Why Free Trade is, was, and always will be unimportant.
So, now that gas has hit $4 a gallon, shipping costs have gone up. Way up, as a matter of fact.
The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.
40-foot shipping containers can, of course, contain hundreds of thousands of dollars in value. So we're not necessarily talking about a huge change. However:
The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”
Yeah, you read that right. The entire effect of thirty years of work on trade liberalization was completely undone by a doubling of the price of gasoline.
The world is a place where most goods are traded essentially freely. The remaining barriers, such as they are, are for goods that are largely a pain to transport (food) and can be produced more or less anywhere (ibid). Of course, we should continue to work to keep the system running smoothly and moving slowly forward. But there is no meaningful economic gain to be had from anything other than maintenance.
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It's impossible to debate if people simply hold beliefs that have no grounding in reality.
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but for the wrong reason. The idea of free trade is based on the concept of Comparitive Advantage, and elegant but simplistic theory which states that all trading partners can benefit when production moves to countries that have the lower cost of production. The theory fails for two reasons: one is that it's explicitly based on the idea that capital is not mobile between countries (an obvious falsehood) and the second is that there are no other distorting barriers to trade (like taxes, tariffs, subsidies, financing, etc.). Unfortunately neither of those conditions are true.
Considering the recent collapse of the recent "Doha round" of trade talks and the reasons givien, it's apparent that the current structure of trade talks aren't based on the capitalist or free trade models at all, but much more closely on the mercantilist or "zero-sum" approach to trade. It's also an example of how trying to shoehorn IP rights into a free trade agreement is another example of IP absolutists screwing up the economy (see the record companies if you want to see a good example of winning the battle and losing the war).
--I blame it all on the Internet
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)The nations that have the freest markets also happen to be the most prosperous. The correlation between economic liberalization and GDP is unmistakeable.
--"I want America to know that I'm, like, totally ready to lead." -- Paris Hilton
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)You cite a statistic re: 'economic freedom' that takes 10 factors into account, only one of which is free trade.
PM's pt. is that even if you have your finger on a genuine + interesting correlation (which is arguable), it must be the other 9 economic liberalization factors that are operative in accounting for GDP growth.
The diary is a good challenge to John + BG, who have both claimed that Obama's lack of support for unfettered free trade is a serious reason for voting against him.
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| parent )Go to the website and download the spreadsheet, then sort the list by trade freedom. The correlations are still strong.
--"I want America to know that I'm, like, totally ready to lead." -- Paris Hilton
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| parent )that all the free trade agreements in the world are for naught if it's too bloody expensive to move goods from point A to B.
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| parent )In big letters, the title of the post: Why Free Trade is, was, and always will be unimportant. A Big Claim was made in the title of the post, and the content doesn't support the Big Claim. That was my point. BTW, PM didn't supply a link to his blockquotes (it's here), but the main point of the piece wasn't free trade, but the effect that oil prices are having on globalized trade. Markets will adapt (in particular free markets), which means that companies are re-computing their time-motion analyses. Heavy, inexpensive items won't be shipped, and lighter higher-value items will.
--"I want America to know that I'm, like, totally ready to lead." -- Paris Hilton
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| parent )since no politician is in favor of "unfettered" free trade, it's all managed trade. Let's see McCain come out against all farm subsidies and the Import/Export bank before we start throwing the title of free trade champion around.
--I blame it all on the Internet
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| parent )Name a farm subsidy that McCain supports. I can't think of a one.
--"I want America to know that I'm, like, totally ready to lead." -- Paris Hilton
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| parent )LINK
--I blame it all on the Internet
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| parent )Read the article. It said he was more favorably disposed to the use of ethanol but he still opposed federal subsidies.
--"I want America to know that I'm, like, totally ready to lead." -- Paris Hilton
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| parent )In any case we should see the GDP numbers before we see the correlation at all. An interesting chart nevertheless, one that I hadn't seen before, thanks BD.
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| parent )but anyway, re: GDP vs. economic liberalization, consider some of the top 15 countries ranked by GDP.
3. China. Economic free rank = 126
7. Italy. Economic free rank = 64
10. Brazil economic free rank = 101
11. Russia Economic free rank = 134
12. India Evonomic free rank = 115
Those are 5 w. negative correlation, there are 4-5 w. a mild correlation and 5 or 6 w. a strong correlation. So it's pretty much a wash.
Anyway, this geenral correlation isn't particularly meaningful as a guide to policy choices since the question is at what stage of development it's wise to liberalize.
Developing nations have an overall poor record when liberalizing a la the IMF/World Bank models.
China, OTOH, has been a model of growth while comparatively ranking in the bottom 1/4th.
