Category Archives: Trade

Charles Davenant on the Need for Humility in Policymaking

Douglas Irwin, on page 53 of his 1996 book Against the Tide: An Intellectual History of Free Trade, quotes from page 32 of Charles Davenant’s 1696 Essay on the East India Trade:

“Wisdom is most commonly in the wrong, when it pretends to direct nature.”

This wisdom applies to much more than trade restrictions and government-granted monopolies.

Kimberly Clausing – Open: The Progressive Case for Free Trade, Immigration, and Global Capital

Kimberly Clausing – Open: The Progressive Case for Free Trade, Immigration, and Global Capital

This is a book that needed to be written. Progressives have long had a complicated relationship with trade and immigration. On one side, there is a free-trade tradition including progressive heroes such as Cordell Hull, FDR’s Secretary of State; President John F. Kennedy, who passed the 1962 Trade Expansion Act and after whom a major round of liberalizing GATT negotiations was named; and Bill Clinton, who signed NAFTA in to law.

On the other side, the progressive movement’s labor and environmental wings often have at best a transactional relationship with free trade, and at worst an outright hostility to it. Many younger people with social democratic leanings, as well as the older generation of presidential candidates, such as Elizabeth Warren and Bernie Sanders, have views on trade that are almost identical to President Trump’s. This is a problem Clausing seeks to address.

She mostly makes the usual economists’ arguments in favor of free trade and immigration. This is fine; trade scholars are not her intended audience, progressives are. Clausing’s progressive credentials help to open the ears of an audience that is often closed to similar messages from different messengers. One particular reason that should resonate more than it does is that free trade and liberal immigration are extremely effective anti-poverty policies. And here, Clausing does a good job of explaining why. But she encounters two problems in her book, one of which is not her doing.

Part of the problem in getting more progressives to support pro-poor trade and immigration policies ties into a political realignment that is currently happening, as the historian Stephen Davies and my colleague Iain Murray have been arguing. For most of the post-war period, the dominant political debate was capitalism vs. socialism. Most people and political parties placed themselves somewhere on that spectrum, and thought of themselves in those terms. That dynamic is largely gone now. Just as conservatives under Trump are no longer a free-market-lite party, progressives are no longer a socialism-lite party, younger social democrats’ pretensions to the contrary. Their fight is on different grounds now.

People are beginning to realign themselves on a different axis—nationalism vs. globalism. Conservatives are rapidly taking over the nationalist side. But progressives haven’t quite chosen their path yet—this complicate’s Clausing’s job. Part of the problem is personality. Trump provides a strongly nationalist figure for conservatives to rally around. As of this writing the progressive side lacks such a figure, whether also a nationalist or more cosmopolitan. There is not likely room for two nationalist parties, but Democrats still haven’t made their choice. If Clausing pushes them in the cosmopolitan direction, she will have done a major service.

These political realignments happen every few generations. The current realignment is neither the first nor last time something like this will happen. But it does explain an awful lot of strange political bedfellows in recent years. Bernie Sanders and Donald Trump essentially have the same immigration beliefs, and for similar reasons. Fox News host Tucker Carlson was surprised to find himself very much agreeing with Democratic Senator and presidential candidate Elizabeth Warren’s economic patriotism plan.

Large parts of Open also have little to with trade and immigration. I am unsure of whether this is a good thing or a bad thing. Her digressions on taxes, regulations, and inequality are standard-issue, and progressives will find little to object to. On the plus side, this can make her market-liberal trade and immigration stances more palatable, especially to progressives still unsure about their place on the nationalism-cosmopolitanism divide. On the other hand, her proposed regulatory policies would reduce the benefits of open trade and immigration. And her views on inequality focus on ratios, rather than people, precisely opposite the liberal approach that would help the poor. For more on this, see Iain Murray’s and my papers on the subject, “People, Not Ratios” and “The Rising Tide.”

Flaws and all, Clausing has written an important book that has the potential to do a lot of good. Ideally, she will not only nudge progressives in a more free-market direction on trade and immigration policy, she will encourage them to take a more cosmopolitan stance in order to provide an effective opposition to an increasingly nationalist conservative movement.

In the Media: USMCA

Yesterday’s New York Times notes CEI’s opposition to USMCA:

Free traders have also panned the deal, which aims to encourage North American manufacturing by raising barriers to products made outside the continent. The Competitive Enterprise Institute, a nonprofit public policy organization that advocates limited government, announced that the new agreement’s “trade-unrelated provisions and political giveaways set precedents that could harm future trade agreements for decades to come.”

Full article here. Iain Murray’s and my joint statement opposing USMCA is here.

In the Media: USMCA

The Wall Street Journal‘s Jeffrey Sparshott quotes me in this morning’s Real Time Economics newsletter:

Don’t Call it Nafta

The House of Representatives approved President Trump’s amended North American trade pact on Thursday. The U.S. Mexico Canada Agreement, or USMCA, passed by a 385 to 41 vote. The Senate is expected to approve the legislation early next year, after which the president would sign it into law. Mexico’s Senate has approved the deal, but it needs ratification in Canada to enter into force and replace the North American Free Trade Agreement, or Nafta.

The Competitive Enterprise Institute’s Ryan Young: “Its economic impact will be almost too small to measure.”

