Category Archives: Economics

Two New Studies on Economics of Trade

Our friends at the Property Rights Alliance and the Mercatus Center have just released two new papers that are well worth reading.

First, Philip Thompson and Lorenzo Montanari have compiled a Trade Barrier Index, just released by the Property Rights Alliance. The U.S. currently ranks 54th out of 86 countries. Singapore and Hong Kong rank 1st and 2nd, while India and China bring up the rear at 85th and 86th, respectively. Among our neighbors, Canada weighs in at 10th, while Mexico is 58th. Their index takes into account four policy areas: tariffs, non-tariff barriers, barriers to services, and trade facilitation, such as participating in international trade agreements and the World Trade Organization.

It is highly useful to have a ranking system for making international comparisons. Even with all the tariff hikes of the last two years, it was still surprising and disappointing to see the U.S. ranked as low as 54th. Hopefully future editions of the Trade Barriers Index can add historical data to give greater context, such as how far the United States has fallen in the last two years, and how much the world as a whole has liberalized trade barriers since the end of World War II.

Protectionists are often quick to point to fast-growing China and India’s protectionism as proof that trade barriers can help growth. But liberalization at the margin can have a huge positive impact on growth; going from terrible policies to merely bad ones still counts as improvement, and can still lift people out of poverty. Further liberalization would help even more. China and India have liberalized, imperfectly, along many trade and non-trade policy dimensions post-1978 and post-1991, as Arvind Panagariya points out in great detail in his excellent book Free Trade and Prosperity: How Openness Helps Developing Countries Grow Richer and Combat Poverty. Thompson and Montanari’s Trade Barrier Index allows us to see how countries fare on trade policy compared to other policy areas such as property rights, regulation, and corruption measured by other indices.

Second, the Mercatus Center’s Veronique de Rugy has a much-needed new policy brief, “New Protectionism: Still Protectionism and Bad Economics,” which punctures some common myths about trade. These include:

  • The 19th-century United States grew despite high tariffs, not because of them. Territorial growth and open immigration grew the domestic market for U.S. goods faster than protectionism could shrink their international markets.
  • The East Asian tiger economies didn’t grow because of tariffs or industrial policy. On net, post-war South Korea, Singapore, Hong Kong, and Taiwan were vastly more liberal than before, even accounting for their varying levels of tariffs, export subsidies, and other interventions. It was this net liberalization that paid dividends. As Panagariya points out, growth accelerated once export promotion policies were lessened.
  • U.S. manufacturing output is at near-record levels. At the same time, manufacturing employment is down, and this is a good thing. The goal of manufacturing is not to create jobs, it is to create things that people value. In an ideal world, all that value would be created without anyone having to lift a finger. This will obviously never happen, but when record output comes from ever fewer workers, it’s a step in that direction. The workers whose time and talent are being freed for other, additional uses make the rest of the economy more productive, too. The adjustment is not always painless, but many government policies intended to help can worsen the problem. Legislators should heed Veronique’s advice and tread lightly here.
  • The middle class is indeed shrinking—because people are moving into the upper classes. The proportion of people making between $35,000 and $100,000 per year, inflation-adjusted, has been shrinking for years. This isn’t because incomes are going down. It’s because they’re going up. Declining global trade barriers over the last 75 years are a significant reason why.
  • Subsidies do not make trade fair. China subsidizes many of its exports. This is good for American consumers, but bad for the Chinese people, who are paying to further enrich people who are mostly richer than themselves. A similar dynamic applies in the United States. In order to subsidize or protect one American industry, Washington must penalize American consumers and other American industries, all in order to give foreign buyers a price break. Contra Peter Navarro, trade cannot be fair unless it is free.

Trade protectionists have called on a wide variety of arguments to justify raising barriers, from growth to nostalgia to inequality to fairness. As Veronique points out, none of them hold up to scrutiny.

Philip Thompson and Lorenzo Montanari’s Trade Barrier Index is here. Veronique de Rugy’s “New Protectionism: Still Protectionism and Bad Economics” is here.

