Bastiat & the 'balanced trade' bugaboo

With the announcement after all of a TPP deal that includes New Zealand, it's worth reminding ourselves, as this guest post by Marco den Ouden does, that trade exists because the parties to every trade see an advantage to doing so, not because it is "good for the country."

_________________________________________________________________________________

"Trade protection accumulates upon a single point the good which it effects,
while the evil inflicted is infused throughout the mass. The one strikes the eye at
a first glance, while the other becomes perceptible only to close investigation."
~ Frederic Bastiat

Protectionists of all stripes often rail about trade deficits. An unfavourable balance of trade. One of the catch phrases of these people, because at some level they realise the value of trade, is that they want "fair trade." Yet that's just protectionism under the guise of being pro-free trade.

One of Donald Trump's bugaboos is trade with China. On the Trump website it says "for free trade to bring prosperity to America, it must also be fair trade. Our goal is not protectionism but accountability."

And Hillary Clinton, in her nomination speech at the DNC, said “we should say ‘no’ to unfair trade deals... we should stand up to China.”

Those dastardly Chinese just don't play fair!

Alleged currency manipulation is part of his objection to the Chinese. The Chinese renminbi was pegged to the dollar until 2005. There was considerable hue and cry in the States that the Chinese currency was overvalued. It was alleged that this created a trade imbalance.

The Trump website goes further. "In a system of truly free trade and floating exchange rates like a Trump administration would support, America's massive trade deficit with China would not persist."

Balance of trade! That old bugaboo.

What specifically does Trump propose with respect to trade? During the primary debates he argued for a 45% tariff on imported goods and scuttling NAFTA. Those dastardly Mexicans are as unfair as the Chinese with their cheap car production.

Ironically, proponents of free trade often make the same mistaken argument. They support free trade because they believe that their country will be a winner. They will win the "trade wars" and have a favourable balance of trade. The country's exports will exceed its imports which will be good for everyone.

But the idea that trade has to be balanced, that the amount of imports and the amount of exports should match is, on the face of it, a load of malarkey.

Frederic Bastiat vs. the Protectionists

Nobody has explained this fallacy better than Frederic Bastiat, the brilliant 19th century French economist and polemicist. Bastiat's forte is the reductio ad absurdum. He takes the position of the protectionists and draws it out to its logical conclusion. His petition of the "Manufacturers of Candles, Tapers, Lanterns, Candlesticks, Street lams, Snuffers and Extinguishers, and the Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting" against the competition of the sun is a classic. His proposal of a "negative railroad" skewers his opponents mercilessly.

His attack on the notion of a balance of trade is equally devastating and equally hilarious. It made me laugh out loud when I read it. Speaking of one of the protectionists, a Monsieur Lestiboudois, he says, "he believes and loudly proclaims that if France gives ten in order to receive fifteen, it loses five." In other words, if France exports say, ten million francs of goods and imports fifteen million, France is out five million francs.

He quotes this trade critic at length with the conclusion that when trade is not balanced, the deficit is money that is given away. "Every year we give away 200 million francs to foreigners.

The Trade Balance and the Businessman

The theories of the free traders are attacked  by the protectionists as valid only in theory, but, asks Bastiat, "do you think the account books of businessmen are valid in practice?"

If there's anyone who understands profit and loss, surely it is the businessman. So, says Bastiat, consider the case of one of his businessman friends who he refers to by his initials, M.T.. Let's compare M.T.'s accounting to that of the customhouse.

"M.T. despatched a ship from Le Havre to the United States with a cargo of French goods, chiefly those known as specialties of French fashion, totalling 200,000 francs. This was the amount declared at the custom house."

Now after arriving at New Orleans, paying the shipping charge and an American tariff, M.T. still manages to sell the French fashions for a profit of twenty per cent or 40,000 francs. The return of his original investment, the shipping costs, the tariff and his profit nets him 320,000 francs which he uses to buy cotton.

In addition, M.T. had to pay for shipping the cotton back to France, commissions, insurance and so forth bringing the cost of the cotton to 352,000 francs. And that is what the customhouse entered into its books as the value of the imported cotton.

M.T. sells the cotton and nets another 70,400 francs in profit. M.T. is up 40,000 francs on the sale of French fashions to the Americans and 70,400 francs on the sale of American cotton to domestic French consumers. He has profited to the tune of 110,400 francs! Not a bad business trip!

But in the accounts of the French customhouse, France has exported 200,000 francs and imported 352,000 francs. Oh my god! It's a trade deficit! France just got snookered out of 152,000 francs! Or as Bastiat puts it, the esteemed trade critic must conclude that France "has consumed and dissipated the proceeds of previous savings, that it has impoverished and is on the way to ruining itself, that it has given away 152,000 francs of its capital to foreigners!" (italics in the original).

Throw it into the sea!

But Bastiat is not done yet! It seems M.T. despatched another ship shortly thereafter with another 200,000 francs of goods. Sadly, the ship sank and M.T. had no choice but to enter into his accounts a loss of 200,000 francs.

