Importance of Free Trade to the US

No contentious issue has more agreement among economists than that trade protectionism is detrimental to all concerned. Yet no issue is less understood by the public and politicians.  The typical claim is made that high wage countries cannot compete against countries where labor is exploited by low pay and terrible working conditions. By that reasoning California and New York cannot compete against Arkansas. In addition to huge wage differentials between California and Arkansas, there are no trade, legal, or language barriers to contend with. Therefore, according to arguments of trade protectionists, there should be massive outsourcing to Arkansas, Louisiana and Mississippi from California and New York. Obviously, this has not happened. Also, wages in Japan skyrocketed relative to US wages throughout the post war period with no effect on their huge trade surplus.
Image of globe in networkThe genesis of persistent trade imbalances has only a little to do with wages and working conditions. To understand why, we must start with the basics. When I get a haircut, I have established a trade deficit with my barber. He can take the money and buy something from me, buy something from someone else, or save the money. This same scenario can be aggregated to a nation as a whole. When we purchase clothing made in China, the Chinese have the same three choices as my barber. In recent decades the net of all such choices by citizens around the world outside the US has been to save much of the money earned through trade.
Now, having saved a chunk of the money earned through trade, our frugal foreigners must choose what to do with the dollars they have not spent. They can trade the dollars for other currencies, or they can invest those dollars in the US. The overwhelming choice has been to invest in the US because of the relative strength of our political economy. That is exactly equal to our trade deficit. As our economy weakens in combination with profligate monetary policies our currency will lose value.
Sideshows like currency devaluation, overvaluation and manipulation are irrelevant to our trade deficit. No amount of currency devaluation by our treasury will reduce our trade deficit as long as we spend and foreigners save. Our currency has plummeted over the past 40 years, sometimes so fast as to be on the verge of utter collapse, yet the trade deficit soared. The value of our currency is a sensitive barometer of the strength of our political economy and something that touches every one of us every day. It is insane to want that measure reduced in value.

Prior to WWI, as a debtor nation, our borrowing and spending was primarily for investment purposes (as in capital equipment). Today the trade deficit is for consumption. The consequences are very different. When we borrowed for investment our currency strengthened along with our economy because we were increasing our productive capital. Our borrowing for consumption means we have literally consumed – actually hocked – our productive capital.
Until now the effects of profligate money printing and extreme economy wide debt have been muted because foreigners have considered the US a great place to invest their savings, though at reduced exchange rates for our dollar. That is about to change.

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Simpfendorfer’s Book: New Silk Road

Ben Simpfendorfer’s book, The New Silk Road (2009, Palgrave Macmillan), fills a critically needed gap in the international public policy literature on the implications of the new trade and economic alliances now being formed between China and several Arab nations.  His personal accounts documenting his extensive residency and travel in Amman, Beirut, and Damascus in the 1990s and Hong Kong after 2000 tell a story rarely told in the developed world.  His fluency in both Arabic and Mandarin Chinese give him a rare, unfiltered look at the emergence of both the Arab world and China as powerful global financial giants in the 21st century.

SilkShopVivid in its accuracy, without being ostentatious, Simpfendorfer leads the reader on a journey through the streets and bazaars of many cities as a way of conveying the pulse of the Arab and Chinese streets.  His book captures the grit and grime of the cities while, at the same time, fixing the scenes he describes within the socioeconomic context of the events he bears witness to.  As someone who is documenting the global shift of power from the post Bretton Woods Western world to the locale of the ancient Silk Road, he outlines the reasons for this rebalancing in clear and lucid terms.  He goes beyond the simple explanations stemming from oil geopolitics and explores the historical roots of the relationships between China and Syria, China and Egypt, and China with her other important alliances in Africa and the Middle East.

As a thoroughly wired economist who plays the role of participant observer he offers subtle insights into why this global power shift is taking place and how the West can best prepare for the diminution of influence that will inevitably come as a result of this shift.  His well researched and well documented facts and figures reveal the stark truth about the lack of language and cultural preparedness that is existent in America, and how that has worked to reduce her influence within these important regions.  He also shows how poor policy decisions by U.S. leaders to cut budgets for peace time efforts to win the hearts and minds of the Arab world have contributed to misunderstandings that have undermined our foreign policy interests and contributed to the rise of Islamic fundamentalism in the world.