Trade Developments on Export-Import Bank and NAFTA/USMCA

America’s trade policy landscape has some big events on the horizon. The House of Representatives will vote next week on Rep. Maxine Waters’ (D-CA) Export-Import Bank reauthorization bill. The Trump administration has signaled opposition to it, making it unlikely to become law. The administration favors Ex-Im renewal, but likely wants it to be more bellicose towards China. As I predicted earlier, Ex-Im’s most likely next step is a short-term reauthorization in the upcoming Continuing Resolution, due November 21st. The agency should be closed, but that is unlikely in the current policy environment. A recent paper of mine lists some second-best reforms that Congress and Ex-Im should pursue.

On Tuesday, November 12th, President Trump is set to give a major speech on trade. He will likely give an update on the first phase of a new trade deal with China. High-level meetings have been taken place, though nothing has so far been formally agreed to. Nothing would be signed until December at the earliest.

European car tariffs are also in play, and may also come up during the speech. President Trump has long wanted to tax European cars on national security grounds, and is due to make a decision on whether to enact such tariffs by November 14th. A new tariff, by raising tensions with an ally Trump needs on China issues, would work against the administration’s efforts to encourage Chinese trade reforms. Further complicating matters, many European cars contain significant amounts of U.S.-made parts, and European carmakers own several U.S. factories employing U.S. workers.

Finally, a vote on the new North American Free Trade Agreement (NAFTA)/United States–Mexico–Canada Agreement (USMCA) still has a chance of happening by the end of the year, though there is no guarantee. The new agreement changes little from the first NAFTA, and 57 percent of its language is taken verbatim from the Trans-Pacific Partnership, which Trump pulled the U.S. out of on his third day in office. Due in part to the low stakes, Democratic opposition has not been forceful. The main holdup right now is organized labor trying to get rent-seeking provisions added to the final agreement. Given the high priority Trump has placed on passing NAFTA/USMCA, they may well succeed.

Export-Import Bank Reauthorization Update

It is a busy time right now in the Export-Import Bank reauthorization battle. Rep. Maxine Waters (D-CA) introduced a new bill to reauthorize the Export-Import Bank for the next 10 years. It would attempt to improve Ex-Im’s image not by reforming the agency, but by changing its name. Her bill for the proposed Export Finance Agency was marked up in committee on Tuesday, but is unlikely to pass. Ex-Im’s charter is currently set to expire on November 21, when the current Continuing Resolution (CR) ends.

Waters’ bill ran into bipartisan opposition. Republicans such as Rep. Patrick McHenry (R-NC) want Ex-Im reauthorization to be tough on China. He cosponsored a previous version of the bill that contained such language. Its removal in the new version caused him to withdraw his support, and to call the bill “weak sauce.”

Some Democrats such as Rep. Denny Heck (D-WA), worry that the tough-on-China language would limit Boeing’s ability to get Ex-Im financing. China is Ex-Im’s largest foreign beneficiary, and state-owned Air China, a Boeing customer, is Ex-Im’s single largest foreign client. Boeing is one of Heck’s constituents.

Other Democrats, including Rep. Rashida Tlaib (D-MI) and Aryanna Pressly (D-MA), oppose Ex-Im financing being used for fossil fuel projects. Pemex, Mexico’s state-owned oil company, is another major Ex-Im client.

Neither party seems much interested in critiques against Ex-Im’s cronyism, corruption, and ineffectiveness.

What are the likely next steps for Ex-Im? The Waters bill could possibly pass the Democratic House, but not the GOP Senate. A similarly awful Ex-Im bill from Sens. Kyrsten Sinema (D-AZ) and Kevin Cramer (R-ND) similarly lacks traction. Meanwhile, Congress has more pressing matters on its plate. Besides the impeachment investigation taking up much of leadership’s attention, a new CR needs to pass by November 21 to avoid another federal shutdown. Congress is out of session until November 12, making for a tight time frame. Neither the Waters bill nor the Sinema-Cramer bill will likely be able to go through the full legislative process by then.

That means Ex-Im will likely get a short-term extension in the new CR, similar to what happened in September. Though both parties want to reauthorize Ex-Im, they currently disagree too much on the particulars to fold a full reauthorization bill into a must-pass CR. Neither party sees any advantage in a shutdown, so where possible they’ll keep anything controversial out of the CR to keep the process smooth. Simply continuing Ex-Im’s funding as-is for a short time will give Congress some time to hash over details and pass a full reauthorization bill before the new CR expires.

