Trade Protectionism

[luiz]

Free Trade looks nice in theory but the reality is that much of the 19th and 20th ceturies saw a huge expansion of workers rights in the western world (rights that affect profits). Free Trade is now an easy bypass system to labor laws. You don't like paying your workers a living wage? You don't like giving them Healthcare and Paid Time Off. You don't like spending some extra cash to reduce the pollutents your factory puts into the air? Well move over shores and you don't have to worry about it anymore.

That may seem not nice, but it's the only way to develop those nations. If the poor nations had a minimum wage similar to the american one, NO INDUSTRY AT ALL would stay in their country.

Keep in mind that while it's true that the average indonesian is really bad-off, he is much better then what he was 20 years ago, before factories moved to his nations. This is factual, and can be proved by the evolution of the per capita GDP in those nations.

If you really care about the Third World, support Free Trade(it will also bring benefits to the First World, btw)

 

[Evertonian]

.
@Evertonian

I understand your concern, but keep in mind that as rule the profits created by the commerce will outweight the actual loss of capital. I'll give one exemple that contains both situations:

A Nestle factorie moved to Brazil, plenty of them. The swiss were concerned that this would take incmoe out of their country, since they would have to pay a lot of brazilian employess instead of swiss. However they profitted twice: the overall prices dropped and Nestlé of Switzerland received royalties from the new factory. All in all, the benefitts outweight the losses.

As for the brazilians, many were concerned that the outflux of royalties would deteriorate our debt situation. Many radical parties untill today call for a ban of foreign corporations, or protective policies towards national industries. What they do not know is that every new factory leaves an ammont of cash here far superior to then what leaves the nation. I have the actual numbers of a Ford factory installed in Rio Grande do Sul. They pay for Ford USA a couple of million dollars a year. They left in Brazil 2 billion dollars in direct investment. So everyone profitts

@luiz
Thanks for your comments.

First, I think free trade in goods and services is desirable most of the time. I was trying to come up with an example where it was economically bad, given my discussion with betazed earlier in the thread.

The amount of capital inflow (or outflow) is always (by necessity) exactly equal to the balance of payments deficit (or surplus).

In your example the Brazilian economy and the Swiss economy benefitted, and although I only know on this example what you told me, it sounds plausible and reasonable that it was mutually beneficial.

Now right now the Brazil economy is running a Balance of Payments surplus, so the royalties being sent to Switzerland are not sufficient to cause the situation I described.

However say an economy was running a deficit of $100bn of GDP (on trade alone and excluding royalties), and its net international debt to overseas was say, $500bn. Now say the rate of return on debt that foreign agents on average received from the assets held in that economy was 5%. It would mean that next year net debt was $625bn ($10bn from deficit $2.5bn in debt service costs). The year after it would be
$756.25. After 10 years the debt would be $2000bn, and the interest payments abroad would be as big as the actual trade deficit, and they would be increasing exponentially.

If these figures represented a small amount of GDP it wouldn't matter because an adjustment back to equilibrium would be painless. But if the debt to abroad represented, say, 50% to 100% of the GDP an adjustment would be incredibly painful, and the government would be guilty because they hadn't done something to stop it before.

In the above example I used royalties as a catch-all for interest payments, dividends and other payments that are received from assets held overseas.

 

[luiz]

@Evertonian
In Brazil we currently have a deficit of around 110% of our GDP(in actual numbers, not in Purchasing Power Parity). And the interest payments represent the largest part of the debt, since we borrowed money on a flexible interest rate, and after the oil crisis they rised exponentially(and we went bankrupt in 1989)

Even if it's true that today we're running on surplus, historically we run on deficit. The strategy used to revert the situation was to atract foreign corporation and focus on exports. Using the Nestle exemple, we export the product beign made there for the US and Europe. The income with exports outweights the royalties payment. I wish I could be more clear but English is not my first language.

 

[betazed]

@Evertonian:

It seems to me that you are saying that when there is a trade deficit then a protectionist policy is better economically to reduce future interest/payment burden. Here is what I think.

yes, putting a tarriff would reduce your trade deficit somewhat but it might end up reducing your GDP even more because of lack of imports. This dictum has been eminently verfied by developing countries (China and India come to mind). No amount of tarriffs and customs duties reduced their trade deficits. When you stop some imports then industries which use those imports (and sometimes generate exports) shut down. So it reduces GDP in two ways, reducing internal consumption and exports. This is principally because you cannot isolate the impact of goods imported from the goods exported.