People rushing through train station 4What becomes clear in reading this insightful book is that it is a story only beginning to be told.  This is just the first chapter of a very long tale about the transformation of the global balance of power.  He only touches briefly on such issues as currency reserves, national debt, and military strengths and weaknesses, among other things.  How these issues will factor into the equation are, of course, of paramount importance as the U.S. moves forward with her foreign relations in the Middle East and China. However, as a book that focuses on the trade aspects of these important countries, it gives some foreshadowing of issues to watch for as a newly emerging sea lane-based Islamic corridor is defined and the ancient Silk Road is reestablished.

The West would do well to heed the warnings set forth in this book.  A ‘Go Global’ initiative, much like the one advocated by China in the 1990s, and described in the book, would be a path worth emulating in order to curtail the current global economic crisis.  It strikes a hard blow to the arguments for protectionist policies by showing how these two important regions are passing by the old powers.

The world should listen to those that speak the languages, along The New Silk Road.

Temple Restoration & Economic Development in Cambodia

On June 3, 2009 Robert Turnbull wrote an article for the International Herald Tribune entitled “Coaxing the Khmer temple from the jungle’s embrace” (pg. 10). The article focused on the restoration of Banteay Chhmar in NW Cambodia by a team led by British Architect, John Sanday.

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The site, once restored will likely be added to the UNESCO’s World Heritage List. It currently has a budget of US$6M and there are 44 employees working full time to restore the site.  Pictured here is a photo I took of the beautiful restoration that was done on the Banteay Srea temple of about the same historical period.

Interestingly, Turnbull also pointed out some of the other issues that are facing the team as they proceed with restoration. Key among these issues is the availability of water. They are operating in a region with many unexploded ordinance from previous war time activities.

These legacy land mines are dangerous to the local people for two reasons. First, many unsuspecting by passers are injured and maimed from the triggering of these old land mines.

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Second, the weapons-grade materials are leaching out of the unexploded ordinance and into the local water supplies. As a result, the local people are plagued by both water quantity and water quality problems.

A hydrologist from Geneva, James Goodman, will be working with the team to map the area and to identify suitable spots for wells to be drilled. These wells will benefit both the restoration activities and the livelihood of the local population. Interestingly, a  Community Based Tourism group has been set up to support the development of a local infrastructure that is compatible with the life style of the local people while at the same time providing a framework for accommodating the increased traffic that is sure to come if the site attains listing on the UNESCO World Heritage List.

I have taken the time to sketch out the events and issues surrounding this temple restoration to point out some of the trade-related implications.

Cambodia is one of the poorest nations in Asia.  Despite recent progress, the Cambodian economy continues to suffer from the effects of decades of war, civil war and internal political strife. The Cambodian economy is still essentially aid-dependent. Investment in infrastructure and social services is predominantly funded by overseas development aid and concessionary loans. Per capita income is rapidly increasing but is low compared with other countries in the region. According the U.S. Department of Agriculture Foreign Agricultural Service, per capita GDP was US$357/year in 2004.

Nonetheless, by 2008 the rate of growth was 9.4% in 2008 as noted by Cambodian Prime Minister Hun Sen in his February, 2009 speech to the Economic Conference of the Economist Group and as reported by the Xinhua News Agency (February, 2009).  They are seeking to maintain a rate of at least 6% in 2009 given the current global financial crisis.  This optimism is based on the relative importance of their three most important industries:  agriculture, textiles, and tourism.

JaneWithChildrenHowever, more than 50% of the population is 20 years or younger. The population lacks education and productive skills, particularly in the poverty-ridden countryside, which suffers from an almost total lack of basic infrastructure. Fully 75% of the population remains engaged in subsistence farming.  Agricultural production for the export markets (a source of hard currency) is just beginning to develop.  And, the country’s textile industry has been affected by the end of the Multi-Fiber Agreement in 2005 which had governed a global quota system for decades.

Nonetheless, efforts are being made, with the support of the World Bank and the Asian Development Bank among others, to develop training programs for employment in each of these sectors.

It is against this backdrop that the Community Based Tourism group associated with the Chhmar restoration is taking place.  It is my hope that the regional issues associated with water availability be resolved.  Further, it is my hope that some training programs be implemented.  A tourist economy can be a double-edged sword.  The demands for young men and women in the sex trade are high in Cambodia.  And, when this is the only option for feeding the extended family, even this can become acceptable in this societal context.

