Me old china plate

Two stories, separate but thematically linked. The first about Chinese foreign policy starts with this.

Donald Trump’s former chief strategist Steve Bannon has warned that Australia will become “a tributary state” to China unless the Morrison government joins the US in forcefully challenging Chinese hegemony in the region.

And then this: from the Herald Sun.

Premier Daniel Andrews has made a big deal out of talking up the Australian content in Victoria’s huge $45 billion investment in infrastructure projects.

Local content should be a priority and, indeed, the government needs to keep construction unions inside the tent to contain costs and keep industrial peace.

Mr Andrews had pledged a minimum 92 per cent of Australian steel would be used in the $6.7 billion West Gate Tunnel project.

But as revealed Thursday by our state political editor Matt Johnston, contractors for the project have ordered a 33,000-tonne shipment of steel from the Chinese government-owned firm ZPMC.

There are serious questions about what agreements were touted by Mr Andrews to foreign investors during his trip to China last month. Mr Andrews, the only Premier to have signed on to China’s controversial Belt and Road Initiative, has previously said he would work to attract Chinese investment in Victoria’s infrastructure program.

No doubt imported Chinese steel would be a lot cheaper than Australian steel. But the decision may yet cost Mr Andrews much more in union fury and public faith.

The title, btw, is a bit of rhyming slang I learned when I first reached these shores those many years ago. Seems quite appropriate in the present context. And while I’m on it, if one is interested in free trade, this might be of interest: How does China cheat on trade? Let us count the ways.

China cheats by protecting its home market from American imports with high tariffs, tricky non-tariff barriers, and costly, constantly changing regulations.

China cheats by subsidizing the exports of government-owned “national champions” to crush its free market competitors and dominate global markets.

China cheats by preying on weak counties, locking up their natural resources with “debt traps” in an obvious effort to gain a global stranglehold on key resources like bauxite, copper, nickel, and rare earths. These monopolies are not only being used to fuel China’s industrial machine, but to punish those countries who would oppose its predatory policies.

China cheats by subsidizing manufacturing with cheap loans and cheap energy, and also by turning a blind eye to environment, health and safety standards. Because of its cheating, it already dominates industries ranging from ship production and refrigerators, to color TV sets, air conditioners, and computers.

Above all, China cheats by stealing key technologies and intellectual property from the United States and other countries. These activities range from cyberespionage and forced technology transfer down to massive open-source collection and plain-old physical theft.

Economics is and has always been a subset of politics. No economics text can ever tell you what ought to be done, only what the consequences of different decisions might turn out to be. And a modern text doesn’t even do that.

A lesson in trade theory

“Every economic answer is a political question.”

Here then is a question for all you experts on international trade, taken directly from my Free Market Economics [pp. 248-249]. Picture two countries, A and C.

Suppose in Country A, in one hour it can produce either one car or 1000 shirts. [It’s also the same answer if Country A can produce ten cars and 10,000 shirts per hour!]

Meanwhile in Country C, in two hours it can produce either one car or 500 shirts.

According to the economic theory of comparative advantage, how many cars will Country A produce? OK, once you’ve worked that out, now tell me if you get the same answer using common sense. As chrisl said, “economic theory is all right in theory”. Personally, I’m not even sure of that, but you get the idea.

So here’s the thing. It is entirely possible that the US is tired of carrying most of the burden for the defence of the West and would like a bit of sharing the burden. It might also find some respite for itself in strengthening those parts of its economy which are more closely associated with its defence industries. And it might even wish for some kind of gratitude from others, supposedly on the same side, in trying to assist the US in resurrecting its strength. And then there are the straightforward economic issues, which are not the same as the political. So let us go to these.

And of course the issue economically is comparative advantage, and not pure let the most efficient producer produce each product. With comparative advantage, it is not always the most efficient low-cost producers who produce. If you don’t even understand that, you should keep right out of this debate.

Why encourage free trade:

  • competition is what drives improvement and growth – without competition most businesses would just coast along to the fullest extent they could
  • innovation is driven by competition – the way to take on an established business is to find a better way to do something
  • all other things being equal, free trade is best

Why “free trade” is not working for the US:

  • cheating is rife – try to sell an American car in Japan – not possible for all kinds of products in all kinds of countries
  • many countries subsidise exports while imposing non-tariff barriers to trade on imports along with tariffs themselves
  • currency manipulation – artificially holding exchange rate lower to discourage imports and encourage exports is not unknown
  • $US is world reserve currency it is unable to adjust to repair a balance of payments deficit
  • there are many forms of approved trade restrictions everywhere you look – the EU for example – such as:

Trading blocs

A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members. Trading blocs are a form of economic integration, and increasingly shape the pattern of world trade. There are several types of trading bloc:

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.

Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members.

Customs Union

A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO.

