Showing posts with label Free Trade. Show all posts
Showing posts with label Free Trade. Show all posts

Monday, February 24, 2014

Trans-Pacific Partnership creating strange bedfellows

Nowhere is the national political divide more evident than on Capitol Hill. One topic, however, has had fairly consistent bipartisan support: free trade agreements. Since President Barack Obama took office, a few FTAs have been signed with approval by the Senate. That has been essentially true since the 1990s, when Bill Clinton and the New Democrats abandoned the traditional organized labor stance against free trade and signed the North American Free Trade Agreement, commonly known as NAFTA, with Canada and Mexico.

The current talk revolves around a proposed pact that has created some surprising partnerships. More about that in a minute. First, some background.

The Trans-Pacific Partnership, or TPP, the latest deal under discussion, is a free trade agreement between 12 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam. These countries, for the most part, already have low tariffs and trade agreements among themselves. In fact, the U.S. already has trade agreements in place with six of the 11 nations included in the TPP.

More importantly, the TPP also excludes China, one the most important trade partners to the 12 possible partners. That's why the agreement should be seen more as part of the U.S. economic diplomacy rather than a traditional trade agreement. The U.S. is trying to increase the influence of U.S. corporations in the region at the expense of Chinese economic interests.

Read the rest here. Originally published in the Reading Eagle (you need to register for free to read the whole piece).

Tuesday, January 14, 2014

Mexico: Twenty Years of NAFTA Regret

By Mark Weisbrot
It was 20 years ago that the North American Free Trade Agreement between the US, Canada, and Mexico was implemented. In Washington, the date coincided with an outbreak of the bacteria cryptosporidium in the city's water supply, with residents having to boil their water before drinking it. The joke in town was, "See what happens, NAFTA takes effect and you can't drink the water here."But what about Mexico? Didn’t Mexico at least benefit from the agreement? Well if we look at the past 20 years, it’s not a pretty picture. The most basic measure of economic progress, especially for a developing country like Mexico, is the growth of income (or GDP) per person. Out of 20 Latin American countries (South and Central America plus Mexico), Mexico ranks 18, with growth of less than 1 percent annually since 1994. It is of course possible to argue that Mexico would have done even worse without NAFTA, but then the question would be, why?
Read the rest here.

Tuesday, December 31, 2013

Jorge Castañeda and the wrong lessons from Liberalization Reforms

Jorge Castañeda, ex-advisor to the left of center candidate Cuauhtémoc Cárdenas, and ex-foreign affairs secretary in the right wing administration of Vicente Fox has written here about the need for further reforms in Mexico. He sings the praises of NAFTA.
"NAFTA brought with it a spectacular increase in Mexican exports, as well as a dramatic shift in their composition. But it proved to be a great disappointment in terms of foreign investment inflows and economic growth, which has averaged 2.6% per year over the last two decades – slower than Peru, Chile, Colombia, Brazil, and Uruguay. As a result, Mexico’s income gap with the US and Canada has barely narrowed."
The change in exports was basically associated to an acceleration of the 'maquilization' process, manufacturing exports with low local value added content. No comments on the massive immigration* and the fact that neither growth nor income distribution have improved after NAFTA (both claims often made about what to expect from it from the free trade crowd).

So what should Peña Nieto do? According to Castañeda:
"Energy reform opens up electricity generation and oil exploration, extraction, and refining to private foreign or domestic investment through licenses, concessions, production sharing, or profit sharing. The oil workers’ union has been banished from the board of directors of Pemex, the national oil company, and new contracts for shale oil and gas, together with deep-water prospecting and drilling, will be signed with a government agency, not with Pemex. 
Once the myriad legal and political obstacles are cleared, Mexico will be able to increase oil and gas production, drive down the price of electricity, and stimulate growth in an otherwise lethargic economy."
In other words, deregulation, weakening of unions to attract foreign capital (more secure environment for capital, since Mexico is such a paradise for workers), and that would lead to growth. No changes from the old Washington Consensus mantra.

You would expect that the failures of "Free Trade", liberalization and deregulation were incorporated, as much as the lessons from financial deregulation in the US after the 2008 crisis, but the resilience of Neoliberal ideas, in the face of adverse evidence, is impressive indeed.

