To trade or not to trade?

 

To engage in exchanging goods and services is one of the oldest human activities, some even say – the oldest. In the last three or so years, trade has acquired an additional feature becoming a hot topic of global politics. Populists especially, maintain that the positive or negative balance of a nation’s trade reflect that nation’s strength – a hotly debated topic (without much support) in science, and an even hotter issue in politics.

After President Trump’s victory in the US (and even before), trade was one of those topics that served as a rallying cry for political agitators and angry people. Allegedly, trans-border trade was (also) responsible for the loss of millions of manufacturing jobs. As a result, TPP and TTIP were trashed by the US government after TTIP also fell prey to liberal and leftist suspicions while NAFTA is to be re-negotiated. All this is supposed to ‘bring our jobs back’, where the tricky issue is what ‘our’ stands for.

Following some of the most respected economists, like David Ricardo, there are not many more useful activities a nation can do other than trade. This leads to an equilibrium between strengths and weaknesses of national capabilities, and, on balance, increases wealth across the board. Things have been getting more complicated by the increasing effects of transnationalization of trade where it has become quite difficult to attribute certain features of a product to one country. Most specialists agree that while globalisation, liberalisation and technological developments have contributed to significant losses of (no longer competitive) jobs, they have also added millions of new jobs.

So how should responsible governments react to the current debate and rising expectations from ‘below’? Keep trading and foster innovation, no matter where? Or limit and control transborder trade?

– Klaus Segbers

Summary
To trade or not to trade?
Article Name
To trade or not to trade?
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In the past, most people would have agreed that international trade is a win-win situation. By 2017, however, trade has become one of the most heated issues in politics.
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  1. Alexei Voskressenski 2 months ago

    The process of political and economic rebalancing resulting from the deadlock of the globalization model proposed by the West in the late 1980s, means a search for a new equilibrium between mercantilism and economic nationalism on the one hand and trade regionalism and transregionalism on the other hand. In the world there are now only three sustainable national markets, and only the US market is fully sustainable in terms of its level of development, competitevness, internal capital and investment, innovation and growing working force, including its cheapest segment. Some argue that even the USA cannot afford a fullfledged economic nationalism anymore. Other states have no other choice than to trade and experiment in order to find a new balance between national production and their ability to compete and trade on markets broader than the national one. So, a task for any responsible government is to find such a new balance that enables states to develop and prosper and not to stagnate and diappear.

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  2. Justas Paleckis 2 months ago

    The European Union seems to support TTIP and trade liberalization unanimously. Nevertheless, member states have interests which differ. Countries that can withstand the tough competition are in favour of a more liberal trade policy, while economically weaker countries have a slightly different attitude. Citizens of the new EU member states have looked at the powerful demonstrations in Western European countries against TTIP with amazement and distrust. There were no real debates between economists and businessmen asking whether the planned EU-US agreement would be useful to them or not. All the more, there was no such discussion in the general public. Meanwhile, President Trump, who felt the pressure from both the US elites and the media, has renounced his pre-election position in terms of foreign policy. It is widely expected that he will move from a radical position towards the more moderate regarding international trade, too. Even in the most powerful country of the world, populism has little chances to win against globalism.

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  3. Shen Dingli 2 months ago

    There should be no such question as for whether to trade or not to trade. In the 21st century, no country could afford to produce everything cost effectively and therefore to refuse to import anything. In fact, almost all countries could offer something which is cost effective for some others to import. Then, to trade is economically rational. The real question, however, is how much to trade. Normally one assumes to export maximally, as this generates more return to import. The more exportation, the more jobs at home and then more importation, and finally the more jobs abroad – the theory goes this way. This argument makes only limited sense, and is absolutely wrong when done excessively. China could now generate all iron and steel for the entire world. The more China exports them, the more the others lose jobs and, lose resources to sustain such one-sided trade. Even worse, China’s own environment has drastically degenerated within decades due to its unsustainable, if not predatory, growth. Eventually there will be no Chinese who are willingness to stay at home. Conclusion: to trade fairly, not to trade unfairly. To be fair, do calculate the cost of human rights, labor rights, environmental protection rights, and intellectually property rights etc., when manufacturing.

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  4. Frauke Austermann 2 months ago

    “To trade or not to trade?”, that is this month’s Global Matters’ question. And the answer is easy: there should not be such a question in the first place, I fully agree with Prof. Shen Dingli. Mercantilism is dead since the 18th century and it is questionable if it ever has been more than an economic theory. The current calls to “Buy American” and the like are regular nationalistic hiccups that seem to be the exception to a rule. However, whilst free trade according to the theoretical ideal does mean “free of national borders”, it does not mean that trade shall be “free of rules”. It is also true that uncompetitive jobs can at best be kept alive temporarily. Furthermore, globalization, liberalization and digitization, the most important buzzwords in business these days, have created new jobs and will continue doing so. At the same time, we may not forget that all these three “-zations” are classical change management processes: while goods can quickly be moved from A to B, people’s minds and cultures, which includes their education, change rather slowly. In fact, even if we now realize that business desperately needs an armada of software engineers, we cannot re-educate former coal miners to do such jobs from one day to another. And this is what states and governments should focus on: rather than limiting trade and closing borders, governments should invest in a constant development of people’s competences and take care of framework rules that make free trade serve people, rather than the other way around.