SreyGirlsSmallAgriculture, especially silk worm farming, presents a viable alternative to a Cambodian economy based strictly on the tourist industry.  Silk worm farming relies heavily on the cultivation of mulberry; the leaves of which are the preferred food source for these rapidly growing worms.  And, due to Cambodia’s latitude, rainfall patterns, and climate, mulberry farming is a suitable crop.

It is my hope that some of the contributions being made by the private donors to restore the beauty to the Banteay Chhmar temple be budgeted for just such programs for the local population.

Overview of Global Textiles Industry

This gives a brief overview of the global textiles industry.

Vodpod videos no longer available.

more about “Overview of Global Textiles Industry“, posted with vodpod

Save the Baby; Throw Out the Bath Water

 
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The current mood of fear regarding the global economic downturn has, unfortunately, caused some in the policy community to cast back, both philosophically and theoretically, to a time before the rhetoric and action of trade liberalization.  The lack of oversight in the market that led to abuses by a few has compelled some thinkers to want to “throw the baby out with the bath water” when it comes to free market principles. 

It has become vogue to think that increased government intervention into the affairs of private firms, and, even in the most extreme cases, nationalization of private assets, could be the new panacea that will help to lift world governments out of their current crisis. As a practitioner, it is my sense that government decision-makers around the world need to avoid such knee-jerk reactions.  Critical review and oversight of the actions of market actors should be preferred over outright governance of these entities.  The need to encourage entrepreneurial and innovative action is now more important than ever.  If we look at public policy over the 20th century we see several  swings back and forth from Keynesian approaches (read:  more government spending) to Hayek and Von Mises’ ideas (read:  free market).   The pendulum seems to have swung more in the direction of the Keynesian approach during this time, given the down-turn of the banking system and the world economy over the past few months.  As we move forward, we need to reflect on the wisdom of Niccolo’ Machiavelli’s 15th Century maxim that “the most vital states are those republics where their citizens enjoy the maximum freedom to be masters of their own destiny.”

The Senate, House and the Obama administration have been working steadily for the past few weeks on a stimulus package which finally was signed into law February 17.  Obama’s administration is employing some innovative approaches to getting input from the citizenry of the U.S. to help make the case for certain aspects of the stimulus package.  These approaches include holding home-based meetings and providing input into the democratic process at a grass-roots level.   There was one such meeting in the Sedona area.  Regardless of what hardships the people of the U.S. and the world are enduring, the decisions on just how to stimulate the economy will be made on the basis of theoretical frameworks, such as those identified above, not on the basis of a political input.  Nonetheless, this input puts a human face on the suffering that people are going through right now. 

Professional economists around the world should consider some of the technical issues and implementation constraints (e.g., social, political, geographic) that confront world leaders as they put forth their opinions on how to bring the world economy around.  I urge caution in the implementation of policies that would undermine the recent progress in global trade and financial liberalization. 

Granted, some of the multilateral institutions need to be updated to reflect the modern balance of economic power, as some have argued (e.g., the United Nations Security Council).  And, the hypocrisy of different standards for the developing world versus the developed world needs to be confronted (e.g., International Monetary Fund “rescue-packages” after the 1997 currency crisis).  Nonetheless, the work of the World Trade Organization (WTO) is even more critical than ever for continuing to beat the drum of global trade.  Further, the work of the WTO in mediating trade disputes plays a vital role in the ongoing interplay between the developed and developing countries.  Concerns about national sovereignty aside, the institutional approach to rationalizing trade actions has been proven to be MORE important and MORE significant than its critics have acknowledged, given the current crisis. 

An updated notion of the ‘collective good’ needs to be defined; one that sheds the shackles of socialist rhetoric and casts forward to a society where the economy has been stabilized and programs that build on trade liberalization have been established.  The ‘rescue’ package has combined tax relief with infrastructure development with aid to states for education and other vital programs.  Hopefully, we will be successful at using the additional stimulus from this package effectively and enhancing our export potential.  Hopefully we’ll cast off the protectionist attitude that has been infecting the public mind.  Hopefully, we will be just throwing out the bath water, and keeping the baby.

Free Trade Agenda in 2009

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The export of the globalization psychology with its promise to improve the living standards of millions of people in the developing world during the 1990s and 2000s was a precursor to the global crisis we are experiencing now, in 2009. 

 Globalization psychology can be defined as an approach to global market integration that uses free trade and regulatory harmonization as a basis and is coupled with financial sector deregulation across national boundaries.  It encompasses both the globalization of sources of supply with cross-boundary supply chains and the globalization of consumer markets.  