* On lack of convergence with the US and immigration Blecker and Esquivel say: "the data show that there has been no economic convergence whatsoever between Mexico and the United States since NAFTA’s enactment. As a result, the historical Mexico-US economic gap in percentage terms has not been reduced after 15 years of free trade, and the incentives to migrate are probably even greater than before." Read their assessment of NAFTA here.

Thursday, December 5, 2013

Bilateral Investment Treaties and the Supreme Court or Do Cry for Argentina

Even though the Doha Round of the World Trade Organization has been completely stalled with little progress, which is really not a bad thing for most developing countries, the trade agenda of developed countries continues to advance with bilateral Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs) [we discussed the Colombian FTA here].

These treaties are even more restrictive than the WTO, and reduce the policy space of developing countries, by imposing more severe and restrictive policies on property rights, judicial jurisdiction in disputes with foreign investors, government procurement policies, management of capital flows, etc. In this sense, it is important to note the recent dispute between Argentina and the British BG Group, that invested on Metrogas, a natural gas distributor in Buenos Aires (now controlled by the YPF, the nationalized oil company), in the early 1990s after Argentina signed a BIT with the UK to promote foreign investment (for all the BITs signed by Argentina go here).

The risks of these treaties should be clear by now. In the aftermath of the 2001/02 crisis the Argentine government froze the prices of gas, besides defaulting on foreign debt and devaluing its currency, leading to significant losses to the BG Group. Even though the BTI implied that the UK firm had to first sue in Argentina, they filed for arbitration in the US and the arbitration panel argued that the post-crisis measures in Argentina had restricted BG Group’s access to courts or renegotiation awarding the company around US$183 millions.

Now the case is at the Supreme Court and Todd Tucker tells us that "based purely on the tenor of the oral arguments, I would predict some type of BG Group victory." Note that if this ruling is actually favorable to the BG Group then it is clear that the well-being of the population (unemployment reached 23% almost, and poverty skyrocketed after the crisis) which benefit from the freezing of gas prices, is to be put behind the interests of international investors.

Tuesday, November 12, 2013

Want 'free trade'? Open the medical and drug industry to competition

By Dean Baker
Free trade is like apple pie, everyone is supposed to like it. Economists have written thousands of books and articles showing how everyone can gain from reducing trade barriers. While there is much merit to this argument, little of it applies to the trade pacts that are sold as "free-trade" agreements. These deals are about structuring trade to redistribute income upward. In addition these agreements also provide a mechanism for over-riding the democratic process in the countries that are parties to the deals. They are a tool whereby corporate interests can block health, safety, and environmental regulations that might otherwise be implemented by democratically elected officials. This is the story with both the Trans-Pacific Partnership (TPP) now being negotiated by General Electric, Merck and other major corporations who have been invited to the table, as well as the EU-US trade agreement.
See rest here

Wednesday, October 9, 2013

Gallagher on Why Trade Deals Must Allow for Regulating Finance

From the Global Economic Governance Initiative (GEGI).
APEC leaders gather in Bali this week to discuss the Trans-Pacific Partnership (TPP) agreement, among other topics. In this opinion article that will appear this week in the Bangkok Post, Jakarta Post, China Daily and other Asian papers via the Globalist, GEGI's Gallagher urges reform of the TPP. Based on new GEGI research with Chilean and Malaysian economists, Gallagher argues that the TPP should have safeguards that allow nations to regulate cross-border finance to prevent and regulate financial crises.
Read the whole thing here.

Tuesday, September 10, 2013

The IMF and The Economist (re)discover the Prebisch-Singer Hypothesis

Free Exchange, one of the The Economist's blogs, had a post recently on the secular declining prices of commodities. The post suggest that there is significant evidence in favor of the Prebisch-Singer Hypothesis (PSH), based on an IMF paper (available here).

Note that the notion that there is something correct about the Prebisch-Singer Hypothesis is not really news. José Antonio Ocampo has written several papers recently (see here and here) showing that overall terms of trade for commodity producers did not go well, particularly in two periods the 1930s, and the 1980s, which drive the negative long-term trend. But it is true, as we noted with Esteban Perez (see here), that many respectable authors still suggest that PSH must be wrong.

Note that while Prebisch did read Marx, and early in his life he considered himself a Socialist, it is far from clear that he can be referred to as Marxist, or suggest that PSH is a Marxist theory (for more on Prebisch see this review of his recently published biography). In fact, many interpretations are compatible and sometimes based in neoclassical suppositions.