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6 Comments

  1. Yang xiaoping 2 months ago

    Trade deficit is not a REAL issue no matter between U.S and China nor between India and China.

    For the trade deficit between U.S and China, it is mainly decided by the offshoring of Multi-national corporations, as well as the STRONG U.S Dollar as international currency. The stronger U.S dollar is, the stronger U.S economy is, the larger China-U.S trade deficit would be. It has been decided by U.S instead of China. It’s economically reasonable normal;

    For the trade deficit between China and India, it is mainly driven by the real demands of common Indian people and supported by the competitive pricing of Chinese commodities due to China’s sound capability in manufacturing industry to integrate upstream &. downstream part to generate ‘concentration effect’. But it is NOT high-value added, though we would have to recognize and appreciate the size of Indian market which attracts not only Chinese but also U.S and other western countries.

    Therefore, Trade is not “to have and not to have”, it’s more economically reasonable choice in the context of global economy evolution.

    But, the real ISSUE for China, U.S, Europe and some EAST Asian Countries is still the strong U.S Dollar which is the key to project U.S leadership in global economic system. At one hand, U.S is undergoing the most significant high-tech, high value-added driven economic transformation; at the other hand, China is and would continue to suffer and explore ways to finish the most difficult economic upgrading of its own economy.

    So far, it’s still too early to say China’s weight in influencing U.S policy has been increasing because of its stronger trade leverage. Also it’s still not clear whether the difference on the quality of two economies (U.S and China) is narrowing.

    In the mid-run, the prospect for China’s economic development and constructive role in international system is positive considering the unfolding of OBOR and the substantial reforms regarding its state-owned companies. Yes, China needs not to screw itself up 🙂

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  2. Zoltan Eperjesi 2 months ago

    Protectionism versus global free trade: thoughts with some pros and cons
    Economic and political arguments for and against the protection of the national market can be best showed from their normative side. Thus, pros and cons are guided here by the question why the national market should be protected or why solutions to boost free trade should be sought? In this way, the problem why it is common in practice to also apply certain protectionist measures is not dissected in its details here, because this is a more complex and quite abstract topic field, respectively to demonstrate how this in praxis works needs precise indebt case-study data.
    Political arguments for protectionism are often based on certain safety traits tied to national interest of single countries. Accordingly, countries must protect specific industries and sectors such as coal, steel, or agriculture in order to remain “independent” and to be able to be completely autonomous especially in the field of self-supply in the event of a crisis. Governments are encountering major difficulties by the adoption respectively by the practice of such protectionist measures because it is rather debatable (many sided conflicts of interest) the identification of those industries and sectors that are significant for the national security. Therefore, the practice of protectionist measures also involves several local conflicts (and not only) and also can generate strong lobbyism. It is also questionable if a certain government has the sufficient “time” to effectively carry out the adopted measures in the term of its mandate as the realization of such measures are mostly tied to complex middle-term or long-time projects that often oversteps a four year timeframe. Such protectionist decisions are quite risky from the perspective of pragmatic politicians as its effects are multisided and they are often going hand in hand with the amendment of the current legislation. The newly created situation can be quite harmful for the flow of foreign capital and investments in the country where the implementation of protectionist measures prevails. Key investors can interpret it as unfriendly business climate. Another complication is that most of the international investors will “punish” such a county with the reduction of their investments in the concerned region or even move their units in other countries where the business climate is more favorable for them.
    The next significant political argument of protectionism is the issue of internal stability. Accordingly, certain sectors need to be protected in order to ensure a favorable employment rata and ultimately to secure in this way the internal stability of their country. However, it should be considered that through protectionism there will be strong redistribution effects, which in turn can generate serious internal tensions, because it is a long-term process to reach consensus among “all” involved key actors.
    Another protectionist issue is the argument of reciprocity, because this should help to prevent a relative loss of power. Countries should only cooperate and liberalize their trade as long they can ensure that another country does not benefit more from the cooperation than it does itself. If another country gains a greater benefit from dealings, it should be answered with protectionist measures. The real difficulty at this juncture is that reciprocal tariff reductions are only focused on exports with the main presumption that they mainly increase the economic benefits of a certain country, while the positive effects that are resulting from rising imports (ex. technology transfer, increase in efficiency, etc.) are often completely ignored.
    Let’s consider protectionism as a tool of politico-economic pressure. Indeed, protectionism can be used as a foreign policy tool to carry out certain sanctions in order to enforce the national interests of a single country. Nonetheless, economic history and case studies are clearly showing that the success story of sanctions is seriously controversial. Sanctions are also frequently damaging the domestic industry as market share will be lost, or they can cause retaliatory measures as a backlash from abroad. Let’s take an opposite example of the history of sanctions. Research of Mr. Guijarro-Usobiaga focuses on EU sanctions and their impact on autocratic regimes. He discusses the past, present and future of sanctions by analyzing the evolution and effectiveness of sanctions as a successful scare campaign and punishment mechanism. Researcher of the LSE claims that sanctions have come a long-way since the 1990s and do constitute an effective means through which actors are trying to enforce certain international norms, but Guijarro-Usobiaga also stresses that they do not constitute a silver bullet. (More to the topic: http://blogs.lse.ac.uk/lseih/2015/04/16/economic-sanctions-past-future/)
    Besides, Mr. Jay Chittooran claims that history says trade protectionism has never worked. His article has the same title as the presented statement. Chittooran concludes his thoughts in the following way: “Trump has said that the goal of his tariff plan is to protect American workers and companies. But as history tells us, protectionism has had terrible, and often unintended, economic consequences.” (Source: http://www.thirdway.org/memo/history-says-trade-protectionism-has-never-worked)
    Let’s see certain political arguments related to free trade. This protects national decision-makers from different interest groups and prevents them from the emergence of an ever-increasing “protectionist” doom loop that repeatedly offers specific support for certain inefficient local industries and domestic production sectors. As a next point, it is to see that free trade also leads to an international division of labor and consequently to rising international dependencies. These interdependencies are encouraging the cooperation between various countries and ultimately generate more stability and peace as the cost (military expenses and the maintenance of weapons stockpile and specialized staff for the case of a war) of non-cooperation are too high for single countries. Of course, it is not to forget that even free trade can be used as a political power tool. Accordingly, countries with a large domestic market can open this and they can foster in this way the dependence of other participants. Besides, they can take advantage from the opening of certain specific areas as an incentive mechanism in order to implement particular political or economic objectives. Nevertheless, it is to note that increasing dependency and the intensification of trade liberalization may also involve international conflicts. Therefore, current trade liberalization (which is increasingly focused on the elimination of non-tariff trade barriers) also strongly touches national legislative areas as well as certain national preferences related to it. To mention some examples: consumer protection, or health and food standards. Liberalization in these fields often leads to serious international conflicts, as the case of the transatlantic trade dispute on genetically modified foodstuff clearly shows… To be continued in my following blog by addressing economic arguments for protectionism and free trade as a next section.