GDP #s are here; http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
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| parent )how the country as a whole advances. China and India, two examples, haven't improved as a whole. City dwellers do much better than their country cousins. Russia has a bushel of billionaires, but poverty in Russia is a huge problem.
And how do we sort out Hong Kong from the rest of China? That seems a bit odd, but it does reflect the realities on the ground. There's a useful lesson in that division, though: political freedoms are concomitant with economic freedoms. As Singapore advances, it has slowly introduced political freedoms in a uniquely Asian model.
Russia tried the political freedom route first, the economic freedoms were naive and hugely counterproductive. Now Russia tries economic freedoms, restricting political freedom. Where they don't advance together, the results are either anarchy and tyranny respectively.
China's engine is running white hot, the whole thing is headed for a meltdown shortly. As with the rest of the economically developed countries, they're hemorrhaging cash. The oil crisis is producing the largest transfers of wealth in the history of the world. It can't continue indefinitely. Even though China enjoys huge export surpluses, rural China is in absolutely terrible shape.
Anarchy or tyranny. That's where things are headed, until some new technology appears to replace petroleum. No society, no matter how economically or politically free, will survive the coming financial crises.
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| parent )Will almost certainly be fine. They've got no problem with all of the alternatives to oil that cause westerners to get their collective panties in a twist. If the PRC needs to keep cars and trucks on the road, then by golly, the PRC will build plants to turn coal into gasoline. If the PRC needs electricity for it's cities, then nuclear reactors and dams will get built.
It's the west that's probably going to have worse problems.
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| parent )30 years of Free Trade deals -- WTO, GATT, Doha, Uruguay . . . all of them combined are less important than a doubling of gas prices.
Free trade deals are tiny changes on the margin of our system, which is one in which enormous quantities of goods flow essentially unimpeded from nation to nation. No sensible person should make any decision about who to support based on these sorts of infinitesimal and unimportant issues.
--It's impossible to debate if people simply hold beliefs that have no grounding in reality.
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)While US tariffs may be low, tariffs in Uruguay or Peru might be high, and as a result they have more of an impact on the ability to enter and stay in a market then high gas prices might. I agree with the idea that the "free trade" argument has become a parody of itself but back before these trade deals were made high tariffs were a problem.
It is also important to point out that free trade agreements make markets more predictable. Business fears uncertainty more than just about anything else. If I am building a shoe factory in New Bedford and I sell most of my shoes in Uruguay then I want to make sure that the next gov't in Uruguay isn't put a large tariff on my product before I pour the foundation of my new factory. The best way to do that is a free trade agreement. Such things make a market more predictable. This is true not only for US supplies but also for Uruguayan buyers. If some company in Uruguay has to buy US products to make its products then a corrupt or Bush-like incompetent gov't in Uruguay can do a lot of damage to this company by throwing up a high tariff on US goods. Another thing to remember is that third world countries have historically been quite poor. As a result, sticking it to the rich factory owner can have more to do with politics than sound economic policy.
I would like to see more debate about "fair trade" at this point.
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| parent )Free trade deals are tiny changes on the margin of our system
I would have thought that the opposite is true ie that FTA lead to very significant changes at the margins, while leaving the centre basically untouched. There's nothing more marginal in our economic system than Haiti, and yet according to TV reports I've seen recently from the island, the local rice growing there has been devastated by imports of cheaper rice from the USA. This is not an unimportant issue on the margins.
--Nothing resembles virtue more than a great crime. Saint-Just
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| parent )since the impact is roughly equivalent to the impact of the FTAs?
p.s. also curious what you mean by 'maintenance'.
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| parent )and the best example is our long history with Canada and the related trade agreement(s) made.
--“Let us go forth to lead the land we love, asking His blessing and His help, but knowing that here on earth God’s work must truly be our own.”
John F. Kennedy
January 20, 1961
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| parent ). . .the designers of the World Trade Center wasted all of that time and money installing insulation, since the money saved on utility costs over thirty years was insignificant compared to the cost of replacing them after they were blown up.
Apples and granola. Heavy on the granola.
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| parent )Gas prices doubling is important + would've had a greater negative impact but for FTAs.
How does that support the conclusion that FTAs are unimportant and that only maintenance matters?
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)as well as the North American Free Trade Agreement. Imagine if we can keep ballots private, will the manufacturing jobs flow back.
--“Let us go forth to lead the land we love, asking His blessing and His help, but knowing that here on earth God’s work must truly be our own.”
John F. Kennedy
January 20, 1961
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). . .if all of those trade barriers were still in place, the price of gas wouldn't have gone up? It seems like you're comparing apples and granola here.
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)