Although the positive effects of free trade have been demonstrated, there have also been some unintended consequences.  High worldwide inflation, off-the-charts prices for oil, and food shortages and riots in many developing countries are just a few of the maladies affecting modern global society.  Security from threats stemming from political unrest and illegal migration are themes that are dominating most developed country public policy agendas.  At the same time, the real effects of global warming are being felt across the planet through increased tornado activity, more frequent and more powerful cyclones and hurricanes, floods, and erratic weather patterns. The extent to which human activity contributes to global climate change is still under debate; but it cannot be contested that the rapid globalization of the 1990s/2000s led to greater and greater levels of petroleum product and natural resource use.  This has exacerbated the already fragile balance between the human socio/political systems and the environmental and energy systems. 

The convergence of disruptions in these social/political and environmental systems has been called by Thomas Friedman the beginning of the “Great Disruption” in a March 8, 2009 New York Times editorial.

It is evident that we are moving towards a period of greater conflict between the ‘haves’ and the ‘have-nots’ of the world.  Globally, it has been shown that, despite all the promising rhetoric of the globalization advocates, and despite the actual, verifiable improvements in the living standards of millions, there has been a negative change in income distribution across the world population since the onset of globalization. Here are some startling facts from the 2007 Human Development Report of the United Nations:

             

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  • About 0.13% of the world’s population controlled 25% of the world’s resources in 2004
  • About 20% of the world’s population consumes 86% of the world’s goods while 80% of humanity consumes the remaining 14%.
  • About 50% of the population of the world lives on less than $2 a day as measured by purchasing power parity (PPP). 

Indeed, as some have claimed, the unregulated, free-wheeling nature of global companies operating in the 1990s/2000s has contributed to what can be called the AIG-effect.  That is where the norms and expectations of financial reward by top management appear to have no basis in reality or any cognizance of the impact of their actions on their subordinates or broader populace around them. If we extend this analogy to the global context we can say that the top 20% of the world population that consumes 86% of the world’s resources has little understanding of the impact of their actions on the other people around the world. 

This is not to say that globalization is not a noble and laudable goal; indeed it is through this world-wide business/technology and economic transformation that the most important improvements to the quality of life and health and welfare have been made.  What is globalization anyway but improved transportation and communications networks and reduced restrictions of the flow of capital and goods?  And, it works for spreading the wealth of nations, as was so eloquently pointed out by Martin Wolf in his 2005 book Why Globalization Works. Wolf argues that a market economy is the only arrangement capable of generating “sustained increases in prosperity, providing the underpinnings of stable liberal democracies, and giving individual human beings the opportunity to seek what they desire in life.”  Furthermore, he concludes that individual nations should remain the locus of political debate and legitimacy and those multilateral institutions, like the World Trade Organization (WTO), should draw their authority from the consensus of the nation-states. 

But, even so, when the technological advances that led us to globalization are coupled with the growth rates in many developing countries, and the effects of the increased demand for petrochemical products are factored in, it becomes obvious to thinking people that there are now many unintended consequences of this global movement. Jonathon Porritt argues very effectively in his 2007 book Capitalism as if the World Matters that this is due to our failure to see that the human, social and economic systems that have led to the massive technology and wealth transfer known as globalization are simply subsystems of a larger thermodynamic earth system that has limits to growth.  And, the unintended consequences of these human derived subsystems seem to be catching up with us at about the same time as the physical processes that regulate our planet’s weather patterns.  He points out that a Five Capitals Framework that accounts for natural, human, social, manufacturing and financial factors should form the basis of our path forward. 

With this, there is hope.  That is, if our governments have the wherewithal to expand beyond the current rhetoric and status quo conditions to incorporate this broader vision. And, with conscious action on the part of the voters, citizens and consumers of the world, we may achieve it.  There are economic possibilities that can help to ameliorate some of the suffering that is increasing at an accelerating rate.  These economic possibilities are beautifully set forth by Jeffrey Sachs in his 2005 book The End of Poverty: Economic Possibilities for Our Time.  In this book Sachs lays out guidelines for ending global poverty and sees this as the great opportunity of our time to advance the Enlightenment objectives of democracy, global security, and the advance of science.  And, in addition to the individual and collective actions advocated by Sachs to improve the living conditions of millions of people around the world, there are public policy changes that can be implemented to further accelerate the effects.   