The good gentleman at the customhouse, however, entered the shipment as 200,000 francs in the export ledger before the ship sailed. But because it sank, there will never be anything entered in the import ledger to counter it. "It follows," says Bastiat, "that M. Lestidoubois and the Chamber will view this shipwreck as a clear net profit of 200,000 francs for France!"

But wait! Bastiat is still not done! "There is still a further conclusion to be drawn from all this, namely, that, according to the theory of the balance of trade, France has a quite simple means of doubling her capital at any moment. It suffices merely to pass its products through the customhouse, and then throw them into the sea. In that case the exports will equal the amount of her capital; imports will be non-existent and even impossible, and we shall gain all that the ocean has swallowed up."

Indeed, when someone sells something, whether to a domestic or foreign consumer, he does so to make a profit or he wouldn't make the trade. Conversely, when someone buys something, whether from a domestic or foreign consumer, he does so because he sees it as advantageous. Trade exists because the parties to the trade see an advantage to doing so, not because it is "good for the country.

Indeed, we could go further and argue that if we need a balance of trade between countries, why not between islands? Why shouldn't the North Island insist that the value of foodstuffs it imports from the Mainland be balanced out by an equal value of manufactured goods exported there? To ask the question is to see its absurdity.

_________________________________________________________________________________

Marco den Ouden writes at The Jolly Libertarian. His post has appeared previously there and at FEE. It has been lightly edited (did you notice?)
.

Withdrawing the US from TPP was a senseless act of wanton destruction

 

The TPP was good for all participants – or would have been. The Cato Institute’s Daniel Ikenson argues in this guest post that America would have been one winner out of many, not the loser Trump has now made it.

---

Yesterday, demonstrating his preference for action over reason, President Trump signed an executive order to officially withdraw the United States from the Trans-Pacific Partnership agreement. On the one hand, it’s refreshing to witness the rare act of a politician fulfilling a campaign pledge. On the other hand … there is nothing else good about it. Trump detonated a bomb; six years of negotiations went boom; now what?

To a president who seems intent on turning the country inward, raising the barricades, demanding self-sufficiency and eschewing the outside world, the TPP was an obvious target. But what’s especially disconcerting is that the president didn’t need to go this far to keep TPP out of play. The agreement couldn’t possibly take effect without congressional passage of implementing legislation, and his signature affixed. He could have just kept TPP on the back-burner in the event that its utility, relevance, or imperative to U.S. economic and geostrategic objectives became evident as his term progressed. Because it will.

My colleagues and I at the Cato Institute did a thorough, chapter-by-chapter assessment of the TPP and concluded that, on net, implementation would advance American economic freedoms. But there is also a geostrategic rationale for the TPP that compels beyond the text of the agreement. I presented that case in a few different articles, but here’s an excerpt from the most recent op-ed, in The Hill: 

The TPP is a comprehensive trade and investment agreement that reduces tariffs and other trade barriers among 12 Pacific-Rim nations. Implementation would help generate greater wealth and higher living standards by more closely integrating economies that account for 40 percent of global GDP.

As an agreement among countries on four continents, the TPP is uniquely qualified to fill the void created by the once successful, but now dysfunctional, multilateral negotiating “round” approach to global trade liberalisation.

But perhaps more significantly, the TPP offers a unique opportunity to refresh the U.S.-created rules and institutions of international trade and adapt them to the nature and conditions of the 21st century global economy. It is a blueprint for securing U.S. geo-economic and geopolitical interests now and into the future.

Without the TPP, as the economic centre of gravity continues its shift across the Pacific toward Asia, those successful trade rules and institutions could become superseded by lesser, opaque, discriminatory rules, which subvert the existing order, advance parochial objectives, and disadvantage U.S. commercial interests.

The geostrategic rationale for TPP—which has yet to dawn on the president-elect—is much less about achieving overt economic and security objectives than it is about preserving and strengthening U.S. soft power.

Unlike most other trade agreements, the TPP permits new members to join. The fact that TPP had achieved critical mass allows its terms to be offered on a take-it-or-leave-it basis.

Just as larger bodies floating in space have significant gravitational pull on smaller, surrounding objects, the TPP—by virtue of its heft—would pull other countries on other continents into its orbit because the costs of remaining on the outside will increase with each new accession.

The evidence of this effect is considerable. As investment in production platforms and supply chains has begun to shift from TPP outsiders to TPP members, current non-members such as South Korea, the Philippines, Indonesia, Thailand, and Taiwan have been considering and implementing various domestic reforms to improve their prospects for eventually joining.

With TPP rules and benefits applying to China’s most important trade partners, Beijing would have no better alternatives than to embrace the TPP itself, which would be good for all TPP parties.

In addition, what better way to dissuade China from bellicosity over its territorial disputes with Vietnam, Japan, and the Philippines than to demonstrate a prosperous alternative to 1930’s-style resource-driven expansionism in Asia?

Rather than deploy a naval fleet, offer China’s neighbours—and China itself—a clearly plausible path to economic growth and security.

But without TPP, China is the large mass drawing smaller countries into its gravitational pull. With the China-led Regional Comprehensive Economic Partnership negotiations waiting in the wings for TPP’s failure, countries in the region will be drawn more deeply into China’s orbit.