Prebisch actually defended the idea of declining terms of trade in a way that is really compatible with classical (meaning surplus approach and Marx) views on long-term price determination. He suggested in his famous 1949 paper that the cause of tendency of commodity prices to fall with respect to manufactured goods prices was related to wage setting in the center and periphery.

In the boom wages went up in the center, but not so much in the periphery, since industrial workers in the center were organized and could demand higher salaries, while that was not possible for the agricultural and mining workers in the periphery. In the recession, in turn, while wages fell in the periphery, they did not in the center. It was the fall in wages in the periphery, associated to the weak labor force that led to lower prices of commodities. Class conflict, and not just technological change (or patterns of demand, as in some explanations of PSH), was at the heart of the asymmetries between the center and the periphery.

Hence, industrialization in the periphery, and the re-organization of the labor force, would imply that more workers in the periphery would be able to keep part of the benefits of higher productivity. Industrialization would be good for the production of the commodity sector, since prices of commodities would go up, with higher wages in the periphery. [For more on Prebisch's views go here]. Note that the classical explanation for long-term prices can be used to explain periods in which the trend for commodity prices was positive too [see for example this video of a talk by Franklin Serrano here].

Funny thing is that Free Exchange, after noting that PHS might be correct, published another post here in which they argue that Free Trade is still the best policy, because:
"the persistence in economic history of the idea that free trade provides the optimal long-run conditions for growth may be a better reason than any other why The Economist still supports free trade today— just as it did 170 years ago."
I will not get again into the problems with Free Trade (you can go here and here), but obviously if in the long-term specialization in commodities does not tend to be a good idea, a trade policy that leads to that pattern of specialization cannot be defended. At least not in a coherent fashion!

Monday, July 22, 2013

Hamilton's Reports and the American Economic System

Alexander Hamilton's reports to Congress go against the grain of much of the core principles of mainstream economics. Hamilton had read the main economic authors of his time, including David Hume and Adam Smith, both of which had a much more critical view of public debt than Hamilton did. He was also influenced by policy makers like Jacques Necker (see here; subscription required), a Genevan banker and finance minister of France just before the Revolution, and Robert Morris, who is often referred as the Financier of the Revolution (see Ron Chernow's biography of Hamilton).

The Hamiltonian plan, which was to a great extent based on the British economic model, was based on the need to consolidate all debts incurred by the states under the Federal government, and to provide the latter with revenues from foreign trade, implying tariffs, and excise taxes (e.g on whisky) to allow to pay the interest on the new national debt. Hamilton argued famously in his Report on Public Credit that a well-funded national debt would be under certain circumstances a blessing, and writing about Jeffersonians* -- which would surprisingly look not very different than some members of the current GOP -- said that: "a certain description of men are for getting out of debt, yet are against all taxes for raising money to pay it off."

Further, he was for a national bank, being instrumental in the founding of the First Bank of the United States, modeled on the Bank of England. Not only the bank would promote the expansion of credit, but also it would provide funding for the government. Further, he was very clear that tariffs on foreign trade were needed not just to raise revenue, but also for the protection of domestic industry. In his famous Report on Manufactures, which advanced ideas on infant industry later developed by Frederich List (for other more recent critics of free trade go here and here), he said:
"The superiority antecedently enjoyed by nations, who have preoccupied and perfected a branch of industry, constitutes a more formidable obstacle, than either of those, which have been mentioned, to the introduction of the same branch into a country, in which it did not before exist. To maintain between the recent establishments of one country and the long matured establishments of another country, a competition upon equal terms, both as to quality and price, is in most cases impracticable. The disparity in the one, or in the other, or in both, must necessarily be so considerable as to forbid a successful rivalship, without the extraordinary aid and protection of government."
All the elements of his economic plan, discussed in his five reports to Congress (available here), were central in what eventually became known as the American System, usually associated to Henry Clay.

* Jefferson abhorred public debt, but was very fond of private debt, being constantly indebted. In 1815 he sold his library, in part to pay his debts, which formed the basis of the Library of Congress.

Wednesday, June 12, 2013

The Trade Deal Scam

From Dean Baker
As part of its overall economic strategy the Obama administration is rushing full speed ahead with two major trade deals. On the one hand it has the Trans-Pacific Partnership which includes Japan and Australia and several other countries in East Asia and Latin America. On the other side there is an effort to craft a U.S.-EU trade agreement. There are two key facts people should know about these proposed trade deals.
See rest here.