The Sinema-Cramer bill is a reformless disaster. The Waters renaming bill is no better. Both bills would extend Ex-Im for another 10 years, increase its portfolio cap to $175 billion, and end its board quorum requirement for funding projects over $10 million in size. Absent a new, better bill, the best feasible option for Ex-Im reform is to amend whatever legislation that reaches the floor with substantive reforms to limit Ex-Im’s cronyism, internal corruption, and dealings with shady governments. Several ideas are in my recent paper. Moreover, not all of them require Congressional action. There is much Ex-Im can do internally to improve its business model, and there is much the White House can do if it is interested in reform. The best policy, of course, is to close Ex-Im.

Sidney W. Mintz – Sweetness and Power: The Place of Sugar in Modern History

Sidney W. Mintz – Sweetness and Power: The Place of Sugar in Modern History

Mintz tells the story of sugar from an anthrolopogist’s perspective, with a focus on working-class Britain. A weakness is that he views economics through a Marxian lens (though not ideologically Marxist), with an emphasis on concepts such as ownership of the factors of production, power relations, and class structure that seem odd to contemporary readers. This instantly dates this book in the reader’s mind to the mid-20th century, when this approach was fashionable. A quick bit of research shows that Mintz was born in 1922, so his scholarly training and career began precisely at the peak of this movement. This book came out in 1986, towards the end of Marxian analysis’ credible period. As an older scholar by then, Mintz still retained much of his earlier training. That said, Mintz does recognize that slavery was not a capitalistic mode of production, and that economists such as Adam Smith opposed both slavery and imperialism.

Other oddities include his use of the term “balancing the accounts of capitalism,” the meaning of which is unknown to this trained economist. Mintz also does his credibility no favors when he describes sucrose-heavy modern diets among lower-class people as a form of intentional, culturally-approved population control, which operates by depriving children of protein and other nutrients. Mintz then cites the Reagan administration’s school lunch policies as an additional form of population control.

Mintz’s analysis is much better on non-economic parts of sugar’s history. His emphasis is not on the science of sugar, or its culinary or nutritional properties, but he is strong on its cultural impacts. The meat of the book on Britain’s working classes from roughly 1600-1900, presumably his specialty in his scholarly research. Mintz goes into how sugar is farmed and processed, how it related to other crops, where it sat in people’s diets and how the growing sugar trade changed diet and nutrition worldwide for people of all classes, though again with an emphasis on Britain. He also goes into sugar’s pre-Atlantic history, which is mentioned in Europe as far back as the Venerable Bede in the 8th century. Henry VIII was an avowed fan, and his court was a major user of the then-expensive spice.

He doesn’t go extensively into sugar’s non-British history, but does mention the Arabic enlightenment physician Avicenna’s (d. 1037) views on sugar. Also of interest are historical views on sugar’s medicinal value in various forms that no longer pass muster, such as powder for the eyes and smoke for the lungs, as well as its usefulness for disguising both medicines and poisons. Some doctors viewed sugar as a cure-all in the early 1700s, though its role in diabetes was also discovered around the same time. Its effects on weight and teeth were also well-known; Elizabeth I apparently had quite a sweet tooth, which had turned black by her old age. There was also a harmful superstition that eating large quantities of fresh fruit was harmful to one’s health. But I do share the time’s positive view of honey, which in my opinion is underrated as a sweetener.

Another historical quirk is how intimately the British paired sugar, imported from thousands of miles to the West, with tea, imported from thousands of miles to the East. Mintz argues that this is partially because tea displaced beer as the working class’ favored drink. In a time of poor sanitation, beer’s germ-killing alcohol made it safer than water. It also made up a non-negligible portion of daily calorie intake for many poorer people. Tea did away with those calories and other nutrients from wheat, which had adverse health consequences. This may explain why the English so commonly replace those calories by putting sugar and milk in their tea, whereas many other cultures do not.