That shift doesn’t mean trade between the United States and those countries will suddenly dry up, but it does mean that existing China-focused investment and supply chain relationships will be reinforced, new ones will emerge and become established, and the costs of reorienting those relationships in the event of some future TPP implementation will increase with each passing year.

U.S. commercial and diplomatic interests in the region would be further impaired by Washington’s failure to follow through on its promises. Reformers in foreign governments that incurred political costs to push the TPP in their countries with expectations of U.S. participation wouldn’t soon forget that the United States proved to be an unreliable partner.

Hopes for the TPP jump-starting a new wave of global trade liberalisation would be dashed and, with U.S. credibility diminished around the world, America’s policy objectives would become more difficult to meet.

In one stroke of a pen and all the bluster that has accompanied it, the new president has thrown all this away, and opened up instead these more dangerous prospects.

That signature represents nothing less than a senseless act of wanton destruction.

---

Dan Ikenson is director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, where he coordinates and conducts research on all manner of international trade and investment policy.
This post first appeared at the Cato at Liberty blog.

.

Trade, TPP and Labour’s love for Trump

 

Politics makes for many strange bedfellows – none stranger perhaps than the local Labour Party and its cheerleaders embracing in yesterday’s parliament the flagship policy of Donald Trump, crowing there that his victory in the US has killed the TPP freer-trade deal stone dead.

Strange.

Strange to see them embrace the Donald. Stranger too to see them oppose freer trade – which raises real wages for everyone they claim to represent.

Because as Donald Boudreaux cogently explains,

the correct case for freer trade does not depend upon exports growing by more than imports. First, there’s no reason to expect freer trade to result in such an outcome. Second, such an outcome, should it occur, might well be lamentable for it could reveal that investment opportunities at home are consistently less attractive than are investment opportunities abroad.

Nor is the correct case for freer trade depend on the creation of jobs.

Politicians routinely sell freer trade as a source of net job and export creation. Yet economists since Adam Smith — and ranging across the ideological spectrum from Milton Friedman to Paul Krugman — have consistently rejected such claims as justifications for free trade.
    Economists understand that freer trade neither increases nor decreases the total number of jobs in an economy. Instead, freer trade changes the kinds of jobs performed in an economy by shifting jobs from industries that are comparatively inefficient to industries that are comparatively efficient.

The result is a greater variety and distribution of goods and services at cheaper prices: the very cure to poverty that any honest Labourite (and Trumpeter) should embrace.

If they were truly honest about wanting to cure poverty.

.

End those freer-trade daydreams now

 

If anyone had any expectation about freer trade with the US, that was given the formal kiss of death overnight with Crooked Hillary’s declaration:

"I oppose it now, I'll oppose it after the election and I'll oppose it as President," the Democratic nominee told supporters at a factory in Michigan.

Mind you, she’s supported it before and probably will again on alternate Tuesdays, if she thinks there’s votes in it. But with  Duplicitous Donald now her keener on building trade walls around their continent than trade between continents, hopes for freer trade with the US are now genuinely dead.

That announcements like this happen almost casually is simply par for this pretty lumpy course. Face it folks, “it's all just a game to these two. It really doesn't matter which one wins, the outcome will be the same.” In this case, protectionism. By default.

We’d have to hope for Gary Johnson to gain the White House for anything promoting freer trade to be back on the table. Unikely, but not impossible.

..

Foreign imports Are good

 

Trade is not a trade-off, explains David Boaz

It’s not just trade’s oppinents who have much to learn. Too many advocates of trade liberalisation don’t really understand the case for free trade either. Consider this sympathetic interview on NPR with U.S. Trade Representative Michael Froman, the chief negotiator of the Trans-Pacific Partnership:

NPR: Froman argues the TPP, the Trans-Pacific Partnership, will give U.S. industries more access to foreign markets. Granted, there’s a trade-off. Other nations get more access to the U.S. for their products. Froman contends that, at least, happens slowly as tariffs or import taxes drop.
Froman: The tariff on imported trucks from Japan, as an example, won’t go away for 30 years. On apparel and textiles, we worked very closely with the textile manufacturers in the U.S. to come up with an outcome that they could be comfortable with, so that we’ll let in clothes coming that are made Vietnam or made in Malaysia, but they’ve got to use U.S. fabric.

This is nuts. The interviewer refers to the lowering of U.S. tariffs as “a trade-off,” and Trade Representative Froman accepts that characterisation. Both operate from the premise that Americans want other countries to reduce their barriers to American exports, and that the alleged “trade-off” for that benefit is that the U.S. must reduce their own trade barriers.

That’s backwards. Free trade allows us all to benefit from the worldwide division of labour, specialisation, comparative advantage, and economies of scale. The benefit of trade is that we get access to goods and services that we might not get otherwise, or we get to pay much lower prices for the goods we want.

More broadly, we want free — or at least freer — trade in order to remove the impediments that prevent people from finding the best ways to satisfy their wants.