Wednesday, April 3, 2013

South Centre hails Indian drug patent decision

We have discussed the role of property rights in the process of development. The recent Indian case is one in which a broader definition of property rights, one which may be seen by some conservative economists as a violation of patents held by corporations, may actually help the process of development.

From SOUTHNEWS, by Martin Khor:
"The ruling by the Supreme Court of India dismissing the petition from Novartis AG is a historic decision with positive global implications ... The Novartis AG application had claimed a patent for a new salt form (imatinib mesylate), a medicine for the treatment of chronic myeloid leukemia. Novartis sells this medicine in several countries under the brand name Glivec (Gleevec). The Indian patent office had rejected the patent application on the ground that the claimed new form was anticipated in a US patent of 1996 for the compound imatinib and that the new form did not enhance the therapeutic efficacy of the drug. The decision was upheld by the Indian Patents Appellate Board (IPAB).
The decision by the Supreme Court of India has significant positive global implications. It has effectively protected the leading role of India in supplying affordable medicines to other developing countries. The reaffirmation of the primacy of health and access to medicines as a right of citizens is particularly important for the international community when these rights are under significant threat under bilateral trade and investment agreements."

Thursday, March 28, 2013

Michael Pettis on the Chinese Growth Model

I have been slow to respond some of the comments in previous posts, and have not been able to post on some topics I wanted. One topic that I left out, but is worth mentioning, is about an interesting post on the Chinese Growth Model that Michael Pettis had a while ago. He compares the Chinese model to the Hamiltonean American System. He suggests that the three keys to the 'model' are: protection, domestic investment (public?) and national finance.

Note that this suggests an active role for the State, which is often not recognized in conventional accounts of US development. Nate Cline has dealt with some of those issues in his PhD dissertation (first and second essays in particular). He says: "that the developmental orientation of the state emerges as fundamental in U.S. history. Most importantly, the federal government’s role in shaping and establishing financial markets and a common money of account allowed the U.S. to escape external constraints on growth related to the capital account." Note that this is more a post-bellum phenomenon than one might think, even if industrialization in the North was already firm in the ante-bellum period.

Pettis limits his argument on Trade to infant industry protection. I have a preference for a discussion of managed trade, rather than 'free' trade (see here). Also, he seems relatively critical of Chinese public investment, suggesting that there is significant misallocation of resources. He also seems to think that financial markets are not efficient. And that's why he tends to be skeptical about the sustainability of the process of growth in China.

I tend to be less concerned with strength of the financial sector, which is fundamentally based on debt in domestic currency, and, hence, relatively free from default risk. I also think that public investment and the expansion of wages (in domestic currency; they are low by international standards) are central for domestic demand expansion, and have been behind the absorption of rural surplus labor into the industrial/services sectors in the urban areas. As a result, a certain amount of 'inefficiency' is more than tolerable. My concerns are much more related to the role of foreign capital, as noted by Peter Nolan (see here).

Tuesday, October 30, 2012

What's the deal with MERCOSUR/SUL?

First there is the issue of whether it should be called MERCOSUL in Portuguese or MERCOSUR in Spanish. More people speak Portuguese, but more member countries speak Spanish. But that is not a real problem. The problem that almost nobody understands is that it is a Free Trade Agreement (FTA). While MERCOSUR/SUL is an alternative to the Free Trade Area of the Americas (FTAA) in the sense that it excludes larger integration with other regions, and the US in particular, it is a Free Trade Agreement (FTA), and was part of the neoliberal logic of integration that came to dominate in both Argentina and Brazil in the 1990s when the main agreements were signed. Per se the treaty is not better than the North American Free Trade Area (NAFTA), and the main advantage is that, given that the initial asymmetries between Argentina and Brazil were smaller than between Mexico and the US, the negative effects were also less significant.

There is little connection with the logic of integration that was defended from the 1950s onwards by the economists at the Economic Commission for Latin America (ECLA) – and the Caribbean, now (ECLAC) – which was based on industrial integration for the creation of economies of scale. In Prebisch's view the aim of integration was to support industrialization. In fact, to some extent the boom in South America – in contrast to Central America and Mexico – in the 2000s has been based on a peripheral integration with Asia, in particular China, that allows for the exports of commodities. In that sense, the Bolivarian project is based on a change in State ownership, wherever it was possible, and an increase in the State’s share of the absolute rents associated with commodity exports, and an increase in transfers programs. Something that has been named natural resource nationalism [on the problems of national resources and development strategies see the paper by Carlos Medeiros here].

