Saturday, March 18, 2017

Trade insight

Daniel Hannan, a (soon to be unemployed?) UK member of the European Parliament, writes insightfully about trade in the Saturday Wall Street Journal.
It is telling that neither of the Obama administration’s flagship trade deals—the Transatlantic Trade and Investment Partnership, or TTIP, and the Trans-Pacific Partnership—even had “free trade” in the title. Although they had liberalizing elements, they also contained a great deal of corporatism.
Monitoring TTIP as a member of the European Parliament, I saw plainly enough what was going on: Big multinationals in Europe were getting together with big multinationals in the U.S. and lobbying for more regulation. By combining the most restrictive rules in the EU and the U.S., they aimed to raise barriers to entry and to give themselves an effective monopoly.
There is a deep point here. Our trade treaties have strong elements of managed mercantilism, not free trade, and can serve the interests of global corporations. There is a "better" trade that is also freer trade, and may address some of the political unpopularity of trade deals. Hannan has in mind a very open US-UK bilateral deal, but more deeply states clearly and concisely how better trade deals could work in general
A British-American deal should avoid that danger. How? By focusing on mutual product recognition rather than on common standards. If a drug is approved by the U.S. Food and Drug Administration, it should automatically be approved for sale in the U.K. If a trader can practice in the City of London, he should automatically be licensed to practice on Wall Street. And so on.
A commercial deal, in this case as in any other, should have nothing to do with human rights or child labor or climate change. Important as those issues are, they are separate from the free exchange of products.
... Once Britain no longer has to worry about the protectionism of French filmmakers, Italian textile manufacturers and the rest, we should reach a comprehensive agreement covering services as well as goods. If we make sure that the resulting deal is in the interest of consumers rather than producers, we could revive the whole notion of free trade, which is something the world very much needs just now.


  1. This is certainly a nice point by Hannan. However, the similarities between the US and UK seem like they would particularly facilitate this type of deal (e.g., the two countries have similar languages, legal institutions, etc.). Therefore, would this type of bilateral deal be idiosyncratic to trade between “relatively similar” countries to begin with? This sounds like a step in the right direction, but I am curious how generalizable this type of trade deal is.

    Also, it’s not clear to me why these trade deals would not be a good thing for lots of corporations as well — perhaps a select few multinationals with the “right” political connections would lose out, but the pharmaceutical company and trader in Hannan’s parable above seem like they would significantly benefit from such a deal. The comment in the last paragraph above (i.e., that the “resulting deal is in the interest of consumers rather than producers”) seems to suggest that such trade deals are less likely (or at least not intended) to benefit corporations.

  2. Here Cochrane returns to one of his favorite themes: in macro policy the extreme is more noble than the center. "Better trade is freer trade".

    We should remove barriers to the freer exchange of products. Would simplify and purify. Sounds good. Feels good.

    Apparently, it is self-evident to Cochrane that the complex and interlocking human systems that emerge within our democracy, forged over time and by political compromise, are necessarily improved when they are ideologically purified.

    Earlier Cochrane opined that economists should resist the urge to play central planner, and I agreed. Oh, the irony.

    1. What in the world are you talking about?

    2. I would like to know so too. We've traded more or less openly with the UK since oh, lets say 1605. They are part of our 'interlocking human system'. There's nothing. NOTHING about our relationship with the rest of the Anglosphere that's ideological pure or otherwise. They're family.

    3. Cochrane's essay reduces to the following argument: 1. better trade is freer trade. 2. TTIP contains elements of protectionism and de-facto favoritism disguised as common standards regulations (an interesting point).

      Cochrane concludes that, ipso facto, we can have our cake and maybe eat it too--a freer trade that "may" also address concerns on the left.

      On this point I am deeply skeptical. A few weeks ago Cochrane treated us to a nice essay on economic humility. Perhaps we should go back and re-read that essay.

      Finally, to understand where a "broad brush" economic commentator is coming from, one needs to identify his political ideology. Is he a left- or right-winger? Because at this "broad brush" level of discussion, that ideology will color everything.

  3. The Trump administration has made it clear that their view of the world calls for bilateral managed trade relations with bilateral balance. How they think that could be made to work, they have not said. In the Trump/Bannon/Navarro world there are no three or four way trade. And if someone is a lower cost producer then they must be cheating.

    1. With all due respect I don't think Trump has made anything clear. I think Trump is a negotiator, not a theorist. That means our task is to define for him what a "good deal" really is, not assume that he's got some sort of sinister plan in his or his advisers heads. He's not Barack Obama with a long held predisposition to some highly ideological policy objective that can't be dislodged by reality. He's not ideological at all.

  4. The discussion of trade balances might benefit from detailed analysis and disclosure of the off-setting capital flows - even if those flows are part of a three way transaction.

    It does not make a lot of sense for the Trump administration to be saying to Merkel: "We are angry that German investors are willing to lend money to the American government at record low interest rates and we want you to stop them."

    1. Absalon,

      And it makes even less sense that the first words out of Mnuchin's mouth after being confirmed as Treasury Secretary were - "We need to raise the debt ceiling".

  5. I never forget Milton Friedman in U of C class: "A Free Trade Agreement with more than two pages is not free"

  6. I agree with this post.

    What is often described as free-trade appears more accurately described as, "trade as defined by interested parties, who tend to be large multi-nationals and banks."

    This is one oddity about those who espouse "free trade": You would think small-minded protectionists are defining global trade.

    Is a more-accurate description that global trade is defined by multi-nationals?

    Add-on: Publicly held multi-nationals have global shareholders bases and fiduciary obligations that necessarily trump any patriotism.

  7. Maybe the Trump administration is not as stupid as all the experts are claiming.

  8. I wholeheartedly agree with her final paragraph.

    ... Once Britain no longer has to worry about the protectionism of French filmmakers, Italian textile manufacturers and the rest, we should reach a comprehensive agreement covering services as well as goods.

    This type of bundling seems dangerous since it makes agreements vastly more complicated and unpredictable. Businesses often end-up being regulated to death. It becomes next to impossible not to break the law.

    This also reminds me of Obama Care, where young single men are required to have a health insurance plan that covers pregnancy, which intern increases their premium.

    I told a friend not to long ago that if regulations continue at this rate, there will soon be a law that makes it a crime not to have committed a crime.

    In general I believe in the acronym, KISS or Keep It Simple, Stupid.

    ‘The KISS principle states that most systems work best if they are kept simple rather than made complicated; therefore simplicity should be a key goal in design and unnecessary complexity should be avoided.’


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