World Trade Organisation

There are then the WTO rules of trade engagement which are not designed to create a world where free trade is on the only answer. The rules were devised when the US economy was a lot more robust than it now is, and when the US was both willing and able to make sacrifices of all kinds to help others withstand the spread of communism. None of this is applicable today. The US is therefore no longer willing to watch others cheat their way into a stronger trade position, at the cost of its own national security, economic strength and domestic employment. Here is part of what the WTO is up to.

WTO Rules

1. Most-favoured-nation (MFN): treating other people equally Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.

2. National treatment: Treating foreigners and locals equally Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.

3. Developing countries have transition periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions — particularly so for the poorest, “least-developed” countries – so these basket case economies are allowed to whittle away at the economic strength of the developed world.

Meanwhile, economic ministers around the world increase unproductive public spending every chance they get, add new regulations on top of old, and increase business taxes at every turn, and then job on their chairs screaming, “Eek, a tariff!’

The quote at the top, by the way, is from Joan Robinson, who has quite a lot to say about free trade that ought to be read by the economic illiterates who populate the world, who are now found speaking on behalf of the status quo, as harmful as the status quo is to most of the lower half of the income distribution. Robinson was not just a Keynesian but also a big supporter of Mao, so I’d be very careful, but the above quote seems as accurate as anything else you are likely to hear about economics.

Protection for Republican majorities in the House and Senate

I am a free trader by nature but not a big fan of economic forms of self-harm. And I am certainly for Trump basing his decisions on political calculation, since I am also against political forms of self harm. PDT is shifting towards a slight increase in protection for American products, as summed up in this article from The Wall Street Journal: ‘Every day is a new adventure’: Trump upends Washington and Wall Street with shifts on trade, guns. Pulling the various bits from the article, there are two sides to it, always bearing in mind that if it’s in the WSJ the story will be shaped by a free-trade ethos. So why, according to the story, would protection levels be increased. This is part of the Trump calculation:

  • foreign countries are stealing American jobs with cheap imports – tariffs are one of the only ways to punish other countries for practices that disadvantage U.S. manufacturers
  • impose tariffs on steel and aluminum in the name of national security – large amounts of cheap steel and aluminum posed a national security risk for the United States
  • Trump has also been keeping a close eye on the special election this month for a U.S. House seat in western Pennsylvania. Voters in places such as Pennsylvania’s 18th District are looking for more to be done by the administration. The president has noted that the Republican in the race is struggling in a district where he won by a large margin.

And why leave things alone. Again from the WSJ and part of the White House debate:

  • tariffs could spark a trade war – other countries would retaliate, imposing tariffs on U.S. exports, damaging an economy that Trump was trying to build up through his tax cuts
  • the stock market was doing well [as is the economy as a whole].

This is hardly a return to Smoot-Hawley, and if it protects Republican majorities in the House and Senate, the small ripple effects on the American and world economies will be worth the extra few cents Americans pay for the goods and services they buy. Meanwhile, this is the stated threat from Europe:

“We will put tariffs on Harley-Davidson, on bourbon and on blue jeans – Levi’s,” European Commission President Jean-Claude Juncker told German television.

Meanwhile public spending rises another trillion and no one says a word.

The benefits of free trade

I am about to do a presentation on the benefits of international trade, which are similar to the benefits of domestic trade. Of course, you have to appreciate the structure and genius of an entrepreneurially-driven market economy first, which all of this is predicated on.

. an economy is an exchange economy – people sell to one another

. sellers, however, have to work out what buyers will want to buy

. not only do they have to work out what buyers will buy, they have to find a way to make sure that they buy from them and not their competitors

. that is why a market economy driven by private-sector entrepreneurs is superior in every way to any other set of arrangements

. sellers are a self-selecting process – entrepreneurs are just members of the community who decide they would like to earn an income from selling products to others

. government-selected sellers weaken an economy (crony capitalism)

. among sellers only those whose products most closely match the wishes of buyers will survive

. therefore:

. prices are kept down
. product quality is improved
. innovation is constant

. governments may contribute with some necessary regulation and will provide welfare, but have almost nothing to offer so far as product and product innovation are concerned

. this is how a domestic market economy works

. international trade is the same only across borders

. foreign sellers often produce better products at lower prices – better to buy from others than produce such things oneself

. comparative advantage explained

. domestic producers often wish to discourage imports but love exports

. will lower living standards to restrict imports

. government restrictions on imports is a very large mistake

. should not protect domestic industry since it does not protect the economy, helps out only a handful of producers and only in the short run

. once business understand that a government will never protect them from competitors who provide better goods and services, domestic competition becomes much more rigorous

. tough domestic competition is the best guarantee of international success

. but the politics are often very difficult for particular groups – such as those who produce primary products

. also many complaints about jobs going overseas – but full employment is more easily guaranteed in an open economy

. a government therefore needs sensible adjustment policies that allow resources to flow where they receive their highest return

. everyone must be made to understand that the best long-term strategy for the entire community is to allow free trade in all goods and services

. leads to higher incomes and more secure jobs

Politics, of course, gets in the way, but every decision maker generally understands all of the above very well.