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  3. Zoltan Eperjesi 2 months ago

    Economic arguments for protectionism and its limitations can be discussed under more catchphrases. The issue of „Terms of Trade“ refers to the terms of exchange in international trade, which are determined by the relative prices of the tradable products. In the two-country case, the “terms of trade” are usually defined, as the ratio between the price of the exported goods and that of the imported products. A worsening of the “terms of trade” means that the concerned country receives less import goods per unit of the export goods than before. In the case of an improvement in the “terms of trade”, a country will receive more imported goods per unit of export products. Supporters of protectionism are claiming that large countries can improve their “terms of trade” through trade barriers. Consequently, a large country can reduce the demand for a certain commodity by imposing a tariff on the imported product. Since a large country is affected by its demand for the world market price of the concerned article of trade, it can reduce the world market price on this item by a custom and the resulting decrease in national demand will also lower the world market price. As a result, the product is cheaper by now. The large country can therefore import more of the product as before and its “terms of trade” have improved. The optimal duty is the one tariff that most increases the welfare of the country. The “Terms-of-trade argument” is very controversial subject matter, because the welfare gain of the great country has to confront with a loss of welfare abroad. Moreover, a country with such a policy must expect retaliatory tariffs as well. In addition, there is hardly such a single country whose demand for a commodity is large enough to determine the world market price. The next catchphrase in the row of economic arguments for protectionism concerns the “Infant Industry” item as advocated by Friedrich List and Alexander Hamilton. According to this argument, young and emerging industries should be protected by educational tariffs as long as they are able to participate in international competition. Therefore, educational tariff is designed to protect “infant” and developing industries, which in the case of free trade would be subject to intensive foreign competition. They have to gain temporary support as they are bearing the potential to achieve international competitiveness. This argument is again highly controversial because of several reasons. It is still not clear why the private capital market does not provide the necessary capital for the development and expansion of a certain industry, if it can be competitive in the long term. The “age” of an industry alone is therefore no realistic argument for its temporary protection as in economic terms several other facets related to operating efficiency are the determinative parameters for responsible decision makers. As a consequence, this argument is full with counterfactual items. Moreover, it is questionable whether the state can better recognize the future viability of an industry than the private capital market and decide about it if it is or not production-worthy. However, strong political influences can lead to the protection of certain industries, which will not be internationally competitive in the long term. In such a case it is very difficult to take back the tariff protection later. The next topic to be addressed is the market failure. The existence of certain domestic market failures involves the introduction of governmental regulations or protective tariffs. These market failures are amongst other things: firstly, incomplete information and information asymmetries; and secondly “first mover disbenefit“. The “first-mover disbenefit” argument states that the first producer in a new industry or sector has certain development and research costs, but because of the transfer of technology, the others, respectively the following companies will not have such expenses. Due to the research and development costs, the prices of the goods of the founding company are thus higher than the prices of the products of subsequent companies, which can adopt and copy the technologies. The founding company is less competitive than the following companies because of its higher prices. Since no company is willing to pay the unique founding costs of the new industry, it will not be founded. Thus, the state has to intervene and promote the development of the new industry, for example through the imposition of a protective tariff. Nonetheless, it is open to discussion whether the protection of the industry from foreign competition is the optimal solution or not. Another catchword is related to the “advantages of the largeness” of a country. The international dominance of a certain country in the production of certain products often results from a time advantage. Thus, the country, which began with the production of a commodity earlier, already completed its specialization and thereby was able to realize returns to scale: now it dominates the market. It has a competitive advantage in the international market. This market dominance also involves that market entry barriers for potential manufacturers in other countries are very high. For that reason, the state should intervene in these countries and support this industry in the domestic market until it is competitive enough to participate on the international market. This point is very similar to the infant industry argument and involves similar difficulties in the praxis. It is not clear whether the government is or not in the possession of all essential information to select the eligible and sustainable industries and sectors. Here again, the question arises why a certain industry cannot find enough support on the private capital market if it is profitable in the long term? It is also a challenging issue that the support of the chosen sector on the domestic market is at the expense of the other profitable sectors. This leads to strong and multifaceted redistribution effects, which not always have to have a positive effect. Assuming that the government is capable of recognizing the strategically important and viable industries and in the best case there is no long-term promotion of inefficient industries, so far only the imposition of a protective tariff is still the second-best strategy. A better and more direct strategy would be the temporary provision with subventions of the industry concerned. It is also problematical that the welfare increase of a country is at the expense of the foreign country. This situation leads to an international profit diversion in the long run. Finally, it depends on the behavior of the partner countries whether the strategic trading policy and the establishment of protective tariffs are successful or not. As a consequence, it is to be expected that other countries will respond with protection tariffs or subsidies as well in order to remain competitive on the market. Such many-sided interventions can result in serious international trade conflicts. Now, it follows “the securing a certain level of income” preferential tag. The pressure on wages is rising as a result of the increasing international competition. A sign of this is the increasingly unequal distribution of income and the increasing poverty in the industrialized countries, where often the USA is cited as an example. For instance, companies that are competing with low-wage countries are forced to cut wages in order to keep production costs low and remain competitive. The establishment of trade barriers is intended to secure the existing income level. However, the politically and socially pressing problem here is that not only globalization or international trade are responsible for the unequal distribution of income. Just to give one example, one of the causes in the USA for this is a decline in the influence of trade unions. Protectionism can therefore not be the only possible solution to this very complex issue. It should to be stressed that protectionist measures are causing costs as well: on one hand, the prices of certain imported goods are higher because of the imposed tariffs; on the other hand, prices of corresponding domestic products are rising. If, for example, these products are semi-finished products that are further processed, the cost of the final product increases by the manufacturer, which makes him less competitive. So there will be a redistribution effect and it is also possible that wages will decline in other sectors. Let’s move to the “securing a certain level of employment” catchphrase. Trade liberalization leads to the disintegration of certain non-competitive industries and thus to rising unemployment. Such changes are hardly affecting the high-tech industries, but often the labor-intensive industries such as the textile and clothing industry, as especially they are competing with products from low-wage countries. As international competition increases, it is to be assumed that companies either reduce their employment or move production plants to low-wage countries. Accordingly, there will be a strong reduction in jobs in certain sectors, predominantly in the labor-intensive low-wage sectors. Therefore, the state should intervene to protect the sectors concerned and thus secure employment. It is to note again that protectionist measures are generating complex costs and such interferences are also causing redistribution effects. Besides, the causes of rising unemployment are manifold and cannot be reduced to such one single factor as the increasing international competition. Consequently, employment strategies must also combine different approaches in order to be effective in the long term. To be continued…

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  4. Zoltan Eperjesi 2 months ago