The degree of industrial development has been limited in the region during the last decade (meaning import substitution re-industrialization), even if it is far from clear that deindustrialization has really occurred, that is, a Dutch Disease problem (I would argue there is almost no case for it). Also, integration of infrastructure or regional financial development have been limited at best, and most plans (like the Banco del Sur or Sul in Portuguese) remain in its early stages. But the limitations of the process of integration should not lead to the notion that we need more integration at any cost in the region. In fact, one of the great advantages of Brazilian external policy is that is has refrained from getting into FTAs and Bilateral Investment Treaties (BITs), preserving policy space, as noted by Kevin Gallagher.

It is important to emphasize that more trade does NOT depend necessarily on reducing the ability of the State to manage trade flows (what is often referred to as Free Trade; for critiques of the comparative advantage theories of trade see here, here and here). Trade integration should not be made at the expense of national development policies, and further integration, with Asia or even within the region, should take place, but subordinated to the development of national processes of industrialization. MERCOSUR/SUL too should be envisioned, less as a FTA, and more as an instrument of mutual support for those national strategies.

Thursday, May 10, 2012

Free Trade and Inclusive Development

By Suranjana Nabar-Bhaduri

One of the central elements in the development of any country is the creation of economic activities that transform the production structure by significantly increasing labor productivity, or the amount of production per worker. By helping to absorb more people into quality employment, the creation of such activities helps to generate a more inclusive and sustainable path of long-run economic growth. While economists and policy-makers accept the necessity of this transformation, there are differing views on the policies that developing countries should follow to achieve this transformation.

Many Western countries and institutions, such as the International Monetary Fund (IMF) and the World Bank, argue that minimizing the role of the State in economic activity, and opening up the economy to external markets is vital to achieving this transformation. But other economists (e.g., Prebisch 1959, Cimoli and Correa 2002, and Ocampo 2005) stress that active industrial and employment generation policies are also essential ingredients for this transformation, and that it is necessary to complement liberalization with such policies.

Read the rest here.

Monday, December 5, 2011

Free Trade Again

So I've been writing a bit more than often on trade issues. One important conclusion of a paper I co-authored a few years ago was that: "absolute advantage, determined ultimately by low costs of production and/or depreciated currencies, seems to be far more important than comparative advantage in the determination of trade patterns. Developing countries that pursue 'neo-mercantilist' policies to enhance the competitive position of their firms may in fact be doing something rational, leading to higher rates of growth and higher levels of productivity that would imply higher living standards for their population. Also, the avalanche of financial crises in the 1990s, shows that the prescriptions of pop liberals were unfounded; and that balance of payments disequilibria are seldom benign and self-adjusting. Crises are cumulative and the costs of adjustment severe. The Asian crisis and the more recent one in Argentina make the point very clear." Interestingly enough since the Argentine crisis in 2001-2, developing countries have grown considerably faster, and rebounded from the Great Recession pretty fast. It has been the advanced economies, that should not have problems with their balance of payments that got stuck. But the causes for that are fundamentally political. The full paper is here (the title should have said only Principle in the singular). Another paper with similar arguments here.

Friday, December 2, 2011

Rethinking Trade and Commercial Policy at the University of Utah

Peter Ho, from the University of Denver, gave a nice and stimulating talk based on his recently published book. He tries to rethink classical political economics views on trade, reviewing the contributions of Smith, Ricardo and Stuart Mill, and the trade policy advise that derives from it. Without having read the book, the presentation suggests a sort of institutionalist approach to the critique of the mainstream.

One thing that did strike me out as peculiar to the presentation, but which may not be reflected in the book, was the critique of the mainstream view of trade on the basis of Ricardo/Mill rather than the Heckscher-Ohlin (HO) model. Note that comparative advantage in the HO story is associated to full utilization of resources and relative prices determined by scarcity (for a critique see here). That's clearly not the case in Ricardo.

Also, the Ricardian (properly understood as part of the surplus approach) story is less about the benefits of trade in general, and more about which social class benefits and which one loses from protection (see my discussion here).