John Steele Gordon – A Thread Across the Ocean: The Heroic Story of the Transatlantic Cable

John Steele Gordon – A Thread Across the Ocean: The Heroic Story of the Transatlantic Cable

The story of Cyrus Fields, a 19th century entrepreneur who laid the first transatlantic cable. Fields was a man of rare persistence. As Gordon puts it on page 12, “But it was Cyrus Fields alone who made it happen, for he served the same function in the enterprise of the Atlantic cable that a producer serves in a theatrical production. A producer does not act or direct or design scenery. But without him, neither does anyone else.” Fields was around at the right time—but he also the right person.

Telegraphy had been around for a bit by the time Fields got started, and people had also figured out that it was possible to lay cable underwater. Earlier initiatives had crossed the English channel, and of course the U.S. had a transcontinental cable over land. But Fields’ grand project required a new suite of innovations everywhere from sea exploration, knowledge of water physics, electric conductivity, cable insulation, ballast and weight for ships, diplomacy, and international finance. Fields, often through sheer force of will and personality, headed up a multi-year effort using  massive amounts of capital to successfully finish the project. There were numerous setbacks, and the on-the-ground (water?) problem-solving his ships’ crewmembers were able to improvise, at times during hostile weather, are both impressive and inspiring.

Fields paved the way for today’s transoceanic cables capable of carrying not just phone calls, but Internet traffic, video communications, and more around the world. As heroes of invention go, Fields deserves a much more prominent place on the list.

C. Donald Johnson – The Wealth of a Nation: A History of Trade Politics in America

C. Donald Johnson – The Wealth of a Nation: A History of Trade Politics in America

Doug Irwin’s Clashing Over Commerce is the gold standard for U.S. trade histories, so Johnson is easily forgiven for not equaling it. While he doesn’t have Irwin’s command of economic theory or larger themes, Johnson does have a good eye for politics. This makes sense, as his political career has taken him from a House committee staffer to a member of Congress (a moderate Georgia Democrat, he voted in favor of NAFTA), to part of the U.S. Trade Representative’s office.

Johnson’s history starts when the country does, and he hits the usual notes. Johnson covers the Madison-Hamilton debate and Hamilton’s American System proposal, Thomas Jefferson’s failed experiment in protectionism against Britain, the 1828 Tariff of Abominations, how northern industrial interests’ protectionism added to southern agricultural resentment in the Civil War buildup (slavery was far and away more important, but tariffs were also part of the story), right on up to the 1920s Fordney-McCumber tariff and the infamous 1930 Smoot-Hawley tariff that worsened the Great Depression.

As with Irwin’s history, this is where FDR’s Secretary of State Cordell Hull comes across as an unlikely free-market hero. He understood all the usual economic arguments for free trade, but he pushed especially hard for free trade as a policy of peace. That he did so during the 1930s buildup to World War II was especially courageous. The old argument that killing the customer is bad for business goes as far back as Montesquieu, whose Spirit of Laws predates Adam Smith’s Wealth of Nations by a generation. Hull stood out in his ardor, his prominent political position, and his time in history in the importance of his trade advocacy.

After World War II, Hull played a major role in building the international infrastructure that served to drastically lower tariffs around the world over the last 75 years, until the current administration.

Johnson played a small role in this process beginning in the 1970s, and this is where his history’s comparative advantage comes out. He has personal knowledge of the political dynamics of the time, and a specialist’s knowledge of textile policy, which was one of the most contentious areas of post-war trade policy until the Multi-Fibre Arrangment (MFA) was finally ditched in 1995 as part of the WTO’s creation. He has also done a great deal of work on labor provisions in trade agreements. I part company with him on his policy preferences in both of these areas, but his knowledge of both policy details and the political process is valuable.

Wisdom on Inequality

From p. 145 of Arvind Panagariya’s 2019 book Free Trade and Prosperity: How Openness Helps the Developing Countries Grow Richer and Combat Poverty:

“[In] the developing countries, wisdom lies in attacking inequality through poverty alleviation rather than by focusing on inequality, which comes in many forms. Excessive preoccupation with inequality risks the adoption of policies that undermine wealth creation and hence poverty alleviation.”

Moreover, the arguments holds in all countries, not just developing ones. The poor are best served by tending to people, not ratios.