    The next point in the row of economic arguments for protectionism is related to the “prevention of the migration of domestic companies abroad.” Free trade and increasing competition require an ever greater cost reduction, so that industries are moving their production to low-wage countries in order to save production costs. To prevent this, the protection of the domestic industry is demanded, thereby reducing competition in the domestic market and thus the profits of the company are increased. As a result, they can offer their products cheaper as before on the international market. However, it is to bear in mind that the protection of a particular industry is at the expense of others and there is no increase in social benefits. Thus, protectionism should not be the overarching strategy in keeping domestic industries in the country. It is necessary to create other incentives, such as improving the domestic infrastructure. The following item to be addressed is “the international tax averaging”. Through different tax rates at home and abroad a country with higher taxes can be cached into a competitive disadvantage. This should be offset by protectionist measures. Counterargument: different tax levels and structures do not necessarily have to limit competitiveness, since competitiveness is determined within a much larger frame and cannot be only bound to certain taxes and duties. Let’s move to the “environmental and social standards” argument. With regard to the environment, it is argued that international competition and competition between regions leads to a reduction in environmental standards. Thus, high environmental standards are increasing the costs of production. Countries with low standards therefore have a cost advantage. There is an unfair competition that leads to a worldwide reduction of standards. This applies both to social and labor standards as well as to health and consumer protection standards. The protection of domestic industries against the competition with low-level countries should thus ensure the high level of standards in industrialized countries. In addition, the import of goods, which have been produced under inhumane conditions (ex. child labor), or their manufacturing is destructive to the environment in the country of production should be limited. Countries should have the right to refuse to import certain goods due to health considerations. An example of this is the debate on genetically modified foods. Counterargument: so far there cannot be determined a “race to the bottom” (competition-induced degradation of standards) in the social and environmental standards in developed countries. In addition, there is a risk that the mentioning of social and environmental standards is only used as pretext, behind which in fact the protection of sensitive areas (such as agriculture) is hidden in industrialized countries. Protectionism increases international tension. Besides, international trade and the long-term positive effects tied to it are leading to increasing economic growth and rising incomes in developing countries. Rising incomes, in turn are accompanied by increasing demand for social and environmental standards. Therefore, (instead to isolate oneself) industrialized countries should open their markets in order to increase the standards in developing countries. Another economic topic is the “balancing the trade balance”. Imports of a country will rise by the reduction of trade barriers. As a government strives to achieve a balanced or positive trade balance, they can either try to increase exports or restrict imports. Again, protectionism is not the best solution in this case since a negative trade balance can have a variety of causes, such as structural problems or an overvalued currency. Accordingly, the measures must address the causes and the restriction of the competition on the market is not a comprehensive answer. Moreover, a negative trade balance as such does not has to be a problem as long as the capital inflows into the country are high. The best example in this respect is the USA. The last point that will be reviewed in the row of economic arguments for protectionism and its limitations are “the fiscal reasons.” After all, fiscal reasons are frequently mentioned in demands for more protectionist measures. This is particularly true in the case of certain developing countries as they often do not have an adequately functioning tax system and their state revenues were “sponsored” to a large extent from customs duties. However, in this case again protectionism cannot be an economically sustainable solution because the introduction of a functioning tax system would be the most viable alternative. Now it follows the review of economic arguments for free trade. The first topic to be addressed is “cost advantages”. Free trade is essentially based on David Ricardo’s Theory of comparative cost advantages, which is a quite complex subject area. In line with this, it is crucial what the exact political framework conditions are, how the business environment is and how changing political and economic circumstances are influencing the trading conditions of main global players and units involved in trade. Through international trade, countries can exploit their comparative cost advantages, which is due for one thing to the technological differences and different productivity of the production factors (D. Ricardo’s theory), and for another thing, due to different factor endowments (model of Heckscher-Ohlin). In theory, free trade enriches both trading partners. This is because both sides will specialize in making what they’re good at and this allows them to make maximal use of their comparative advantage. They can, therefore, specialize in the production of certain goods in which they have a comparative advantage. They will produce more of this products and export them abroad. In return, they can import more goods and consequently consume more goods than they could have produced. Specialization and international trade are thus increasing the possibilities for consumption. The second issue to be addressed is the “specialization” of companies. Through international trade and specialization, there is an optimal international distribution of resources. So goods are produced where production is cheapest and most effective, whereby productivity enhancing international division of labor is achieved. The third economic argument for free trade is “export-led growth.” Free trade opens new markets and can thus lead to an export-led growth. The opening up of new markets means that the demand for domestic products is increasing, so that production can be expanded. The fourth economic issue which speaks for free trade is “transfer of technology”. Free trade allows an international transfer of technology and thus encourages innovation. The fifth economic item to be named is “employment”. As a result of international trade and because of the growing demand on products even the production is boosted and to that effect the demand for labor is increasing as well, which in turn leads to more employment. The sixth economic argument for free trade is “the quality of jobs” as commerce promotes export-oriented industries. As wages in these industries are generally higher than in the internal-oriented industries, the quality of new jobs is frequently much higher. A shift of jobs from domestically-oriented sectors to export-oriented industries is also to be seen as positive development. The seventh economic catchword in this row is “efficiency”. Due to the increasing domestic competition, companies are forced to produce more efficiently and cheaper. Therefore, it comes to the removal of market distortions and other inefficiencies. Inefficient producers and industries are being pushed out of the market. However, domestic economic reforms, innovation and structural change are strongly promoted, which leads to productivity gains and sustainable growth. Businesses have an opportunity to compete in the global market, that helps them to understand the real value of their product and therefore they will initiate several improvements and developments on the product which has to compete with other goods in a global market. This process also allows businesses to get more competitive and to effectively adapt to consumer’s demands. This development increases the economic efficiency of trading partners, and as a result also decreases the prices of products and in some cases even that of certain services. Now it’s time to address the ninth argument for free trade, which is “decreasing prices”. International free trade leads to an increasing supply and thus to lower prices, that is in the interest of consumers. International free trade allows the free exchange of exotic products, which offers consumers more variety and diversity of goods. Consumers have the opportunity to purchase imports cheaper which were made abroad. Free trade also helps to get foreign currencies in the economy by the way exporting goods to other countries. Accordingly, customers will have a lot of variety of products and they can explore other cultures, ideas or even services (truism). Therefore, free trade also creates strong relations with other countries, which is limiting the chances of external conflict. In this way, the world has more access to ideas and products from all over the world. As shown in the statistics of the EU (Eurostat), free trade boosts the GDP of the participating countries. Following this, it can be stated that more competition leads to more progress and free trade allows for a far-reaching open competition across the global with foreign businesses. This in turn frees up valuable resources at home, which can be used for the production of other goods or the provision of better services. To be continued…