I agree a burgeoning trade deficit is asking for trouble (which is the reason I fear for the US economy). However, the solution to get out of it is not less trade but more trade. You get out of it by increasing exports and not by decreasing imports. This is the lesson that China and India learnt the hard way.

To this let me add that yes there are some imports that can be curbed by some tarriffs. If it can be shown that some product imported does not add to the economy's exports or GDP in any other component apart from pure consumption then yes putting a tarriff on it makes sense. Sports cars and lipsticks come to mind.

 

[Evertonian]

@luiz
I don't want to get sidetracked into a debate about the Brazilian economy as I'm sure you know far more about it than I do. But I have one question, what does the 110% refer to? Do you mean the total Government debt? Or the net debt of the economy to abroad? There is a difference.

In the US for example the total Government debt is 70% of GDP (not all that high), whereas the economy's net debt to abroad is 35% of GDP (shockingly high). The reason that the second figure can be so much lower is because it implies much US government debt is held by the US private sector.

 

[luiz]

@luiz
I don't want to get sidetracked into a debate about the Brazilian economy as I'm sure you know far more about it than I do. But I have one question, what does the 110% refer to? Do you mean the total Government debt? Or the net debt of the economy to abroad? There is a difference.

In the US for example the total Government debt is 70% of GDP (not all that high), whereas the economy's net debt to abroad is 35% of GDP (shockingly high). The reason that the second figure can be so much lower is because it implies much US government debt is held by the US private sector.

I mean the total Government debt. Around 250 Billion Dollars are of External debt, the rest is held by the brazilian private sector(Something like 320 Billion Dollars).

 

[Evertonian]

@betazed I was hoping you would read it as I knew you'd have some intelligent things to say about it

@Evertonian:

It seems to me that you are saying that when there is a trade deficit then a protectionist policy is better economically to reduce future interest/payment burden. Here is what I think.

Yes that's right. In particular when there was a threat of the interest payments themselves causing the deficit to spiral exponentially. Ultimately if that point was reached the only solution would be an extremely large and painful cut in private and public sector consumption.

yes, putting a tarriff would reduce your trade deficit somewhat but it might end up reducing your GDP even more because of lack of imports. This dictum has been eminently verfied by developing countries (China and India come to mind). No amount of tarriffs and customs duties reduced their trade deficits. When you stop some imports then industries which use those imports (and sometimes generate exports) shut down. So it reduces GDP in two ways, reducing internal consumption and exports. This is principally because you cannot isolate the impact of goods imported from the goods exported.

I agree a burgeoning trade deficit is asking for trouble (which is the reason I fear for the US economy). However, the solution to get out of it is not less trade but more trade. You get out of it by increasing exports and not by decreasing imports. This is the lesson that China and India learnt the hard way.

To this let me add that yes there are some imports that can be curbed by some tarriffs. If it can be shown that some product imported does not add to the economy's exports or GDP in any other component apart from pure consumption then yes putting a tarriff on it makes sense. Sports cars and lipsticks come to mind.

Agreed, you'd certainly want to target your protectionist measures so that you didn't hit raw materials you needed to supply your export industries.

 

[Evertonian]

I mean the total Government debt. Around 250 Billion Dollars are of External debt, the rest is held by the brazilian private sector(Something like 320 Billion Dollars).

Thanks luiz
In my example I meant the total debt of private and public sector held by overseas agents, minus the total overseas assets held by domestic agents. So I think the debt we were talking about was different debts.

 

[betazed]

Agreed, you'd certainly want to target your protectionist measures so that you didn't hit raw materials you needed to supply your export industries.

I want to point out something else.

The problem is that you do not know what "raw materials" mean? Let's take India for example. It has a huge software industry and also a budding hardware industry. Now what is raw materials for India? Is it silicon chips, machines to make silicon chips? Or is it fully functional boards? Or maybe computers for its software industry? Or is it OS level software and nothing else? Or is it application software for services?

As you can see it is very hard to define "raw materials". What is considered raw materials for one is really the output of another. So you can very rarely identify anything that is raw materials from the entire economy viewpoint. Hence targetting raw materials for exemption of protectionism and trying to put protectionism for everything else is impossible because everything can be deemed as raw materials for something else.

