High external tariffs were effective once

I was preparing for a lecture I have been asked to give on Technology and Development to visiting scholars of Indian Economic Service at the Singapore Civil Services College tomorrow. I had made a mental note of referring to Professor Robert Allen’s work on the history of economic development. I had written on it in MINT in February 2015. Let me recall those words here:

According to him, North America and western continental Europe caught up with the British industrial revolution by adopting the following:

• Internal free market (elimination of internal tariffs)—national single market

• Stable domestic banking system

• High external tariff

• Universal education

• Infrastructure.

They did not catch up practising free trade and open capital markets. What a surprise! [Link]

High external tariff was needed to catch up with Britain which industrialised earlier. Now, President Trump is again resorting to high external tariffs. America has a stable banking system and an internal free market. Its infrastructure is in need of improvement, for sure. In other words, trade barriers were effective. They may well be effective again. Academics are finding it difficult to accept that possibility.

I saw an article by Professor Dani Rodrik in FT.  He was making two points of which I thought one was valid – that the WTO was more intrusive than that of GATT. His second point was that such intrusion did not allow for heterogenous economic models like that of China’s. I thought that the second point was problematic.

Countries are now holding China into account for its failure to honour the very commitments it made when it joined the WTO.  It signed up to it. It benefitted from it. Its breakneck export growth and foreign exchange reserves accumulation were due to its accession to WTO. Higher Foreign Direct Investment into China was also due to WTO accession.

Second, I was not sure if China’s economic model was that heterogenous. It followed Japan’s model  – export growth, undervalued currency and protected domestic markets. Post-2008, China copied the neo-Western model of economic growth – reliance on debt. I doubt if there was much that was or is heterogenous about China’s growth model.

But, on the intrusiveness of WTO (vs. GATT), Professors Joel Trachtman and Simon Lester have responded sharply to Dani Rodrik. You can see their posts here and here.

For what it is worth, Professor Rodrik should also read this Merics brief on what certain things mean in China.

Also, I am not sure many in America see the US-China trade dispute the way Professor Stiglitz sees it. I have cited in these pages from the Harvard-Harris poll of the last few months that those polled did not want a trade war but they also wanted China dealt with, firmly.  Stiglitz writes:

No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war

He may be too harsh on the first part of his statement but he appears most certainly wrong with the second part of his statement. He should go through carefully pages 123-130 of the June 2018 Harvard-Harris poll.

If China was winning the trade war, a rare and risky outburst from a Chinese professor against President Xi Jinping would not have happened.

As of now, it does not appear that China is either winning the battle or the war. China has imposed unremunerated reserve requirements on forward transactions on Yuan and the People’s Bank of China demands ID proof for transfer of US dollars over USD1000.00 Professor Stiglitz has allowed his biases to cloud his judgment.

He should spend some time reading the detailed two-part article that the South China Morning Post on how China might have mishandled the US on the trade dispute. One can find them here and here.

Both he and Professor Rodrik would also find it useful to read the Merics China Monitor dated 18th July 2018 on China’s cosmological communism.

Read this comment too in the FT on strains showing in China.

Not too many people – even those who are ideologically ill-disposed towards Trump find it easy to side with China. For example, FT thinks that IMF would be wrong to bail out Pakistan which tantamounts to bailing out Chinese banks that lent to Pakistan to get China to build some infrastructure as part of its ‘One Belt One Road’ initiative.

Of conclusions and explanations

Financial Times has a series of stories/articles (actually, these days, newspapers mostly their stories with journalists as creative authors – you can interpret it whichever way you want) on the United States announcing tariffs on Chinese goods and on China’s retaliation. A quick glance at the headlines will tell you which way FT is leaning. Well, actually, you don’t even need to cast a sideways or a quick glance. By now, we should know. Let us set that aside for a moment.

Here is an interesting header:

Header 1.png

So, what is this economic lever? You don’t have to wait too long. Another story and another header gives you the answer:

header 2

It was a fun exercise on a Sunday morning, alright.

Making sense of Trump and trade

The title of this post is misleading. It gives the impression that I have figured it out. No, I have not. I am still making sense of both. But, I can begin to see why President Trump is viewed either as too crazy or too much of a genius. These extreme characterisations seem more appropriate than middle ones.