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  5. Zoltan Eperjesi 2 months ago

    The last economic argument is the so named “intern and extern economies of scale”, which can be used through international trade, the operation of new markets, specialization and expansion of production. Internal economies of scale are at a manufacturer present if he can achieve a disproportionate increase in the quantity of output by specializing production with a proportional increase of all production factors. By doing this, the total cost of production increases disproportionately to output increases. So the average costs will decrease with increasing amount of output. Internal economies of scale occur, for example, if production can be extended without the need for new production facilities or technologies, so that the cost of the infrastructure remain the same, while profits rise due to the increased production. Specialization can also be used to achieve external economies of scale, for instance, if there is a concentration of certain industries in a region, whereby technology and knowledge “overflows” from one industry to another in a way that thereby the cost of all the branches of production can be reduced. These are external effects since they are not included in the cost accounting of companies. The free trade principle and the arguments mentioned in the above are criticized from many sides. It follows a short summary of main critical points: a) the economic-theoretical assumptions and basics of classical and neo-classical trade theories are no longer appropriate; either the mobility of production factors or the intra-industry trade, nor the redistributive effects resulting from trade liberalization have been taken into account; the trade-related short-term adjustment costs have been ignored as well, which are mostly very concentrated and this accompanied by selectively increasing unemployment. It is to see that the pros and cons of free trade are mostly the same as with most of the aspects of capitalism. Free trade will benefit both, the seller and the buyer as well since the comparative advantages of countries will be applied and the common wealth between the trading countries will increase. However, the cons is as always the distribution of wealth among the citizens within a country and the negative external effects on the environment. Besides, if the bargaining power between the trading partners is uneven distributed, from then on also the chance of exploitation for the selling country increases. This is what happened between the developed and less developed countries, where the buyer paid a too low price to the seller because of the buyer’s stronger position. Thus, certain transactions were guided by the “take it or leave it” motto. This is where maybe “Fair trade” (which is also strongly criticized) or other alternatives such as direct trade or even other options of e-commerce are coming in. Taking everything into account, but trying to put it simply, it is to remark that “capitalism” in itself is beneficial for all parts as long as there is certain governmental control and serious consensus arrangements are observed by trading partners. The last economic crisis also has shown certain well-known elements (banking sector tied to international stock exchange and in the virtual money or capital market; see “bad banks” and “toxic assets”) of the self-destructive sides of the entire system. Right here is the main rupture where new and old critic arouses from all sides on the system which should be repaired. As Ms. Alexei Voskressenski presented in his post, “the process of political and economic rebalancing resulting from the deadlock of the globalization model proposed by the West in the late 1980s, means a search for a new equilibrium between mercantilism and economic nationalism on the one hand and trade regionalism and transregionalism on the other hand.” Indeed, there are today maybe only three sustainable national markets. It is also recognizable that not even the USA can afford a full-fledged economic nationalism anymore. Again, Mr. Voskressenski puts it simply: as “other states have no other choice than to trade and experiment in order to find a new balance between national production and their ability to compete and trade on markets broader than the national one.” Therefore, the ongoing challenge of any responsible government is to adhere to such a new balance, which perhaps still must be continuously worked out together with other partners, which allows the participants to improve and succeed within a certain well-balanced framework and not to isolate oneself from others as in this case there will be no dialogue and many energies will flow in the direction of crisis management. The opinion of Mr. Shen Dingli is quite interesting, as he may have a point concerning the issue. Thus, I pick up his line of argumentation. “In fact, almost all countries could offer something which is cost effective for some others to import. Then, to