bankrupting America in the 34 years since our last trade surplus in 1975, during which time our cumulative trade deficit now exceeds $9.2 trillion. I wonder if any other country would be so patient with such trade results for so long? I don't see many volunteers in the global community raising their hands to take over for a while.

In these instances I speak of - trade in manufactured goods with badly overpopulated nations - the blind application of free trade policy is even more damaging (to the reasonably populated nation) than the blind application of protectionism in all of the other cases.

My fondest hope is that some economist of some influence will research the relationship between population density and per capita consumption, and then its effects on trade, as I've done. I think they would be astounded by what they found. It might be a great research project for economics students.

By the way, just a comment about my inclusion of Germany. When I analyzed America's trade deficit in manufactured products with each country, I translated it into per capita terms - that is, divided by the population of the nation in question. How else can one compare the effectiveness of our trade policy with a country like Ireland, let's say, as opposed to a country like China? Using 2006 trade results, I found that the deficit with China was rather unremarkable - nineteenth on the list. Germany, a nation seven times as densely populated as the U.S. and almost twice as densely populated as China, was 9th on the list, with a per capita trade surplus with the U.S. in manufactured goods of $541 per person - three times worse than China's surplus with the U.S. To not include Germany in my list of examples might come across as Asia-bashing.

Also, just as a matter of interest, in case you and your readers are wondering who was no. 1 on the list - it's Ireland. America's per capita trade deficit in manufactured goods with Ireland in 2006 was $4,306 - 25 times worse than the deficit with China. Of our top twenty per capita trade deficits in manufactured goods, eighteen were with nations much more densely populated than the U.S.

And here's an even more revealing statistic: in 2006, we had a $17 billion trade surplus with the half of nations below the world median population density. With the half above the median (same number of nations) we had a $480 billion deficit.

If tariffs in such instances aren't the answer, then there had better be another because a global economy that's predicated upon America enduring an enormous trade deficit in perpetuity is unsustainable, as the global economic collapse has demonstrated.

Thanks for the opportunity to present my case. Best wishes!

Pete Murphy
Author, "Five Short Blasts"

2:10 pm  
Blogger Pete Murphy said...

Gavin, after re-reading your opening paragraph, I think a correction is in order. The tariff structure I propose is indexed to population density, not simply the total population. The latter case would have you believe that I'm targeting China, and that's not the case.

Pete Murphy

5:48 pm  
Blogger Gavin Kennedy said...

Hi Pete
Apologies for the delayed reply but we've had more snow than usual this week and, as usual, the country has ground to a halt, though the domestic requirements haven't.

Thank you for you elaboration on your hypothesis, which readers may find helpful.

However, it doesn't answer my objection to tariff targetting, which inevitably discriminates aginst some countires, who will notice the shift in their trade with the tariff imposing country.

It is the noticeable affects of targetted protectionism that starts the 'beggar thy neighbour' spiral to less trade and futile attempts by retalliation to restore the new deficits.

This does not mean that general tariffs are less 'toxic'. In trade wars all parties lose.

I shall continue my response on the main Blog posts today because I think many readers may not scroll down to read these exchanges.

10:28 am  
Blogger Pete Murphy said...

Gavin, I guess we'll just have to agree to disagree.

Regarding the snow storm in Britain, it made the national news here in the U.S. last night. Of course you won't get a lot of sympathy from someone from Michigan, where we've had over four feet of snow so far this winter!

1:48 pm  
Blogger ClydeB said...

Of all the economic writers (scribblers in your terminology) including "authorities" and learned scholars that I've read, Pete Murphy is the lone researcher to discover the relationship between population density and individual consumption. Some are cogent enough to note the lessened consumption in high density populations but attribute it to "policy" and not a recurring theme across the spectrum of nations.
His documentation is convincing and the results speak for themselves. Our nation is bleeding to death from the idiotic trade policy misnamed free trade. A trade balancing system of tariffs applied on a nation to nation basis will have very little effect on exports from the US, since the higher populated countries only buy necessities from us anyway. They can't afford to raise prices because to do so would jeopardize their employment situation. Our subsidizing foreign payrolls at the expense of our own are hallmarks of the current policy. All in all, there is very little down side to Pete's theory and a tremendous potential for gain.

3:38 am  
Blogger Gavin Kennedy said...

Clyde

I don't doubt that Pete is a sincere and objective researcher; I do doubt that he appreciates the political reaction to the policy he advocates if it was implemented.

If the richest economy in the world thinks it can change its trade balance with tariffs, then the whole world will do likewise, first, perhaps, in dribs and dabs, but soon in wholsesale measures.

The long term answer is to transfrom non-competitive businesses into competitive businesses (I cited the US car industry, where the problem is manifest).

A fall in demand for US imports which compete with US products will be less likely to provoke retaliation than the very visible afffect of tariffs.

I think you are very optimistic to believe that "tariffs applied on a nation to nation basis will have very little effect on exports from the US". Worse, it could cause widespread copying across the world and then we all lose (including US carmakers, shareholders, employees and their pensioners).

Protectionism has real downsides which, if their history does not convince you, you should think of what the US would do if a 'ban American' policy waa adopted, not by a hostile country, but by political and trading allies in the EU?

Fuel efficient US cars, perhaps not petrol cars too, would be a domestic beater, perhaps a world beater too.

1:26 pm  
Blogger ClydeB said...

Gavin,
What seems to be missing in your argument is the fact that the densely populated countries aren't buying from us now at a rate that can or will sustain a balance of trade. Our record trade deficit is adequate proof. We have the productive workforce, the product quality and generally the competetive price. We just don't have a market. Our trade junior- partners are going to protect their payroll at our expense. They have no choice since their excessive population has produced a far greater workforce than they have work for. They must export or suffer the consequences. A balancing tariff, applied to the monetary discrepancy in trade on a per-capita basis favors no product, industry or group. Foreign gov'ts are making the equivalent payments in the form of subsidies already, so there is potentially no loss to them.

5:25 pm  

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