One last point about the talk, that I would have liked to discuss with Peter (I had to leave for a defense) was on Mill. He was a peculiar author in-between classical political economy and marginalism, and his contributions are more problematic to properly understand than authors like Ricardo and Marshall. In fact, Mill is a key author to understand the break between the surplus approach and marginalism. As noted by Krishna Bharadwaj, what was Ricardian in Mill's theories does not appear in Marshall's work, and what is proto-Marshallian in Mill's ideas was not part of Ricardo's views of political economy. In that sense, while I'm comfortable with a Smith/Ricardo approach to trade, I'm less keen about adding Stuart Mill to the mix.

PS: I should have noted that his discussion of trade policy builds on Hamilton, List, Prebisch, Myrdal, Singer and others, like the work of Ha Joon-Chang. A paper of mine on a similar subject is the entry on Export Promotion for the International Encyclopedia of the Social Sciences, edited by Sandy Darity (here).

Sunday, October 23, 2011

Commercial Policy in Latin America

Last week I taught my Raúl Prebisch class, in my Latin American Economic History and Development course, dealing with Import Substitution Industrialization (an annual thing now). The classic paper in English was published in the American Economic Review of 1959. The masters' students have to read the original paper. This follows my two previous posts (here and here) on trade. A few things that are important to notice.

Prebisch clearly says that industrialization (and hence the expansion of domestic production) is an inevitable part of the process of development, something that has been often forgotten as if strategies based on services or intensive agriculture are alternatives to industrialization. We still live in industrial societies (not post-industrial ones), and industry remains the main source for productivity growth (something that was referred to as Kaldor's Second Law of development).

Second, even if there is strong growth of productivity in the primary sector, these tend to be passed to prices and benefit the consumers, mostly in developed countries, whereas at least part of the increases in productivity in the other two sectors are retained by workers in the form of higher wages. So the problem of industrialization is associated to the ability to keep in the developing countries the fruits of technological progress, and not with protectionism for the sake of domestic special interests. Further, the workers expelled from the primary sector (if productivity is to grow there) must be incorporated in the other sectors, and as a result a preoccupation with what he calls (following Lewis) 'surplus manpower' (p. 255).

Last but not least, it's worth again emphasizing on the question of protection (since Prebisch is seen often as the Devil by Free Traders*), that Prebisch (p. 259) notes clearly that: "protection by itself does not increase productivity."

* The typical attitude is I did not read it, and I did not like it. The aversion of the mainstream to Prebisch is so strong that Dani Rodrik confesses in his Prebisch Lecture (see the irony?!) that a month before he had not read any of his works. Basically he found out that Prebisch: "did not favour indiscriminate protection. He anticipated his later critics by recognizing that trade protection on its own would not lead to increased productivity in manufactures, and that it might even resuit in the opposite."

Friday, October 21, 2011

More on "free" trade

In a recent post I promised to develop the critique of the dominant trade model, the so-called Heckscher-Ohlin-Samuelson (HOS) theory. While the Ricardian concept of comparative advantage is based on the labor theory of value (and is compatible with modern versions of that theory, as developed by Sraffa), and its results hold if the assumptions are realistic (limited capital mobility, and a fixed level of employment, the latter could result from domestic demand policies), the HOS is an application of the marginalist theory of value and distribution and it suffers from that theory's inconsistencies.

The HOS theory says that a country exports the goods that are intensive in the use of the factor of production that is abundant in the country. A country with lots of workers, and according to theory cheap labor, would produce goods that are labor intensive and export them, while importing capital intensive goods. The graph below illustrates the argument.
If there are two goods (a and b), and one (a) is always more capital intensive (bigger capital-labor ratio) than the other (b), and in both goods we have that as capital intensity increases (larger K/L ratio) the rate of interest falls, then as the rate of interest falls the relative price of the capital intensive good with respect to the labor intensive one falls too. In other words, in a capital abundant country, capital intensive goods would be cheap, and specialization would be guided by the relative prices.

The capital controversy showed that there is no reason, in a world with multiple capital goods, to have a monotonic decreasing relation between capital intensity and the remuneration of capital. One way in which that effect could be represented would be with a capital intensity reversal in the production of goods a and b, as shown below.