The newsletter is here. My original statement is here. Iain Murray and I came out against USMCA here.

On the Radio: China Trade

On Monday, December 16 at 6:35 AM ET, I’ll be on Richmond’s Morning News with John Reid on WRVA to talk China and trade.

That’s 5:35 AM for me here in the Central time zone. Fortunately, I’m always happy to talk trade policy.

Phase One of a China-U.S. Trade Agreement and the Ratchet Effect

As of Friday, December 13th, the U.S. and Chinese governments have agreed in principle to phase one of a trade agreement. The Chinese government will purchase more U.S. agricultural products, and according to The Wall Street Journal, “Mr. Wang [China’s Vice Minister of Commerce] said that the agreement would cover a range of contentious issues, including agriculture, intellectual property protection, technology transfer and liberalization of the financial sector, without elaborating.” The U.S. will hold off on a planned tariff increase set for Sunday, December 15th. It will also decrease tariffs on $120 billion of Chinese goods from 15 percent to 7.5 percent.

Details are still sketchy at this point, and are subject to change. The agreement also needs to be formally ratified by both countries. It is unclear how long this would take. President Trump also has a history backing out of already-announced major policy changes, and might do so again at any time. This might partially explain Beijing’s muted tone, and why they did not announce such a significant deal until after Beijing’s markets closed. A sudden gain on Friday’s news could be wiped out, or worse, on Monday if Trump backs out over the weekend.

But for the sake of argument, suppose phase one is ratified smoothly. Where would U.S.-China trade stand? It would still be worse off than just a few years ago. Both countries’ trade barriers would remain higher than before the trade war started. The trade war is a fresh example of the “ratchet effect” Robert Higgs warned about in his classic book Crisis and Leviathan. A crisis results in expanded government power, which is never fully walked back. Post-crisis leviathan remains larger on net.

In this case, a fabricated crisis over Trump’s misunderstanding of trade deficits has created a new trade leviathan. If it is ever tamed, it will take years. Both U.S. political parties are taking a populist turn. Chinese President Xi Jinping has spent six years consistently re-centralizing China’s economy and rejecting needed economic and political liberalization. Tariffs from the U.S. are clearly not encouraging better behavior. In this political climate, two years of trade mistakes might take a generation to fix, or longer. Both countries would be better off if they had never fought a trade war in the first place.

Many of China’s promised phase one reforms are vague, and difficult or impossible to measure. It is also unclear what will happen to China’s retaliatory tariff increases, which are penalizing U.S. exporters even as China has lowered its tariffs against the rest of the world over the last two years. The ratchet will remain tighter than before the trade war. It is just a question now of how much tighter.

The story is similar for the U.S., which will keep in place 25 percent tariffs against $250 billion worth of Chinese goods that did not exist two years ago. Those still-new tariffs will keep consumer prices artificially high after phase one passes. Companies in all manner of industries will still be scrambling for ways to adapt to suddenly higher costs and disrupted supply chains.

Businesses in both countries are having to make important long-run decisions right now with no idea of what’s to come next. This is bad for investment, and one reason the risk of recession in the U.S. remains uncomfortably high despite an otherwise-excellent economy.

President Trump has said that phase two negotiations will begin immediately, but there is no indication yet what his goals are for phase two, what its timetable will be, how many phases there will be, or what Trump’s ultimate policy goals are. These will be Trump’s problems for at most another five years. Most businesses hope to be around for rather longer than that, and would like to be able to plan accordingly.

CEI Opposes USMCA

This is a joint statement from Iain Murray and me, originally posted at CEI.org.

The Competitive Enterprise Institute (CEI) today announced its opposition to the USMCA agreement between the United States, Mexico, and Canada.

Statement by CEI Vice President for Strategy Iain Murray and senior fellow Ryan Young:

“While USMCA is not that different from NAFTA, its trade-unrelated provisions and political giveaways set precedents that could harm future trade agreements for decades to come. USMCA’s acronym, which scraps NAFTA’s “F” and “T” standing for “Free Trade,” is more telling than its drafters likely intended.”

Murray and Young make the points that trade negotiations should:

  • Free trade, not manage it.
  • Set economic precedents, not political ones.
  • Allow countries to compete with one another on setting least-onerous regulations, not standardize a one-size-fits-all regulatory regime for all countries.
  • Focus on trade, not include more than 2,000 pages of campaign bragging points and payoffs to political constituencies.

Unfortunately, the USMCA:

  • Preserves NAFTA’s near-zero tariffs between its members but raises several non-tariff barriers, from export quotas to sourcing requirements to monetary policy.
  • Is filled with trade-unrelated provisions that do not belong in a trade agreement. Energy and environmental provisions will narrowly benefit politically connected companies and activists but raise consumer prices and reduce their choices. Regulatory obstacles for automobile parts will dismantle supply chains that have taken decades to build and make new cars even more expensive. Labor provisions, aimed at buying union political support, that will reduce access to Mexican products for U.S. producers and consumers.
  • Will influence how upcoming agreements are made with China, the United Kingdom, and the European Union.

CEI opposed the original NAFTA because its non-tariff barriers and trade-unrelated provisions could become entrenched in future trade agreements – fears that proved well-founded.

Related analysis:

Traders of the Lost Ark

The Ideal U.S.-U.K Free Trade Agreement