This is a point that Cato scholars at the Herbert A. Stiefel Center for Trade Policy Studies have been making for years. As Center director Dan Ikenson wrote last year:

Arguably, opening foreign markets should be an aim of trade policy, but [to feel the benefits at hime] real free trade requires liberalisation at home. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports — the so-called terms of trade.
    Trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports, yet holding firm to those domestic barriers while insisting that foreign markets open wider is the U.S. trade negotiating strategy.
    Indeed, that’s almost every government’s negotiating strategy. It is the crux of reciprocity-based trade negotiations, which, at its core, is a rejection of free trade.

Ikenson and Scott Lincicome made that case at greater length, with specific emphasis on the “central misconception” that “exports are good and imports are bad,” almost five years ago.

Thirty years ago in the Cato Journal, the economist Ronald Krieger explained the difference between the economist’s and the non-economist’s views of trade. The non-economist believes that the primary purpose of all economic activity is to produce jobs and growth. The economist however understands that “the purpose of economic activity is to enhance the wellbeing of individual consumers and households.” On this basis therefore, “imports are the benefit for which exports are the cost.”

Imports are the things we want — clothing, televisions, cars, software, ideas — and exports are what we have to trade in order to get them. The fewer of the latter paying for the more of the former, the better off we all are.

I wrote more about this persistent misunderstanding in The Libertarian Mind (buy it now!):

Politicians just don’t seem to get this. President Obama’s official [2010] statement on “Promoting U.S. Jobs by Increasing Trade and Exports” mentions exports more than forty times; imports, not once. His Republican critics agree: Senator Rob Portman says that a trade agreement “is vital to increasing American exports.”
    More colorfully, during his 1996 presidential campaign, Pat Buchanan stood at the Port of Baltimore and said, “This harbour in Baltimore is one of the biggest and busiest in the nation. There needs to be more American goods going out.” That’s fundamentally mistaken. We don’t want to send any more of our wealth overseas than we have to in order to acquire goods from overseas.
    If Saudi Arabia would give us oil for free, or if South Korea would give us televisions for free, Americans would be better off. The people and capital that used to produce televisions — or used to produce things that were traded for televisions — could then shift to producing other goods.
    Unfortunately for us, we don’t get those goods from other countries for free. But if we can get them cheaper than it would cost us to produce them ourselves, we’re better off.
    Sometimes international trade is seen in terms of competition between nations. We should view it, instead, like domestic trade, as a form of cooperation. By trading, people in both countries can prosper. And we should remember that goods are produced by individuals and businesses, not by nation-states. “South Korea” doesn’t produce televisions; “the United States” doesn’t produce the world’s most popular entertainment. Individuals, organised into partnerships and corporations in each country, produce and exchange.
    In any case, today’s economy is so globally integrated that it’s not clear even what a “Japanese” or “Dutch” company is. If Apple Inc. produces iPads in China and sells them in Europe, which “country” is racking up points on the international scoreboard? The immediate winners would seem to be investors and engineers in the United States, workers in China, and consumers in Europe; but of course the broader benefits of international trade will accrue to investors, workers, and consumers in all those areas.
    The benefit of international trade to consumers is clear: We can buy goods produced in other countries if we find them better or cheaper. There are other benefits as well. First, it allows the division of labour to work on a broader scale, enabling the people in each country to produce the goods at which they have a comparative advantage.
    As Ludwig Von Mises put it, “The inhabitants of [Switzerland] prefer to manufacture watches instead of growing wheat. Watchmaking is for them the cheapest way to acquire wheat. On the other hand the growing of wheat is the cheapest way for the Canadian farmer to acquire watches.”

I hope that politicians, commentators and blog commenters --- and even so-called advocates of trade liberalisation -- will come to understand and to advocate the strong case for free trade, which economists have understood since Adam Smith in 1776.

---

David Boaz is the executive vice president of the Cato Institute and has played a key role in the development of the Cato Institute and the libertarian movement. He is the author of The Libertarian Mind: A Manifesto for Freedom and the editor of The Libertarian Reader.
His articles have been published in the Wall Street Journal, the New York Times, the Washington Post, the Los Angeles Times, National Review, and Slate, and he wrote the entry on libertarianism forEncyclopedia Britannica. He is a frequent guest on national television and radio shows, and has appeared on ABC’s Politically Incorrect with Bill Maher, CNN’s Crossfire, NPR’s Talk of the Nation and All Things Considered, The McLaughlin Group, Stossel, The Independents, Fox News Channel, BBC, Voice of America, Radio Free Europe, and other media.
A version of this post appeared at FEE.
[Pic of Auckland by Skyscraper City.]

RELATED POSTS:

• “The current Republican front-runner, Donald Trump, has repeatedly claimed that China, and many other countries, such as Mexico and Vietnam, are ‘killing us’ in foreign trade. … The implication of this belief and its intellectual foundations is that the United States needs to adopt a government policy of increasing exports and reducing imports by such means as protective tariffs, import quotas, and export subsidies. …
      “Now the truth is that in the monetary conditions of the present-day world … an outflow of part of the money supply of a country in exchange for imports is positively favourable. … Exporting part of the supply of dollars represents getting imports of real goods in exchange for pieces of paper that are virtually costless to produce and replace. At the same time, it limits the rise in prices in the United States by holding down the increase in the supply of money in circulation in the United States. Thus, seen in this light, an excess of imports over exports turns out actually to be highly favourable rather than ‘unfavourable.’”
  China et al. Are Not “Killing Us” – GEORGE REISMAN’S BLOG
• “…the prices of the items in the market basket that low-income families buy have increased less than items in the basket that high-income families buy. … one reason prices rose less for low-income people is that they were buying goods from China.”
  Trade with China Is Especially Good for Low-Income Earners: Cheaper Goods Help People with Less to Spend – David R. Henderson, FEE
• “Trump frequently suggests, as he did in the debate, that Mexico could pay for the wall out of the $58 billion trade deficit. But that is nonsensical. The trade deficit does not go to the government; it just indicates that Americans are buying more goods from Mexico than the other way around.”
  Fact-Checking Trump on Trade – NOT PC
• “Tariffs are taxes on imports. Simple as that.”
  Cue Card Libertarianism: Tariffs – NOT PC
  

Quote of the Day: On tariffs and cronyism

 

“The tariff … [is simply] an elaborate system by which corporate interests
‘get control of legislation in order to tax their fellow-citizens for their own benefit.’”
~ William Graham Sumner, from his 1906 book
Folkways: A Study of Mores, Manners, Customs and Morals,
as quoted in Thomas Leonard’s 2016 book
Illiberal Reformers: Race, Eugenics, and American Economics in the Progressive Era

TPP opposition: it’s not about democracy

Funny, the noisier opponents of the TPP argue against the semi-free-trade agreement being signed because, they say, it represents a "threat to our democracy" -- that it threatens our sovereignty -- that its measures "constrain domestic law and limit our [government's] regulatory freedom."

And yet the same objections can be made about every single international agreement ever signed.

And the very same protestors can be heard just as noisily on every other day demanding that the govt sign up immediately to international agreements on labour standards, and climate change, and "indigenous rights," and whatever else social injustic campaigners dream up..

So consistency is not their strong suit.

But neither is "democracy" their aim.

And in any case, what’s wrong with constraining governments to protect contracts, and to prevent them enacting wilful regulatory changes?

Repost: TPP - Dismantling the negative railroad

“Why the TPPA is a better trade agreement than you think: In a word, Vietnam.
… Vietnam will be the biggest gainer from TPP.  Do you get that, progressives?
Poorest country = biggest gainer.  Isn’t that what we are looking for?”
- Tyler Cowen, “Why the TPP is a better trade agreement than you think”

In evaluating the deal that places us smack bang into the world’s largest semi-free-trade zone (to be excluded from which would be, as former PM Helen Clark suggested, unthinkable), it’s worth just recalling why human beings trade at all: because as Frederic Bastiat pointed out many years ago, left to our own devices few if any of us would be able to produce enough just to get through a mild winter, let alone produce enough to survive and flourish and hang around long enough to produce a mid-life crisis and a second family. We can’t produce enough on our own, yet when we trade with each other the products of our efforts we can, and we do. (Turns out we’re so helpless that, without trade, even a simple sandwich is beyond our individual means.)

As John Stossel would say, “What could be more benign than the freedom to trade with whomever you wish?”

Somewhere or other, I’ve called this the Miracle of Breakfast, the realisation that the division of labour is as benevolent as Adam Smith once explained.

Trade between nations connects us to the worldwide division of labour.

Trade between individuals demonstrates how trade benefits each party to the trade—the double thank-you moment demonstrating that we each benefited from the exchange. 

How many times have you paid $1 for a cup of coffee and after the clerk said, "thank you," you responded, "thank you "? There's a wealth of economics wisdom in the weird double thank-you moment. Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win.
    Economists have long understood that two people trade because each wants what the other has more than what he already has. In their respective eyes, the things traded are unequal in value. But this means each comes out ahead, having given up something he wants less for something he wants more. It's just not true that one gains and the other loses. If that were the case, the loser wouldn't have traded. It's win-win, or as economists would say, positive-sum.
    We experience this every time we have that double thank-you moment in a store or restaurant.

It is just bullshit to say that because NZ has already removed most of its tariffsNZ negotiators were arguing with one hand behind their backs, with is about to get our pants down. The benefits from trade accrue not just because we allow access to our markets—to use the language being bandied around by peak-Kelseyites—but because the benefits of trade increase exponentially as the network of exchange expands. And this semi-free-trade deal expands the network about as far as it’s politically possible to go.

* * * *

The two facts at the heart of free trade’s many benefits are these:

1. that we each trade to get the things we want, and
2. we all want very different things 

Of course, we don’t need volumes of paper to make a “free-trade deal.” All it takes for free exchange to happen is 1) legal protection for contracts and 2) no outright bans. (In Adam Smith’s words, "the Division of Labour is limited by the Extent of the Market.")

But free exchange can be hampered. It can be hampered by distance—which is why people build shipping lines, roads and railways to get goods and people to markets more easily and more cheaply—or it can be hampered by tariffs and quotas that make getting goods and people to markets is more difficult and more expensive, all but cancelling out the many benefits of those shipping lines and railroads. No wonder Bastiat likened the effect of tariffs and quotas to a negative railroad—one with so many breaks in the track that costs and delay are as certain with the railroad as they are with tariffs and quotas.