trade is economically rational. The real question, however, is how much to trade.” The theory presented by Mr. Dingli (“the more exportation, the more jobs at home and then more importation, and finally the more jobs abroad”) is indeed full with pitfalls for involved trading partners, especially if this is done excessively. The example of China (export done in excess, one-sided trade and the destruction of its own environment also means in the end to lose valuable resources, inclusively human capital) clearly shows that “predatory” growth also generates several unsustainable losses. The conclusion of Mr. Dingli also shows the controversial side of the discussion topic, thus one could ask how should “responsible governments” trade fairly and not trade unfairly? This direction already concerns another thing, as formulated by Mr. Segbers in the introduction of this blog. Thus, it is valuable for all of us to review such concepts as responsible government tied to “fair” or ecologically (and not only) sustainable trade. I am not sure that the concept of “responsible government” is a clear standard, which is accurately practiced by each member state of the EU. In my opinion each political regime tries to interpret it in its own interest. Mr. Dingli shows certain directions of what it means to trade fairly (“do calculate the cost of human rights, labor rights, environmental protection rights, and intellectually property rights etc., when manufacturing.”) and one also can include the topic addressed by Mr. Justas Paleckis in this line of argumentation as he pays attention to an important detail: such a global player as the EU supports TTIP and trade liberalization but member states have quite different interests especially considering own commercial activities. Member states are quite differently involved in the global and inner-European trading, not to mention the different levels of development of the private and industrial sector if comparing core European countries with their competitors in the periphery. Accordingly, one could even consider world system theory (but also dependency theory) because several elements of it are today very often amalgamated in the political rhetoric of certain charismatic actors in Europe, – and not only. Both, world-systems and dependency theory are well-known in the former Eastern bloc countries as well. Moreover, almost a half century of socialist rule and harsh communist regimes are still present in unprocessed legacies. Thus, it is no wonder that the public discourses of certain charismatic politicians are containing several catchwords by which they can “play” with the pigeonholed image of the bad and exploiting west (labelled as imperialist or capitalist, thus the bad exploiter powers in times of communism). To present globalization as black sheep for every possible problem has been a fashion in certain circles and I just want to point out few issues. Some opponents criticize the economic/foreign policies of the West and the USA, some again criticize the sharks of Wall Street, some criticize the policies of international companies and organizations as WTO, IMF and finally conclude that globalization is very bad. Even though most of the disapprovals are based on opinions rather than facts (this distinction is really important), but I am not going into details here. Some of the critics also have factual valid points but simply condemning globalization for EU, USA, international companies, WTO or IMF makes absolutely no sense, because Globalization as a concept exists independent of those countries, institutions and organizations. To put it others: it just means no geographic trade barrier-as simple as that. Progress of technology may make it easier, the existence of certain institutions may delay it or facilitate it, but globalization as a main track of resource allocation such as industrial inputs, human capital or monetary capital isn’t defined in terms of a certain president, EU, WTO or Wall Street. Thus, globalization cannot be blamed for the failure of a specific policy or institution. Furthermore, globalization, in and itself doesn’t damage the environment. Indeed, Arctic ice melting, high carbon emission, etc. are dangers to humans, but counteracting them requires coherent environmental policy, proper regulations and more significantly, suitable positive/ negative incentives on the economic players. In my opinion, regulating the environmental externalities by private players is one of the very few issues where the economic role of a state could be vital, – otherwise if an interference of the state in the private sector is demanded it should be carefully thought out how this should work within the checks and balances framework. Conclusively, by thinking on how discrimination works, it is really hard to defend protectionist policies and this should not be a sort of cliché against discrimination, but if somebody wants to criticize globalization having certain assumptions it also should express them.