In that case, as the intensity of capital increases (K/L goes up) at first, as before, a is the capital intensive good, but now there is a switch and b becomes the capital intensive good at lower rates of interest. The consequence is that for a part of the process as the capital-labor ratio increases the price of a with respect to b increases, but after the switch, the other part of the process, it decreases. The relative abundance of capital and labor is not a guide for relative prices anymore, and as a result, neither can it determine patterns of specialization.
As a result it is not generally true that trade depends on comparative advantage based on relative scarcities of factors of production. This suggests (as the critique of the Ricardian version of the model) that absolute advantage, lower costs, might be more important than conventional wisdom suggests. Also, it implies that history and institutions are central to understand patterns of trade specialization.

The seminal work in this area was done by Ian Steedman, extending the ideas of Sraffa to foreign trade. The classic papers have been collected in Steedman's edited book Fundamental Issues in Trade Theory.

Saturday, October 8, 2011

On 'free' and managed trade

In one my last posts I promised to talk about "free trade." As I said the name itself is a misnomer, much like "free market." Not just because it suggests that those that oppose it are somehow against freedom, but mostly because it vaguely indicates that trade and markets are like natural phenomena, which would spring out if only government restrictions were eliminated.

In fact, it is well known, at least since Polanyi's classic, that the key markets in capitalist economies (those for land, labor and money) were slowly created by the interplay of social conflicts articulated through the political process and that their very existence results, in part, from the power of the State. Thus, simplistic and manicheistic views on the relation between the State versus the 'free' market miss the point of how States and markets co-evolved historically.

For example, the Bank of England, created in 1694, obtained the monopoly of money creation only after the Bank Charter Act of 1844, something that resulted from the victory of the City (financial interests) over the country banks (closer to commercial interests). The money issuing monopoly would be impossible without the backing of the government (and its monopoly of violence). The same can be said about international trade transactions. For example, it is well known that the period of the so-called first globalization (1870-1914) saw a significant increase in the volume of world trade. However, several regions actually became more 'protectionist,' i.e. increased the tariffs on trade (see Paul Bairoch for a good discussion on the topic).

In Latin America the higher tariffs allowed government revenue to increase, which, in turn, created the conditions for national armies to reduce domestic conflicts, and centralize administration, provide guarantees for foreign lenders, and fund the construction of railroads and ports. Without tariffs and higher government revenue the integration into world markets would not have been possible.

That does not mean that everybody in Latin America (or in other regions for that matter) did benefit from the increase in international trade during the period [it's worth remembering that in Mexico, towards the end of the period, peasants did revolt against the Porfiriato in the so-called Mexican Revolution of 1910]. It was not 'free' trade that produced growth, but the management of trade to produce commodities for the center (a particular project supported by local elites and international financial and commercial groups) that led to growth (with high levels of inequality).

A more logical discussion, for all these reasons, should not be about 'free' trade versus protectionism, but about what type of managed trade a given society wants, and who benefits from the different trade arrangements. For example, in current discussions about bilateral and multilateral trade agreements the issues of investment and property clauses are essential. The dispute is mostly about those that want to protect the interests of corporations (e.g. property rights, access to foreign courts, elimination of financial regulations forbidding sending profits abroad, etc.), and those that might have alternative interests (e.g. protecting domestic jobs, creating national capacity for industrial innovation, the environment, etc). In fact, for specific cases, like defense or sanitary and phytosanitary rules, it is well established that trade should be regulated, i.e. not 'free' but managed (for discussions of some current problems with the 'free' trade agenda see here and here).

But the problems for the defenders of 'free' trade are not limited to the inconsistencies of their policy positions. In fact, despite the general agreement on 'free' trade by academic (mainstream) economists, the theoretical foundations for their position are very shaky. The basis for the argument harks back to David Ricardo's Principles (and also to the parallel work by Robert Torrens). Ricardo argued that if England and Portugal traded without imposing tariffs it would be mutually beneficial, even if Portugal was better at producing both goods being traded, cloth and wine. The reason is simple. Even if Portuguese workers were more productive than their English counter-parts at producing both goods, they might be better at producing one of them (say wine) and would still benefit from putting all their efforts behind the activity at which they excelled.

In other words, the argument for trade without tariff or other restrictions was based on the the idea that trade is equivalent to access to better technology. The Portuguese could specialize in what they are better technologically, and obtain through trade the things that they do not produce. The English would have also access to better wine. Both would get cloth even if the English were less effective at producing it. The message is: specialization is the wealth of the nations.