Hence you are better off not putting protectionism meausres on anything for economic reasons. That way you are wrong less number of times (which is usually the best you can do in most cases in real life)

 

[luiz]

@betzed

I have to agree. As Hayek used to say, the ammount of information needed to actually manipulate the functioning of the economy is so huge that the best way to avoid catastrophic mistakes is to let the economy run on itself.

 

[Ozz]

As Luiz pointed out what you say is not actually true. The living standards of the poor did increase when free trade was ocurring.

However, even if the living standards fell (which they didn't), and even if you could show a correlation between income disparity and free trade (which there isn't) does not mean that they are cause and effect. Just because two things are correlated does not mean that one causes other.

As I said (I think the fourth time since yesterday) there is little point in duscussing these things unless you study them formally.

Really? Diposable income and buying power both increased, Well I seem to
have noticed a real decline in the standard of living regardless of the
stats you base your arguments on, of course those stats may be just as
good as the accounting coming out of Exron, Northern Telecom etc eh?

How good is your health, dental, eyeglasses, retirement plan compared
with yer father's or grandfather's? That is if you even have one. Notice
the new pawn shops, cheque cashing, food banks and soup lines, hav'nt
see propersity like that since the 1930s.

I have studied them "formally" BTW, but your correct there is little point in dicussing these things if the discussion is limited to state-approved theories and facts and the evidence of our own senses is to be discounted.

 

[bigfatron]

Really informative discussion, thanks guys!

What comes across (apart from a very informative lesson in macro-economics) is the subtle distinction between the general wealth of a country and the general well-being of its inhabitants. The two things are closely linked, and in general things that benefit the general economy are also good for the well-being of the population, but there are effects of free trade and free enterprise that need to managed.

The error of most governments perhaps comes from trying to prevent free-trade rather than mitigate its effects - to use Luiz' example, to impose tariffs or provide subsidies, instead of re-training redundant workers.


Another issue to me is that of the short-term view of the market. In general the market's view of the viability of a product is taken over the investment horizon of the investment community, which ranges form 0 - 25 years. Very few investors look at the likely investment return beyond a 25 year time horizon. Where a longer term view is necessary (and this won't be very often) the government may need to intervene by regulation or otherwise.


You can also ask why the wealthy countries get so much grief for trade protectionism when every country is at it to some extent - the answer, I think, is similar to that concerning military action or political intervention (where large, powerful countries also tend to get criticised far more): that is, that such countries can do far more damage by virtue of their financial and political power.

For instance, the EU has totally distorted the sugar market and caused untold misery in a raft of ex-colonies in order to support a few thousand industrial sugar-beet farmers in northern Europe. The US has done the same to the maize and cotton industries.

No small nation has the financial muscle to carry the costs needed to inflict comparative damage.

So the US and EU have special responsibility because we - uniquely - have the financial capacity to inflict major economic collateral damage through protectionist actions.

 

[Evertonian]

@Ozz
Things that were considered luxuries a few of generations ago are necessities now. Things like washing up liquid, new socks when the old ones get holes in, and vacuum cleaner bags or filters.

And things that are luxuries now, and that people devote their disposable income to, were just not accessible a few generations ago. Things like CDs, computer games, cars, trips to amusement parks.

Standards of living have risen. Not for every single person every single year. But over time and for most people, yes, they clearly have.

 

[betazed]

Really? Diposable income and buying power both increased, Well I seem to
have noticed a real decline in the standard of living regardless of the
stats you base your arguments on, of course those stats may be just as
good as the accounting coming out of Exron, Northern Telecom etc eh?

http://www.cato.org/pubs/policy_report/pr-nd-js.html
http://www.bcstats.gov.bc.ca/pubs/eet/eet0110.pdf

This is what came up on the first page of a google search. I am sure others can provide you with more statistics.

Anyway, Seems to me you are equating free trade practices with the practices of corrupt and unethical practices of individual companies. I must say that they are two completely different things. Blaming free trade and capitalism for the ills of these companies is like blaming God for the evils of the fanatical religionists. Both abuse a freedom and a concept for their ulterior motives and blaming the concept makes no sense. Guarding against such practices and punishing the wrong doers seems to be the rational thing to do instead of abandoning free trade and capitalism.