These changes are best pointed out by Joseph Stiglitz in his 2006 book Making Globalization Work.  Importantly, Stiglitz argues that the key to successful global trade liberalization lies in the approaches that multilateral institutions and individual countries take to ground trade in principles of fairness.  This point underscores my underlying premise that is based on international trade as the engine that is fueling globalization and with it, the increases in human welfare we have witnessed over the past few decades. But a second part of my premise lies in the simple fact that the economics of globalization must be grounded in the physical and thermodynamic truth of the limits to growth.   

The above cited arguments of the reform globalization advocates, no matter how sound, were, nonetheless, made prior to the onset of the rapid rise in crude oil prices, the failure of the world credit and banking systems, and the global plunge in the stock markets that have so shocked today’s world economy.  In fact, to some extent, they predicted this outcome.  

Now, that the world is undergoing this transformation, it is of such significance that the entire fabric of modern human society is threatened.  The delusion of unlimited growth is being questioned by millions of developed world citizens and consumers as they scramble to pay their mortgages, put gas in their cars, and, at the same time, keep food on their tables. In the emerging markets and developing countries, it is much more dire as the populations of internally displaced persons, emigrants and immigrants continue to grow from natural disasters, resource shortages, and political upheaval.

The capitalist consumer is either being transformed into a desperate survivor or a responsible citizen through the day-to-day struggles of this rapid economic transformation. This situation is, indeed, the natural outcome of the depletion of global oil reserves and was forecast as early as 1956 by geophysicist M. King Hubbert and presented so forcefully by Paul Roberts in his 2004 book End of Oil. Our societal failure has been our inability to mobilize the political will and resources needed to adequately plan for this natural outcome through energy diversification.  

It is the actions of the responsible citizens of the world that will help us avoid such collective delusions in the future.  But, as Mort Rosenblum argues in his 2007 book Escaping Plato’s Cave, it is in part, America’s blindness to the conditions in the rest of the world that is threatening our very survival.  America’s citizens happen to make up a good part of that 20% consuming 86% of the world’s resources.  His solution for Americans is to quit gazing at the shadows on the wall and turn around to cast our eyes on the reality of the moment.  If we can do this, there is hope.

But, with the world in desperate straits, it seems unlikely that the U.S. should be launching new initiatives like some of the programs in the ‘stimulus’ package recently passed by the U.S. Congress and signed into law by President Obama.  Indeed many European countries are refraining from using deficit spending as a tool for stimulating their own economies and they are questioning the wisdom of our approach to doing this.

Furthermore, with so many Americans out of work, there is little support for programs that are aimed at shifting resources from the developed world to the emerging markets.  On the contrary, a strong protectionist mentality has, in some circles, taken hold of the American psyche and threatens to take us back to an 18th century mercantilist mentality.  This tendency must be strongly countered by the rational arguments for free and fair trade and continued trade liberalization. 

It is our leadership in advancing free trade that, in the past, led the U.S. to become the leader of the free world.  It is our approach to establishing free markets which has, in turn, improved the welfare of millions of people around the world.  And, at the end of the day, within the current geopolitical context, it could help us to counteract this short-sighted, protectionist reactionism.  Herein lays the key to our path forward. 

What I am alluding to when I refer to the ‘hope’ of our time is this:  We have the opportunity to take an entirely different approach to our economic and trade agenda.  Let us recognize that our underlying assumptions of unlimited growth were not comprehensive enough to take into account the thermodynamic and limits to growth realities of our natural systems.  Let us recognize that free trade as defined by classical microeconomic theory (i.e., based on perfect markets, perfect information, unlimited resources, mobility of labor, etc.) does not exist in this idealized form.  Therefore, it is unwise for us to base our public policy on a theoretical framework that is elegant, but not reflective of reality.  Let us recognize that we need to substitute this outmoded model with an updated, more workable framework.  But in this recognition, it is important that we refrain from casting back to a time when mercantilism was the norm and trade protectionism was the battle cry. 

The guiding vision that should instruct our national commercial public policies in this day and age should be based on a more integrated model that reflects all of the Five Capitals outlined in Jonathan Porritt’s framework. To reiterate, these are:

  1. Natural Capital
  2. Human Capital
  3. Social Capital
  4. Manufacturing Capital
  5. Financial Capital

With this kind of a guidepost, our actions can once again help us to lead the free world toward positive outcomes, and a free trade agenda that truly works.  That is:  a free trade agenda that reflects the needs of our time, a free trade agenda that is fair, and a free trade agenda that recognizes the natural limits to growth.