The image of a relatively young and boyish looking Canadian Prime Minister being attacked by a much older person and the Head of State of a much bigger country appeared like an unfair game until you read this one. All the sky-high tariff rates that President Trump mentioned are true!

The article too provides a partial explanation for why the Canadian Prime Minister’s Liberal Party lost the Ontario provincial elections so badly. I did not know about it at all. This Wikipedia entry is good enough for us and the statistics are so clear that you do not have to worry about the commentary. You can figure out what happened yourself.

On ZTE, the President’s U-Turns have baffled and frustrated many, including me. But, it may be a much longer game of chickens and charade. You can figure it out yourself if you have subscription to ‘Wall Street Journal’ and can read this article. I won’t elaborate.

Jamil Anderlini wrote in FT this morning that President Trump seems to have conceded more than President Kim did in their summit meeting in Singapore yesterday. To a degree, Wall Street Journal agreed. The comments on Jamil’s article were strongly critical of him and his judgement. To be fair to him, he had sided with Trump on his trade battle with China but then we all thought that Trump had backtracked on ZTE (or, may be not). Second, we live in a world where analysts and commentators are required to make instant judgements on matters that are slow-moving. So, the comments might be a trifle too harsh.

May be, the header of his article on the Trump-Kim summit was too sweeping and too hasty. See below:

anderlini.png

This WSJ Opinion (‘Best of the web’) contrasts the reporting in New York Times now with its reporting in 1993 when a similar opening to North Korea was made under Bill Clinton.

FT readers too have commented that, had the meeting taken place between Obama and Kim, the FT would have reported it very differently. That should make some of these newspapers reflect as to what really are they achieving with their biases and how far their reputation for objectivity had sunk.

Two vs. 1157

Reproducing the article that I co-wrote with Dr. Srinivas Thiruvadanthai for MINT. He blogs here.

Economists write letter to the wrong address

Economists have deservedly earned a reputation for being out of touch with reality. They are cementing it with their latest letter to Donald Trump

As of last count, 1,157 economists had sent a letter to US President Donald Trump warning him not to repeat the mistake of the Smoot-Hawley Tariff Act of the 1930s. The one-page letter was a copy-and-paste job from the letter that economists sent to the then president in 1930 because the fundamental principle, according to them, has remained unchanged since then.

No honest economist would generalize theory across space and over time, without considering the context. In the 1930s, the Great Depression had many parents. When it suits them, economists point to the gold standard as the culprit. With considerable justification, some of us would like to point to the asset bubbles, excessive bank lending and the “Great Gatsby” decade of the 1920s as more important causative factors for the Great Depression. At best, the Smoot-Hawley tariff might have been a complementary factor. The tariffs were enacted in June 1930. By that time, the US and the global economies were already in a vicious downward spiral. Industrial production was down almost 20% by June and the Dow Jones Index down close to 40%. More importantly, as Barry Eichengreen and Kevin O’Rourke have shown, world trade fell more in 2008-09 than in the Great Depression, though there was no trade war in 2008-09!

Although economists are virtually unanimous in their support of free trade, the theoretical justifications are much less sound than they make it appear. Comparative advantage, the cornerstone of the benefits of trade, assumes full employment and frictionless movement of factors of production across sectors. These conditions are generally not true in practice. It is not easy for a middle-aged, laid-off steel worker to be retrained as a lab technician, much less a software engineer. Indeed, recent work by David Autor shows that the entry of China into the World Trade Organization (WTO) had a strong, negative impact on the long-term prospects of US workers displaced by Chinese competition. Economists will be quick to point out that these negative effects reflect the failure to implement adequate compensatory policies, but how many times have you seen 1,000 top economists write to the president urging more aggressive policies to help workers displaced by free trade?

The signatories to the letter cite the 1930s precedence. However, there is no precedence for dealing with a nation of 1.3 billion people that makes commitments with the conscious intent of not honouring them—whether it is on trade or technology matters. William A. Galston, who served during president Bill Clinton’s first term in office, wrote for The Wall Street Journallast August (“Second Thoughts On Trade With China”) that when China joined the WTO in 2001, it had promised to sign the Government Procurement Agreement, which requires government purchases to be made on a non-discriminatory and transparent basis. Sixteen years later, at the time of his writing the article, China had not yet done so. China pledged not to militarize the islands it had created in the South China Sea. But, it proceeded to do exactly that. “They tell us what we want to hear and then do the opposite,” says an unnamed German government official, in a Reuters news report. German government officials note too, wryly, that trade with China is win-win. That is, China wins twice. More than half the members of the German chamber of commerce in China are not planning new investments in the country.