How good is your health, dental, eyeglasses, retirement plan compared
with yer father's or grandfather's? That is if you even have one. Notice
the new pawn shops, cheque cashing, food banks and soup lines, hav'nt
see propersity like that since the 1930s.

If you want to tell me that we are not better off now than in the 1930s then I have no argument for you that can change your mind.

You may make an argument that the absolute number of people living on bare minimum or below bare minimum has increased. However, I wonder how much of that is because of population growth in the first place. As a % we are far better off than our fathers who were better off than our grandfathers in pure economic terms because our per capita consumption has increased.

Now you can argue about "quality of life" etc. I fear such an argument will quickly devolve into meaninglessness unless you can define intangibles like "quality of life".

I have studied them "formally" BTW, but your correct there is little point in dicussing these things if the discussion is limited to state-approved theories and facts and the evidence of our own senses is to be discounted.

I am being accused of supporting the establishment. That's got to be a first.

FWIW, science (and economics is scientific in a way) has continually shown us that we cannot depend on our own senses for "facts" and "evidence". That is because our senses are evolutionary programmed to see what is best for our own personal survival which may or may not have any relation to reality. So any argument that you base on your own personal experience can be best termed, for lack of a better word, as no more than "anecdotal" and hence cannot be accounted as evidence for a argument. You are of course entitled to it.

 

[Ozz]

@Ozz
Things that were considered luxuries a few of generations ago are necessities now. Things like washing up liquid, new socks when the old ones get holes in, and vacuum cleaner bags or filters.

And things that are luxuries now, and that people devote their disposable income to, were just not accessible a few generations ago. Things like CDs, computer games, cars, trips to amusement parks.

Standards of living have risen. Not for every single person every single year. But over time and for most people, yes, they clearly have.

Ah. Your using technological progress inplace of buying power and comfort,
they used to buy Hi-fi's, muscule cars, and Pong games and go to the
cottage which were the Computers, Cds and five flags trip of today.

Standards have fallen, ask to any workin' man over 40.

 

[betazed]

Standards have fallen, ask to any workin' man over 40.

I must ask, How do you define "standards"?

I define it as a measure of consumption per capita. This maynot be the ideal definition but it is precise and measurable.

 

[Evertonian]

Ah. Your using technological progress inplace of buying power and comfort,
they used to buy Hi-fi's, muscule cars, and Pong games and go to the
cottage which were the Computers, Cds and five flags trip of today.

Standards have fallen, ask to any workin' man over 40.

Technological progress mean living standards have risen. take the example and your counter example. I said computer games, you said a generation ago Pong was available. Well you can still get Pong. But they would have had to work a lot more minutes to earn enough to pay for Pong then than you do now!

It is my belief that some working men over 40 think that living standards have risen (however I'm pleased to say I don't fall into that category myself )

 

[Ozz]

Anyway, Seems to me you are equating free trade practices with the practices of corrupt and unethical practices of individual companies.

If you want to tell me that we are not better off now than in the 1930s then I have no argument for you that can change your mind.

As a % we are far better off than our fathers who were better off than our grandfathers in pure economic terms because our per capita consumption has increased.

Now you can argue about "quality of life" etc. I fear such an argument will quickly devolve into meaninglessness unless you can define intangibles like "quality of life".

I am being accused of supporting the establishment. That's got to be a first.

FWIW, science (and economics is scientific in a way) has continually shown us that we cannot depend on our own senses for "facts" and "evidence". That is because our senses are evolutionary programmed to see what is best for our own personal survival which may or may not have any relation to reality. So any argument that you base on your own personal experience can be best termed, for lack of a better word, as no more than "anecdotal" and hence cannot be accounted as evidence for a argument. You are of course entitled to it.

No, I just used those iceberg tips to show that statistics are only as good
as the source, and are reflective of the question asked. How many individuals
do you need to spoil the sample, there will be more next week.

No, I was pointing out the economic recovery of 1930 era viable businesses
which had all but disappeared and are viable once again.

Job benefits are not intangable, they have a real economic value, has anyone
with a dental bill and no insurance from their job if the dentist will accept
some intangable money.

Statics again, Yes, can you make an economic argument of any sort
without government stats? An argument of your own? If these theories
were a science we won't have differient schools of thought on economics (kension, Keynes,Reagan Trickle down)

The point I orginally made was that in open trade between two partners
the standards lower to the level of the poorest. Not that trade is "bad"
it's not, but unequal trade is. The tariffs make up for child labour, no
pollution control etc.

