There’s an excellent Letter to the Editor in the Financial Times today (“Trade is now about participation, not competition”), which points out that the mercantilist approach to trade “exports good, imports bad” is an antiquated view given the globalized supply chain for products and services.
The letter states:
Conventionally, nations tend to believe that export is a virtue and import a vice. This mercantilism has lost its relevancy these days since an increasing number of companies, not states, must import various components to export their final products in the global value chains. After all, it is not that nations compete against each other in a game of trade, but that private companies participate in a collective project of trade.
Lots of important points in that one paragraph including the importance of imports for inputs in manufacturing and the fact that it is companies that engage in trade, not countries.
CEI has long pointed out the dangers of promoting trade by promoting mercantilism here, here, and here, for example.
Earlier today, the Office of the U.S. Trade Representative sent a notice to Congress that the Obama administration would begin negotiating a trade partnership agreement with the European Union. In the letter to House Speaker John Boehner, Acting USTR Demetrios Marantis noted that official talks would begin no earlier than 90 days from the transmittal of the letter.
The agreement would be the largest trade pact to date. The two trade power houses together represent 30 percent of global trade. As the letter stated:
Last year the United States exported $458 billion in goods and services to the EU, estimated to support more than 2.2 million U.S. jobs. The stock of U.S. and EU investment in each other’s economy totaled nearly $3.7 trillion in 2011, and EU affiliates in the United States employed an estimated 3 million Americans in 2010.
While tariffs already are very low or have been eliminated on most goods, there are still some so-called sensitive products where talks about reducing tariffs could get sticky. However, the biggest hurdle in reaching an agreement will be non-tariff barriers to trade, particularly those relating to differing regulatory approaches to health and safety, and standards.
It’s expected that the negotiations would be fairly lengthy — taking several years. On the regulatory front, the two parties have to figure out whether to take an approach that involves mutual recognition or one that seeks to “harmonize” the regulations. CEI has cautioned against regulatory harmonization, particularly since the EU has adopted the precautionary principle as the basis for much of its risk assessment.
When one country puts up a barrier to foreign trade, its partners tend to return the favor. This is, to put it politely, a poor recipe for economic health. On page 360 of Lawrence White’s excellent book The Clash of Economic Ideas, he quotes Joan Robinson explaining why in one pithy sentence:
The logic of embracing free trade unilaterally, that is, no matter what policy any other national government adopts, is well expressed in an adage attributed to the economist Joan Robinson: Even if your trading partner dumps rocks into his harbor to obstruct arriving cargo ships, you do not make yourself better off by dumping rocks into your own harbor.
National governments tend to ask for a quid pro quo from their citizens’ trading partners before lowering tariffs and quotas and other nonsense. One understands the impulse; that is why it takes internationally negotiated agreements such as NAFTA to get anyone to dredge up those rocks. The point is that those rocks are a bad thing in and of themselves. Get rid of them, then. Even if you have to do it alone.
A Financial Times article today focuses on possible negotiations for a bilateral trade agreement between the U.S. and the European Union and some of the potential sticking points in completing such a pact. Chief among these, the article notes, are “behind-the-border” domestic regulation, such as differing technical standards in areas such as pharmaceuticals, medical services, and advanced electronics, as well as “safety regimes for conventional cars” and foodstuffs.
In dealing with differing regulatory standards, the U.S. Chamber of Commerce cautioned that the parties, however, shouldn’t aim for full regulatory convergence:
“The aim in many instances is not to drive immediately for full regulatory convergence but to try to make sure that regulators on both sides of the Atlantic are making decisions with their eyes wide open,” says Sean Heather, vice-president of the chamber’s centre for global regulation.
CEI made that point strongly in its comments on February 3, 2012 to the U.S. Trade Representative on possible negotiations on a U.S.-EU trade agreement:
Often policymakers on both sides of the Atlantic, in reviewing the regulatory state’s complexity and lack of uniformity, call for “harmonization” of regulations. However, such harmonization can lead to conformity and stagnation – resulting in superior alternatives not being explored. Rather, policymakers should look to competition among regulatory regimes. This “discovery process” is a better way to reduce transaction costs and thus increase voluntary wealth creation.
Providing companies with a choice of regulatory regimes often works better than a single uniform regulatory structure or a harmonized system. Centralized regulators can suffer from limited information and pressures from special interest groups. Dispersed regulatory structures can satisfy different preferences, try varied approaches to regulating, gain information about what works and what doesn’t, and provide feedback to learn more about the cost effectiveness of specific rules. Regulatory competition provides these benefits.
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Last week, Ira Mehlman of the Federation for American Immigration Reform (FAIR) denounced CEI’s position on immigration. Mehlman argued new foreign workers would degrade wages and make America poorer. I responded by noting opposition on such grounds is not anti-immigrant, but fundamentally anti-people. “If fewer workers means more prosperity, then wouldn’t no workers be the ultimate prosperity?” I asked. “When have we limited the workforce enough?”