I have said that as long as one has regard, as unfortunately happens, only to the interest of the producer, it is impossible to avoid running counter to the general interest, since the producer, as such, demands nothing but the multiplication of obstacles, wants, and efforts. . .
    Whatever the protectionists may say, it is no less certain that the basic principle of restriction is the same as the basic principle of breaks in the tracks: the sacrifice of the consumer to the producer, of the end to the means.

The TPP deal doesn’t take away all the breaks in the track, but it does remove many of them:

In terms of the substance, there seem to be three broad themes.

1. Eventual elimination of all tariffs in all industries except beef and dairy
2. Minor concessions from Canada on dairy but better deal with Japan on beef (tariff dropping from 40% to 9%)
3. Most of the potentially “bad”* stuff has been resisted (change to Pharmac model, the US demands on ISP liability for copyright, tobacco companies can’t use ISDS provisions)

And it begins momentum to for those other breaks to be dismantled. Eventually.

Because free trade really is breaking out everywhere.

* * * *

Look, the TPP looks to be about as close to full-blown, unhampered, knock-your-socks-off free trade as Andrew LIttle looks to pulling the Labour Party together. But to complain, as both Gould and Kelsey do, that because, you know, NZ dairy doesn’t achieve full tariff-free access to the US, Canada and Japan while ignoring the small sliding tariff reductions that are allowed for is like a teenager whinging because their mummy has bought them the wrong coloured iPhone for their birthday.

It’s not full free trade—but trade between the 12 nations will be freer than it is now. There is some cronyism, but since even the cronies are quietly whimpering about things there’s less clearly less than they thought they paid for. So on balance, there are more reasons to be for than against-and being against would be to make the perfect the enemy of the good.

And since the increasing expansion of the worldwide division of labour has already meant around 138,000 people have nbeen moved out of poverty every day for the last 25 years, unless you think that’s a bad thing rather than a good, the you and I would surely see very little to complain about that expansion continuing.

---

* “Bad” is by the estimation of David Farrar, whose summary this is. There is much to be said about each of these things at some point, but suffice to say now that extended 12-year patent protection for drugs pertains not to present drugs but to future miracle drugs, preserving at least some part of the golden goose that will help us all age disgracefully.
Oh, and NZers are moochers on foreign drug producers and consumers

Ngati Whatua offer TPPA signatories a two-for-one deal

It is reported that Ngati Whatua et all are objecting to the signing of the TPPA  because they allege it shows insufficient racial favouritism towards themselves, and are as a consequence shunning the signing of the TPPA in Auckland between ministers from 12 countries– and refusing to perform the Maori rites that have become customary at the opening of an envelope anywhere in this fair land.

Never has a protest been so impotent, and so welcome: Those 12 ministers might well reflect that in going ahead and signing the trade deal anyway, this is in effect like being offered a two-for-one deal.

Jane Kelsey struggles to find things to object to #tpp #tppa

If this is all Jane Kelsey can find to damn the just-signed Trans-Pacific Partnership agreement as “toxic,” (her word, meant seriously) then one wonders what she normally takes as poison:

Who gave the Prime Minister and Trade Minister the right to sacrifice our rights to regulate foreign investment, to decide our own copyright laws, to set up new SOEs, and whatever else they have agreed to in this secret deal and present it to us as a fait accompli?

That “damning” paragraph (my word, meant very unseriously) comes as the culmination of two-thousand of her words calling for the “campaign” against the agreement to “move into a new phase.” Yet in all those words she gives few to engender any reason to campaign against, and many more to campaign for.

She huffs and she puffs and fails even blow off a door. Indeed, the more she talks about the agreement, the more I shift from grudging approval for the agreement to outright enthusiasm. Were you aware, for instance, that under the agreement

future governments may not be able to establish new state-owned enterprises … which foreign competitors say has an adverse effect on their activities.

So no new nationalisations then? Or that

[foreign] investors are also expected to be able to use ISDS to enforce their contracts …

And that

The cross-border services chapter … will require governments to maintain the current failed risk-tolerant light handed approach to regulation of services.

And while listing it among her own “downsides,” she grudgingly admits “New Zealand’s patent laws currently meet the final TPPA threshold.”

So on close inspection, it seems the only real downside appears to be that she no longer has any valid reason to complain. Because even through gritted teeth she has to admit “there do appear to be more significant gains for beef, fruit, seafood, wine, forestry products, lamb – but, as the Australia Japan FTA showed, the devil will be in the detail.” If these are the details she chooses to highlight, then it seems more like a benevolent deity hidden with than a harbinger of dark satanic mills.

And but me no buts, there seem few if any real reasons for her campaign to move into any phase other than one called “shutting down now.”

Equally Bryan Gould struggles to maintain relevance for himself, let alone the “campaign.”  The TPP he says:

is about managed, not free, trade - and trade that is managed in the interests of large, international, and mainly US corporations…

his evidence for which is, apparently, that it “represents”

a further, large, and largely irreversible step towards the absorption of a small economy like New Zealand into a much larger economy – an economy that is increasingly directed from overseas, not by politicians or even officials, but by self-interested and unaccountable business leaders.