"anecdotal"? Horse hockey, I can verify the existance of a food bank,
hock shop, rusted out 1982 ford, they has mass, your "sciencitfic"
stats have none and a marginal of error at all times even if the source of the
data is reliable (which is questionable in itself)

 

[Ultraworld]

my 2 cents (hate that verb)

1. Imagine the opposite of free trade: an autarchy which does NOT trade a single product with the rest of the world. They will fall into poverty

2. If a country A becomes protectionistic other countries (B, C, D, E, . . .) might do that too. This way they will eleminate labour-specialisation.
(btw: it is a understandable but not a smart move from those other countries, the best is just a full acces to the world market were the prices are the lowest)

 

[betazed]

Oh boy! So many arguments and so little time. I will do my best.

No, I just used those iceberg tips to show that statistics are only as good as the source, and are reflective of the question asked. How many individuals do you need to spoil the sample, there will be more next week.

No, I was pointing out the economic recovery of 1930 era viable businesses
which had all but disappeared and are viable once again.

I am not sure what you are saying here. Are you saying industries dissappeared because they were not viable and that is bad? Personally, I would like some industries to dissappear from US and US to move up the economic ladder. I would like US to become more and more involved in hi-tech industries and leave the plastic crockery and rubber slippers to China. Industires disappering maybe a good sign or a bad sign. Without specifics we do not have any idea.

also, I am slightly suspicious of any argument that tries to justify itself by pointing towards the Great Depression. No one knows exactly why it happened and how it got resolved. I am sure there are many reasons but there is no conclusive evidence in any way.

Job benefits are not intangable, they have a real economic value, has anyone
with a dental bill and no insurance from their job if the dentist will accept
some intangable money.

And how is that relevant to the current debate? Universal Healthcare is expensive. So an argument for this can be made in favor of some socialism vs. capitalism. I fail to see how free trade which is the topic under discussion has anything to do with medical bill costs?

Actually, that is not right. Free trade can actually reduce medical bill costs. For example, look at the outsourcing of radiology and prescription work to India from US hospitals.

Statics again, Yes, can you make an economic argument of any sort
without government stats? An argument of your own? If these theories
were a science we won't have differient schools of thought on economics (kension, Keynes,Reagan Trickle down)

If Economics is not a science then neither is Astrophysics or Astronomy to a large extent. neither of them can run controlled experiments. Both of them have to gather data from an existing sample and match it with various theories. Both of them can at best look at a select sample of historical data (with the data getting messier further you go back). The best you can do is come up with theories and see if they match the data and make predictions that you can later verify in existing data.

Oh, before I forget both of them have schools of thought.

Now would you also say that Astronomy is not science?

The point I orginally made was that in open trade between two partners
the standards lower to the level of the poorest. Not that trade is "bad"
it's not, but unequal trade is. The tariffs make up for child labour, no
pollution control etc.

While this is not an advocacy of child labor, let me ask you this? Suppose a child in the inner heartland villages of China has two options. One is to starve or eke out a existence eating had to mouth everyday, or rather go to the new cities on teh eastern coast and work in the sweat shops 10-12 hours a day getting a decent wage and a decent meal. Which one would you prefer? I am not sure what your answer will be I know the child's anwer. he unanimously wants to work and end his misery. You do not need to take my word for it. Just read Nicholas Kristoff's extensive coverage of mainland and hinterland china in NYTimes. It has both video, audio and text and makes for insightful reading.

before human rights group attack trade for all the evils of child labor and environmental degradation, let them ponder on who and what has led to more emancipation and betterment of children all over the world? Their self-immportant busybodying or the employment provided to these children that allows them to get out of poverty doing self-respecting work.

"anecdotal"? Horse hockey, I can verify the existance of a food bank,
hock shop, rusted out 1982 ford, they has mass, your "sciencitfic"
stats have none and a marginal of error at all times even if the source of the
data is reliable (which is questionable in itself)

Once again, how does existance of a food bank mean anything about standard of living. It is like saying that standard of living has gone down because some people are poor and need food. Of course but that has been always true. What you need to show is that a greater % of people are poor and need to depend on food banks.

If you want to continue this debate on standard of living then I must ask you to define the term first. Otherwise we will be talking about different things and have a meaningless discussion.