Mehlman has now responded twice without answering this question. Instead, he expanded to a general attack on the market. He said Americans shouldn’t want their destiny determined by an amorphous and unaccountable entity like ‘the market.’” I noted the free market is just free people — Americans like you and me, not some “amorphous entity” — and is made accountable by our own free choices. Mehlman responded by making it clear how little respect he has for this free choice:
Okay, David, try this one: What is a mob? It is people, acting without reason, making irrational and immoral decisions which cause great harm. As a civilized society we have the right to restrict the freedom of a mob to act like a mob. Without the application of reason, we will lose our freedoms and our liberties.
Wait, so the market without government regulation is like a “mob, making irrational and immoral decisions”? No, the market is not a “mob” – it is free people, making nonviolent decisions based on their own personal knowledge of their circumstances. And, unlike a mob, consumers and producers can’t “cause great harm” since they must trade to get what they want. As Milton Friedman put it, “The most important single fact about a free market is that no exchange takes place unless both parties benefit.”
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Representatives of the International Longshore and Warehouse Union Local 63 (ILWU) agreed to a labor contract with port operators associated with the Los Angeles/Long Beach Harbor Employers Association.
The deal, announced Tuesday, ends an eight-day strike that began when the port’s clerical workers walked off the job after complaining that they had been working for the last two years without a contract. The strike idled 10,000 dockworkers, effectively shut down 10 port terminals and halted trade into the ports of Los Angeles and Long Beach.
“I am pleased to announce that an agreement has been reached between labor and management that will bring to an end the eight-day strike that has cost our local economy billions of dollars,” L.A. Mayor Antonio Villaraigosa said in a statement.
Mayor Villaraigosa’s concerns about the strike are well-founded, considering the effects of a port shutdown would be felt beyond Southern California. According to Colliers International, the ports of Los Angeles and Long Beach are the two busiest ports in the United States and North America, both equipped to accommodate a combined 14 million 20-foot equivalent units (TEUs) of cargo per year and make up around 40 percent of all U.S. container imports. According to Fox News, the shutdown of the two ports has kept $760 million of goods per day from being unloaded. Bloomberg reported the strike’s economic cost totaled $1 billion per day.
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My last blog post pointed out the anti-immigrant charge that “massive infusions of cheap foreign labor” impoverishes the country is fundamentally anti-people. After all, I noted, “If fewer workers means more prosperity, then wouldn’t no workers be the ultimate prosperity? When have we limited the workforce enough?” Anti-immigrant advocates have no reply for this. They simply do not understand human beings are producers of wealth for others, that they expand the economic pie, not just consume it.
Rather than respond to this point, Ira Mehlman of the Federation for American Immigration Reform (FAIR) just further attacks the free market. He writes:
I must point out the irony that CEI is arguing that limiting immigration is ‘anti-human’ while it champions labor policies that treat workers as mere commodities, not as fellow citizens who have the right to earn a fair wage for their work.
Not only must free marketeers explain to FAIR the economy’s most basic fact — that it wouldn’t exist without human beings – but we apparently also must explain its second-most basic fact: that freedom of contract is mutually beneficial. It allows employees and employers, not government bureaucrats, to make contracts both sides agree are fair. No side has a “right” over the other. By contrast, “fair wage” standards create unemployment and benefit politically connected unions at everyone else’s expense. CEI doesn’t “treat workers as mere commodities” — it treats them as individuals, deserving of equal legal treatment.
Sounding even more like an “Occupier,” Mehlman writes, “CEI charges that, ‘FAIR doesn’t want to leave people, or the market, free to choose to immigrate or not.’ They are correct on the latter; we do not want our destiny to be determined by an amorphous and unaccountable entity like ‘the market.’” Mehlman somehow separates “the market” from “people.” But what is the market? It is people, you and me, who determine the course of our lives through voluntary decisions with accountability enforced by our own free choices rather than those imposed by bureaucrats. Freeing the market means empowering people, not determining their lives for them.
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What economists call “labor,” most of us just call “people.” Without people, there is no economy — no producers, no consumers, no supply, and no demand. This fact is so fundamental most economic textbooks simply skip right past it. Even second-graders know none can produce less than one, one less than two, and two less than three.
But for the anti-immigrant advocates in D.C., each new person makes us poorer. It is a philosophy so anti-human, so counter-common sense that bureaucrats are the only people who seriously have considered it and not rejected it. It is the anti-life premise of population control policy the world over: from China’s one-child policy to eugenics. Rather than seeing progress in the eyes of each new person, they see only death and destruction. These protectionist, anti-immigrant, population controllers see more “labor” — that is, more human beings — as a starting point for a race to the bottom for societies.
This Friday, Ira Mehlman of the Federation for American Immigration Reform (FAIR) demonstrated exactly this contempt for the most basic fact of the market when he responded to a CEI press release that opposed a bill to reduce immigration. Mehlman scoffs at the notion that “without massive infusions of foreign STEM workers our most vital industries would wither and die.” We never argued such a thing — rather, we argued new foreign workers would expand (almost by definition) America’s industries, increasing Americans’ wealth.