In other words, it connects little old New Zealand much more closely into the worldwide division of labour. Hardly a bad thing.

Look, the TPP looks to be about as close to full-blown, unhampered, knock-your-socks-off free trade as Dan Carter looks to putting a forty-point game together. But to complain, as both Gould and Kelsey do, that because, you know, NZ dairy doesn’t achieve full tariff-free access to the US, Canada and Japan while ignoring the small sliding tariff reductions that are allowed for is like a teenager whinging because their mummy has bought them the wrong coloured iPhone for their birthday.

It’s not full free trade—but trade between the 12 nations will be freer than it is now. There is some cronyism, but since even the cronies are quietly whimpering about things there’s less clearly less than they thought they paid for. So on balance, there are more reasons to be for than against-and being against would be to make the perfect the enemy of the good.

And since the increasing expansion of the worldwide division of labour has already meant around 138,000 people have been moved out of poverty every day for the last 25 years, unless you think that’s a bad thing rather than a good, the you and I would surely see very little to complain about that expansion continuing.

NB: Mind you, only to Chris Trotter have the full horrors of the TPPA been fully revealed . . .

Economics for Real People: Trade Policy in NZ’s recent history

With the finalisation of a TPP deal yesterday, could this week’s discussion hosted by our friends at the Auckland Uni Economics Group be any more topical?  (And remember, you’re all invited whether students or economists … or even, most especially, if not).

Seminar: Does New Zealand Economics Have a Useful Past?
    Looking at the role that economic thought has had on the economic development of New Zealand, and focussing mainly on trade policy over the period from 1920s to the early 1980s, the newly-appointed editor of the History of Economics Review Dr. Geoffrey Brooke will explain the different perspectives taken by academic economists in New Zealand, and relate these to the activities of policymakers over that period.
    And he asks: Is the often held view that the reform decade beginning in 1984 illustrated the power of what J. Maynard Keynes had called the “gradual encroachment of ideas” trumping the “power of vested interests”?

        Date: Thursday, October 8
        Time: 6-7pm
        Location: Room 040C, Level Zero, University of Auckland Business School
                       (plenty of parking in the building’s basement, entry off Grafton Rd)

        ALL WELCOME!

About the Speaker:
Dr. Geoffrey Brooke is a Lecturer in Economics at the Auckland University of Technology. Dr. Brooke holds both a Bachelor of Commerce (Honours) and a PhD in Economics from the University of Auckland. Prior to this, he completed a Bachelor and a Masters (Finance) in Business Science from the University of Cape Town.
His research interests are equally divided between economic history and the history of economic thought.

#TPP : Mooching on drug producers and consumers

Annette King, Jane Kelsey, and Uncle Tom Cobley and all have denounced what, they say, “the TPP will mean with regards to life-saving drug costs.” It’s unfair, they say, that drug companies should have even the five years recognised by the TPP to make the most from selling the many future life-saving drugs that wouldn’t have existed without them.

Is it not too much to recognise where all these life-saving drugs actually come from that everyone takes so much for granted?

And to acknowledge that we in NZ are, to be blunt, mooching on the people who develop and pay for them.

As Jason Potts says of similar folk in Australia, Don't Complain About TPP Pharmaceuticals, We Already Free Ride Off US Consumers:

These folk present themselves as fighting for the public health care system by holding firm in an intellectual property battle against big greedy US pharmaceutical companies who want provisions that will cost sick Australians [and NZers] hundreds of millions of dollars. The media optics are clear about who is on the side of good and who is on the side of evil in this fight.
    But biologics are extraordinarily expensive, difficult and risky to make. All the huge costs are upfront, with very small marginal costs. The spectacular economics of a few blockbuster drugs need to be set against the enormous costs, and often losses, of the many stages of testing and developing safe and effective new biologics.
    So who pays for this?
    The reality is that the US healthcare consumer pays for most of this - this is why the US spends a much larger fraction of its GDP per capita on healthcare (about 17.4 percent) than Australia (about 9.8 percent) [and NZ (about 8.7 percent).
    Let me put that more starkly – Australian healthcare consumers are free-riding on US healthcare consumers. Sick people in the US are paying more so that sick people in Australia can pay less. That's the issue here. This is about fairness and Australia doing its part to pay its share of the cost of developing life-saving drugs that benefit everyone in the world.

Let’s put it more starkly for NZ readers: Spending on healthcare in New Zealand is the second lowest per person among a group of developed countries. New Zealand healthcare consumers are free-riding on US healthcare consumers and producers. Sick people in the US are paying more so that sick people in New Zealand can pay less. That's the issue here.

Is it fair that the folk paying for and producing life-saving drugs are given so little recognition, either legally.morally or financially?

TPP: Dismantling the negative railroad

Few details have been released on the final TPP deal agreed last night in Atlanta, but enough to get a broad overview—and to realise much of the opposition to it has been as unhinged as it has been incoherent. “Peak Kelsey” as one politician dubbed it. An orgy of uninformed eloquence, said another. And a very good reason for Labour to keep talking about lack of details as they work out how to quietly backtrack from the anti-TPP corner they inastutely painted themselves into.