Bryan Riley, director of the National Taxpayers Union’s free trade initiative, which coordinated the letter, had said that the anti-free trade message was not being driven by public opinion and that it was top-down. This is inconsistent with facts. The monthly Harvard-Harris poll tells a different story. From the March 2018 edition:

—55% said America’s trade agreements cost jobs and only 45% said that they created jobs

—61% approved of the president leveraging the threat of tariffs to win more favourable terms for America from trade agreements

—More than two-thirds (67%) said that the US should punish China for forcing American companies to give up technology secrets

—72% were either concerned or very concerned about the US losing technological supremacy to China

—75% said that the US should take steps (including tariffs) to correct the $375 billion trade deficit with China

—58% supported the imposition of tariffs on Chinese goods

—68% said that the American government should buy America-made goods and hire Americans

Economists have deservedly earned a reputation for being out of touch with reality for their failure to anticipate the 2008 crisis and read the mood of the people correctly on either side of the Atlantic in the last three years. They are cementing their reputation with this letter to the US president. They should reflect on why even 1% of the number of signatories do not emerge from China to tell their president to honour international commitments, and on their own reluctance to address a similar letter to China, despite its documented breaches of trust.

In short, the inability and unwillingness of 1,000 learned men and women to call out a nation that plays either by its own rules or none at all, with no recourse to others against such unilateralism, do not provide good soil for the growth of world peace.

V. Anantha Nageswaran and Srinivas Thiruvadanthai are, respectively, a Mint columnist, and director of research at the Levy Forecasting Institute.

Comments are welcome at theirview@livemint.com

Prof. Rodrik is wrong

Happened to read this piece by Professor Dani Rodrik in ‘Project Syndicate’. MINT has carried it as well.

Let us start with what he gets right: The United States might have stolen IP from Britain. The problem then was that there were no international intellectual property regimes. They did not exist. Everyone stole from everyone. Germany stole from Britain too. Ask Ha-Joon Chang. That is what he documented in his book, ‘Kicking away the ladder’.

But, now, right or wrong, fair or unfair, we have international laws and countries voluntarily sign up to them, because they want the technology and hence, they sign up to complying with transfer restrictions to other nations.

Now that nations sign up to international agreements, they cannot go back and cite precedence from another period when no framework existed.

If they had no intention of complying and did not sign the agreements, then, it would have meant that they signed up to the philosophy of ‘might is right’. Then, it becomes a law of the jungle and survival of the fittest. There is no role for op.-eds. and economists. We can watch the slugfest.

Indeed, that is the conclusion that Prof. Rodrik’s arguments are leading us to. China is not claiming that it is not cheating nor is Prof. Rodrik claiming that China is not cheating. But, he is questioning the actions that the U.S. Government is taking. Where would that lead to? Only the jungle.

Prof. Rodrik has written often enough that economics rules and laws operate within the prevailing social and political contexts. Hence, to cite precedence from another era and another context must sound very unconvincing, even to him.

The context is indeed different now in another aspect too. Technology – beneficial and menacing – has advanced tremendously. There are chemical, biological and nuclear technologies that can cause tremendous damage. Hence, stealing them and propagating them to nations that do not have a record of responsible deployment (not just against the rest of the world but against their own people) is immoral and actually, they tantamount to crimes against humanity. These are not morally equivalent to and are far different from stealing technology for sewing machines during times when no intellectual property regime existed.

If one can hazard a guess as to why Prof. Rodrik wrote this piece, we get clues from his concluding lines. Prof. Rodrik writes that many liberal commentators question Trump’s methods but not his goals. He wanted to differentiate himself by criticisng both.

The other possibility – and all of us are susceptible to it at some point if not always – is that he has set up a goal for himself: “I cannot be in the same side as Trump is. So, let me see what I can do to come up with an argument to help me reach or stay in that position.

Then, one tends be a bit careless about the ‘logical landmines’ on the way. The goal is not to be where Trump is.

This piece falls well short of the analytical and logical rigour that one has come to expect of him.