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  6. Zoltan Eperjesi 2 months ago

    Wrong economic understanding of protectionist actors concerning free trade? The resistance to free trade is large and politically widespread today. It is predominantly based on the idea that international trade is a zero-sum game. For example, the current US president has bought into the idea that the global economy is a zero-sum game. (Source: ttps://www.ft.com/content/59d1a53e-b71a-11e6-961e-a1acd97f622d?segme) Accordingly, to put it simply: there is no win-win situation as what some win, the others lose. It is stipulated that one could protect oneself from major losses by demarcating against foreign competition. Subsequently, opening up the market could only be made against the concessions of other countries. Nevertheless, the idea that protectionism can protect the domestic market from exploitation by others (foreign import products) is quite inaccurate. In point of fact, foreign trade is no more than the expansion of the interpersonal division of labor among the trading partners of other nations where the current shifts and differences between the legal systems of the participating countries are particularly complicating the efficient execution of complex commercial operations. However, no politician would dare to interpret domestic division of labor as exploitation of one participant through the other and to that effect just suggest the self-subsistence of each single citizen. Moreover, if analyzing trade barriers it is quite obvious that do not serve the entire population but individual sectors. Thus, taking something specific and applying it more broadly is making a generalization. It’s a generalization to say all dogs chase squirrels. Back to the topic: it is therefore about the targeted operation of some particular interests. Another main argument sees protectionism as an opportunity to better protect socially weak people from foreign competition, because it destroy jobs and should therefore be constrained. Nevertheless, if concerning pros and cons, also this reasoning has certain weaknesses. First of all, empirical studies are demonstrating that it is less the globalization that destroys jobs but rather the creative destruction of technical progress, which is certainly accelerated by intense competition that comes from both directions: from abroad as well as from the domestic market. In any case, the increase in overall economic productivity and the associated wage increases are primarily responsible for the related problems of low-skilled workers. Secondly, the ongoing structural change caused by domestic or foreign competition can only be suppressed in the short term by means of trade barriers. That is to say, vulnerable jobs are possibly secured in the short term, but they prove to be non-profitable in the long term and will therefore one way or the other eliminated later. Thirdly, when you come to think of it, protectionist measures are undermining in the long-term the realization of proposed social objectives as soon as consumer goods (ex. food, footwear and clothing), for which the low-income households have to spend a large part of their income, are subject to particularly high tariffs. As an example see the related situation in most of the OECD countries. The main causes of protectionism are thus not founded on the desire to help the most vulnerable, but in the power of vested interests, such as the automotive industry, the chemical industry or agriculture. A question arouses: Does protectionism help to tackle the most pressing economic and social policy problems? In fact, for example the problems mentioned by President Donald Trumph as a justification (!) for his protectionist plan, namely bilateral trade deficits and job losses in traditional American industries, have little to do with foreign trade. Indeed, America’s existent problems have nothing to do with imports. (Please see: Source: http://bdi.eu/media/themenfelder/internationale_maerkte/publikationen/20160525_Laenderbericht-USA_Stabilitaetsanker-Weltwirtschaft.pdf) and accounts of Mr. Andreas Freytag: http://www.insm-oekonomenblog.de/ )
    One can constructively criticize free trade as it also has its mistakes, but comprehensive economic and political-economic reflections are suggesting that currently free trade and open markets represent the best possible trading policy in a country. It follows a short review of certain economic, social and political arguments as presented in up-to-date theoretical and empirical studies. Let’s formulate them in statements: a) The demand for infrastructure is increasing through international trade, especially in emerging and developing countries. If such investments are made, a positive circular flow can occur because the costs of the division of labor are reduced for example by cheaper communication channels, comprehensive financial services and better roads etc. b) The positive economic effects of foreign trade are increasing