In evaluating the deal that places us smack bang into the world’s largest semi-free-trade zone (to be excluded would be, as former PM Helen Clark suggested, unthinkable), it’s worth just recalling why human beings trade: because as Frederic Bastiat pointed out many years ago, left to our own devices few if any of us would be able to produce enough just to get through a mild winter, let alone produce enough to survive and flourish and hang around long enough to produce a mid-life crisis and a second family. Yet when we trade with each other the products of our efforts, we can, and we do. (Without trade, even a simple sandwich is beyond our individual means.)

Somewhere or other, I’ve called this the Miracle of Breakfast, the realisation that the division of labour is as benevolent as Adam Smith once explained.

As John Stossel would say, “What could be more benign than the freedom to trade with whomever you wish?”

Trade between nations connects us to the worldwide division of labour.

Trade between individuals demonstrates how trade benefits both parties to it—the double thank-you moment demonstrating that we each benefited from the exchange. 

How many times have you paid $1 for a cup of coffee and after the clerk said, "thank you," you responded, "thank you "? There's a wealth of economics wisdom in the weird double thank-you moment. Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win.
    Economists have long understood that two people trade because each wants what the other has more than what he already has. In their respective eyes, the things traded are unequal in value. But this means each comes out ahead, having given up something he wants less for something he wants more. It's just not true that one gains and the other loses. If that were the case, the loser wouldn't have traded. It's win-win, or as economists would say, positive-sum.
    We experience this every time we have that double thank-you moment in a store or restaurant.

That we each trade to get the things we want, and we all want very different things, are the two facts at the heart of free trade’s many benefits.  The benefits accrue not just because we allow access to our markets—to use the language being bandied around this morning by peak-Kelseyites—but because the benefits increase exponentially as the network of exchange expands.

Of course, we don’t need volumes of paper to make a “free-trade deal.” All it takes for free exchange to happen is legal protection and no outright bans. (In Adam Smith’s words, "the Division of Labour is limited by the Extent of the Market.")

But free exchange can be hampered. It can be hampered by distance—which is why people build shipping lines, roads and railways to get goods and people to markets more easily and more cheaply—or it can be hampered by tariffs and quotas that make getting goods and people to markets is more difficult and more expensive, all but cancelling out the many benefits of those shipping lines and railroads. No wonder Bastiat likened the effect of tariffs and quotas to a negative railroad—one with so many breaks in the track that costs and delay are as certain with the railroad as they are with tariffs and quotas.

I have said that as long as one has regard, as unfortunately happens, only to the interest of the producer, it is impossible to avoid running counter to the general interest, since the producer, as such, demands nothing but the multiplication of obstacles, wants, and efforts. . .
    Whatever the protectionists may say, it is no less certain that the basic principle of restriction is the same as the basic principle of breaks in the tracks: the sacrifice of the consumer to the producer, of the end to the means.

The TPP deal doesn’t take away all the breaks in the track, but it does remove many of them:

In terms of the substance, there seem to be three broad themes.

1. Eventual elimination of all tariffs in all industries except beef and dairy
2. Minor concessions from Canada on dairy but better deal with Japan on beef (tariff dropping from 40% to 9%)
3. Most of the potentially “bad”* stuff has been resisted (change to Pharmac model, the US demands on ISP liability for copyright, tobacco companies can’t use ISDS provisions)

And it begins momentum to for those other breaks to be dismantled. Eventually.

Because free trade really is breaking out everywhere.

---

* “Bad” is by the estimation of David Farrar, whose summary this is. There is much to be said about each of these things at some point, but suffice to say now that extended 12-year patent protection for drugs pertains not to present drugs but to future miracle drugs, preserving at least some part of the golden goose that will help us all age disgracefully.

TPP leverage?

The commentariat is of a single half-mind that NZ is that because NZ has already removed most of its tariffs we are negotiating the TPP with one hand behind our backs, and are about to get our pants down.

Garbage, says Eric Crampton. (Well, that’s my summary since he’s far too well-mannered a fellow.)

I could understand this argument if we were talking about bilateral trade deals. But, New Zealand is only one of many countries in the TPP. Whatever deal comes in applies to all of them….
    I just can’t see how New Zealand’s tariff status affects things. We’re a small enough country that, even if we had crazy high tariffs, no US domestic industry would care enough about getting access to the NZ market to outweigh US dairy wishes to keep NZ out. This is just standard Mancur Olson stuff: the costs of free trade with NZ, in the US, are concentrated; the benefits are diffused. And that would be true no matter New Zealand’s tariff status.
    [Rob] Salmond argues that New Zealand has no leverage because we have no particular tariffs to concede. I just cannot see what coalition, in any of the TPP trading partners, cares enough about getting access to New Zealand markets in particular to get into a fight with their counterparts in their domestic dairy industries.

Like I said. Garbage.

Still, Eric is still willing to bet NZ won’t be signing up …

Quote of the Day: On the TPPA

“Why the TPPA is a better trade agreement than you think: In a word, Vietnam. 
… Vietnam will be the biggest gainer from TPP.  Do you get that, progressives? 
Poorest country = biggest gainer.  Isn’t that what we are looking for?”
- Tyler Cowen, “Why the TPP is a better trade agreement than you think”