If fewer workers means more prosperity, then wouldn’t no workers be the ultimate prosperity? When have we limited the workforce enough? The logical conclusion of Mehlman’s premise means no workers at all, and that really would make “our most vital industries wither and die.” But if that’s so, which I hope he would admit that it is, then doesn’t more workers mean “our most vital industries” would live and grow? Obviously!
FAIR’s founder, radical environmentalist John Tanton (pictured above), argued that eliminating population leads to progress, but “double the number of people,” he says, and “we’re back where we started.” Contrast this anti-people philosophy with that of the father of classical liberalism and limited government, John Locke. “People are the strength of any country or government,” Locke wrote. “I ask whether England, if half its people should be taken away, would not proportionably decay in its strength and riches? …That most can be made where are most hands needs no proof” (at least to everyone but D.C. anti-immigrant crusaders).
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There are lots of claims that the federal government saved the American auto industry by bailing it out. (Never mind that Ford didn’t get a bailout, and “foreign” companies such as Honda and Toyota make many of their cars in America.)
Critics of the bailout make the valid point “any company can be kept afloat indefinitely with taxpayer subsidies.” They also say the bailouts have resulted in GM becoming politicized and “spending lots of money” on a politically correct car that consumers and car-buyers don’t want “because of pressure from Washington rather than demand from consumers” (as even the liberal Washington Post has noted, discussing the GM Volt). But although these criticisms may be persuasive to newspaper editorialists and economists, they will be unpersuasive to an ordinary person in Ohio or Michigan who desperately wants a job, now, and does not care about how that happens or whether it costs taxpayers money. Such people are likely to be grateful for the bailout if no one explains to them that Mother Nature and good luck, not big government, saved the U.S. automakers.
General Motors never would have recovered as it did if not for the massive Japanese earthquake and Tsunami that devastated its rivals, such as Toyota. The tsunami so crippled Toyota that GM could regain market share despite the Obama administration leaving GM’s uncompetitive, inefficient work rules and high labor costs largely intact.
General Motors also benefited from another factor that has often been overlooked: the massive Thai floods in 2011, which inundated and shut down Japanese car-parts factories in Thailand for many months, crippling Japanese automakers’ global supply chains. On Dec. 8, Toyota “cut its profit forecast by more than half after Thailand’s worst floods in almost 70 years disrupted output of Camry and Prius vehicles.” The World Bank estimates the floods did $45 billion in damage to the Thai economy and left half its factories under water for substantial periods. By harming Japanese automakers, the Thai floods gave a huge boost to their competitor, General Motors, enabling it to survive despite the Obama administration’s costly coddling of the UAW union in the bailout, which threatens the automaker with future losses in the billions.
GM also benefited from good luck — primarily the huge safety issues and recalls that befell Toyota in 2010. This helped GM and Ford move forward at a time when overall auto sales were rising rapidly. As The New York Times noted in March 2010 “Toyota Motor, estimating that it lost 18,000 sales in the United States last month while its chief competitors enjoyed big gains, introduced incentives Tuesday as it tried to restore consumers’ confidence in its vehicles after three big recalls,” as the company “acknowledged that the recalls had hurt Toyota’s ability to attract new buyers.” Toyota rebounded after it turned out its vehicles were safe, and that crashes of Toyota vehicles were the result of driver error, except for one crash that resulted from a dealer improperly installing a floor mat.
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“Imagine there’s no countries. It isn’t hard to do,” John Lennon once told us. Ignoring Lennon’s grammatical error, that is exactly what University of Wisconsin-Madison economist John Kennan tried to do in a new paper released this month by the National Bureau of Economic Research (NBER). Kennan modeled the world economy without immigration restrictions and found that free labor mobility could have a dramatically positive effect on global GDP.
“The estimated gains from removing immigration restrictions are huge,” he concluded, “more than $10,000 a year for a randomly selected worker from a less-developed country (including nonmigrants)… with a relatively small reduction in the real wage in developed countries, and even this effect disappears as the capital-labor ratio adjusts over time; indeed if immigration restrictions are relaxed gradually, allowing time for investment in physical capital to keep pace, there is no implied reduction in real wages.”
This rapid increase in worldwide wealth achievable at very little cost is due to productivity disparities for workers in different countries. Similarly skilled workers from different countries can have dramatically different levels of productivity. One paper (Clemens, Montenegro, and Pritchett (2005)) found, for example, that Mexican worker wages are 2.5 times less than those in the United States, which means their labor produces far less than the American worker with similar skills.
Therefore, simply allowing that Mexican to relocate, without any increase in education or skills, would dramatically increase his or her productivity. These wage differences have everything to do with America’s free market institutions and capital that has developed over time. Preventing from foreigners from accessing America’s capital and institutions results in massive inefficiencies, as workers produce far less than they would in the U.S. Higher production levels mean lower prices for American consumers, not to mention the rest of the world.
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