the middle class. This is particularly evident in various locations in the world as for example in Singapore and South Korea, but even in Ethiopia comes into being a small middle class. This development increases the pressure on political elites to improve their inland institutions. To state more precisely, that means to strengthen the legal order and private property rights, to increase economic freedom and reduce corruption. c) Foreign trade provides a better understanding of other cultures and contributes to peace. The best known example in this respect is the European Union, at least with a view to the functioning of its internal market. d) Dynamic efficiency, which means that intensive global competition increases the pressure on the import-competitive industry in order to increase productivity in each single sector inclusively the participating economic units. Following this, imports also cause a technology transfer. e) Static efficiency, which means that compared to the self-sufficiency extended work division allows for the specialization of the production, respectively trade according to comparative cost advantages and in this way improves the allocation of resources. More specifically, this means that the trading partners will specialize in that material in the production of which they are the relative most best (in terms of cost structures). Even if a partner could do absolutely everything in the best way, it is therefore worth dividing the work for all parties, since they change the relative prices in favor of the partners in such a way that they are better off than in the status quo ante. f) The freedom to choose the trading partner can be interpreted as a civil right. Put another way let’s ask: on what kind of legal basis (!) can the state dictate terms (!) to citizens to choose contractors where they want? Therefore, it is obvious that foreign trade also strengthens this right and the freedom of the individual, but also society as a whole. After implementation of opening-up policy measures in the national market, not only the number of potential trading partners, but also possible economic activities will considerably expand. This diversity of potential trading partners reduces the dependence on individual trading partners and thus, contrary to various preconceptions, increases national independence. This is particularly true if the citizens of a country are dealing with partners in many countries. Today, companies are often positioned globally and therefore their global value chains consist of various stages in several countries. It is a complex system, which in certain cases evolved through decades. The majority of trade politicians is still recognizing the value of foreign trade. This multilateral trade system was created after the Second World War in order to make rational liberalization from an economic perspective also politically attractive. This is accompanied by the principle of reciprocity, which provides the political decision-makers of a country with a weighty argument against domestic interest groups.g) Foreign trade is only the expansion of the division of labor at home. There, too, is so far free trade than that products from one city do not have to be declared in another city in the same country. Consequently, there is a specialization even within the domestic market according to their different skills and resources: so the theorem of the comparative cost advantages also applies to this units. Let’s suppose that every city in the home country imposes its own corporation tax on which advance payments from other places would not be deductible for profit-making. Where would the creation of this new tax-machinery lead and how much would it cost for citizens? There are alternatives as the development of social and educational policies help better than protectionism. Thus, if politicians really want to support the weakest or the losers of the work division, they should not operate with protectionist measures, but with target-oriented social and education policy, respectively comprehensive and sustainable strategies. With more targeted social policy, the state should help those who lose their jobs either in the short term, until they get a new job again, or in the long term if they cannot find a job. The state can certainly do more with a targeted service demand or similar measures at this point, which currently is often not the case. Through target-oriented education even the qualification can be increased so that even those whose jobs are lost through technical progress or competition are given the opportunity to find employment again. It is to observe that the development of the politics on a world scale, gets inputs to reorient and enforce rules by which wealth-creating economic policies can be combined with more targeted social policies. Let’s hope that these conflicting policies will not shift to more ideological confrontations or a war of trade.

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