However, what is often missed in the discussion is that the Ricardian argument for comparative advantage, as it is the case with all economic models, depends upon certain special assumptions, and that those premises responded to Ricardo's own political views. First, Ricardo assumed that all workers that were employed in wine production in England would find jobs in cloth production, and that all workers in the cloth sector in Portugal would be able to work in the wine sector. Say's Law of Markets, that suggests that general demand crisis do not take place domestically was extended to external markets too. Workers are always employed by definition (not necessarily full employment for Ricardo). Further, Ricardo assumed that capital was immobile, that is, even if it was cheaper to produce from Portugal (given its higher productivity and lower costs) and export to England, English capitalists would prefer to maintain their capital in England and produce in the home country.

Note that if any of those assumptions is violated Ricardo's argument falls apart. In other words, if workers in England and/or in Portugal in the displaced sector cannot find jobs in the other sector, it is unclear that all benefit from 'free' trade. Also, if capitalists can and do move from country to country (interestingly enough Ricardo descended from a family of bankers emigrated from Portugal to Italy, then to the Dutch Republic and finally to England) then in his example the lower costs (absolute advantage) of Portugal would determine that both cloth and wine would be produced there. England would be in a difficult situation importing both goods and condemned to grow at a lower pace, which is exactly the opposite of the historical situation (for an analysis of Anglo-Portuguese trade after the Methuen Treaty of 1703 that allowed Portuguese wine to be exported to England free of taxes and the same for English textiles into Portugal see Sandro Sideri's Trade and Power).

The reasons for Ricardo's special assumptions are very well-known. Ricardo represented financial and industrial interests, and was a harsh critic of the Corn Laws, the tariffs on imported grain imposed after the Napoleonic Wars, that favored the landed and aristocratic classes, defended by his friend Robert Malthus. Ricardo assumed that wages were at the subsistence level, and that tariffs on the importation of grain would lead to the use of more and less productive land in England for their production, increasing the rent accrued by the landowners. For a given output, and fixed wages, the higher rent would necessarily reduce profits, and capital accumulation. In other words, the special assumptions (which Ricardo thought relevant for the particular case of England in that particular historical context) were instrumental in his argument for the elimination of tariffs on grain imports. His was a progressive argument for industrialization and against the agrarian aristocracy (for a discussion of Ricardo's political views see Milgate and Stimson's Ricardian Politics).

Generalizations of the Ricardian argument can only be defended if his assumptions (including that displaced workers do find jobs and there is no capital mobility) are also thought to be generally valid. More modern arguments for 'free' trade rest on the so-called Heckscher-Ohlin-Samuleson (HOS) model, that is fraught with logical problems, and even less defensible than the generalization of Ricardian views, but I'll deal with those in another post.

PS: My paper "What Do Undergrads Really Need to Know About Trade and Finance" might provide a more detailed discussion of some of the issues above. Robert Vienneau has posted here elements of the Sraffian critique of the HOS model.

Thursday, September 1, 2011

The Colombia FTA again

If you missed my piece on the Colombia Free Trade Agreement, then you can read it at Triple Crisis; it is posted with a link to the original at NACLA.

Saturday, July 23, 2011

The Colombia FTA: Only Corporations Win

Trade has been a contentious issue in U.S. politics for a very long while. In recent times, free trade agreements have been promoted as essential by the cheerleaders of globalization, and as a threat to good jobs with decent wages and benefits by those who are skeptical about the advantages of the global economy. President Obama, a man of broad views, seems to represent both opinions. On February 12, 2008, candidate Obama made the following argument on this issue:
“It’s a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart. That’s what happens when the American worker doesn’t have a voice at the negotiating table, when leaders change their positions on trade with the politics of the moment, and that’s why we need a President who will listen to Main Street—not just Wall Street; a President who will stand with workers not just when it’s easy, but when it’s hard.”
The previous year, Senator Obama had opposed trade deals with Colombia, Panama, and South Korea, while favoring one with Peru. Facing several critics, even before he won the nomination, Obama clarified that he did not intend to unilaterally revise NAFTA, but would be favorable to having a dialogue about the costs of free trade agreements (FTAs). Once in office, however, Obama seems to have made a 180-degree turn.

Read the rest here.