Media changes its own climate

Actually, Jamil Anderlini has not written a truer sentence than the second sentence of his article. He was writing about the actions of President Trump with respect to China. He wrote that Donald Trump was right and that one would not read those words (‘Donald Trump is right’) every day in FT. Jamil Anderlini is right.

In another article in FT which discusses the index of ‘Reporters without borders’  and the worsening press freedom around the world, the picture chosen is that of Donald Trump. There are far, far worse heads of governments and leaders whose picture would have fitted the story and the header. Hint, hint…

Yet, the FT chose to put his picture for this article when not a day passes without any of the mainstream media, very much including FT, attacking him viciously. That has gone on relentlessly since he took office and before that too. The media has done its bit in spreading the ‘climate of hate’ against the American President. FT has been in the front and centre of it. In fact, putting his picture on that story is proof of that!

What is inexplicable is that the media has been thoroughly out of touch with the feeling of the people. The monthly Harvard-Harris polls must be eye-openers. But, rarely do we see mainstream media discusses the mood of the nation captured by that poll, month after month.

The March poll reveals the public’s mood in the United States with respect to China, on transfer of technology to China from the US, on Trump’s actions with resepct to China, etc. In the survey, 52% said that the mainstream media covers mostly negative stories on Trump. In such an environment, shoiuld it be a surprise that there is a climate of hate against the mainstream media? Have they not put in more than their fair share of hard work to earn that?

The real bully in the America-China trade war – part 2

Earlier in the day, I read Professor Joe Stiglitz’ piece in ‘Project Syndicate’ on Trump and the tariff threat. Predictably, he has criticised President Trump heavily so much so that the ‘darling’ of the World Social Forum now bats for free trade – which is the pet project of his nemesis, the Fund! This is the comment I posted under his piece in ‘Project Syndicate’:

Ash Carter, in an interview to ‘Politico’ in February had said that economists had not provided real answers for dealing with China. William Galston, he served in Clinton’s first term in office, says that China is yet to ratify the Government Procurement Agreement that it agreed to do so when it joined WTO in 2001. it is about non-discriminatory opportunity in government procurement.

Joseph Stiglitz, who discovered a niche for himself, opposing free trade and all the other nice things for the Fund and for Wall Street, suddenly discovers virtue in free trade because Trump is now considering imposing tariffs on China.

One thing is clear: whether or not Trump wins, economists have both lost it are still losing it.

Later in the afternoon, I read Larry Summers in FT where he says that the world is rallying behind China and not behind Trump. My response to his piece was as follows:

Mr. Summers should worry that he is on the same page as Joe Stiglitz. He can then reflect on what binds them. Is it rationality or an irrational bias against whatever Trump does.  He should read up on what Ash Carter told the interviewer from Politico on how useful (or not) economists had been to America in dealing with China.  Here is the link.

Two, he can read papers by economists Peter Schott (Yale University) and Justin Pierce (Federal Reserve) on how much the conferring of ‘Permanent Normal Trade Relations’ (PNTR) status to China mattered, for the worse, for American manufacturing employment.

Three, he might do well to have a word with William Galston who served in the first Bill Clinton term. He wrote in WSJ in August 2017 that China agreed to sign the Government Procurement Agreement – a non-discriminatory government procurement regime – when it signed up to the WTO in 2001. Sixteen years later, it had not done so. Referring cases to WTO takes years for adjudication. China knows that. That is why it now pretends to have faith in the multilateral system when it had shown very little respect for its own commitments to the WTO.

Far from calling out the real bully and asking that country to make concessions such that the threat of a trade war is averted, American economists are busy running down their own President.  That is evidence, if it were needed, that elite interest are divergent from national interests.

If proof were needed for my last satement above,  he should check out the pages 108, 161-162 and 169-175 of the monthly Harvard-Harris poll for the month of March released late March.  Here is the link.

In a pre-Trump world when no one threatened tariffs on China, inequality rose, Brexit happened, 2008 crisis happened and Trump himself got elected.

After Trump but where Trump is not in office, in Italy, Austria, France, the Netherlands, Poland and Hungary swung Right and Catalonia voted to separate from Spain.

Summers and his ilk must find answers as to why their world of free trade had no answers for these people (including for Ash Carter!) that they decided to show their helplessness, anger and frustration in the above manner.

Postscript: Indian readers might be interested to check out pages 108 and 110 of the Harvard-Harris poll. Link given above.