Category: International Trade

Last Friday, the New York Times editorialized in critique of American tariffs, which it says “raise the price of goods and are all too often based on outdated political considerations that defy logic and good sense.”


Blog author: jballor
Friday, April 13, 2007

In the film The Pursuit of Happyness (review here), there’s a scene where Will Smith’s character arrives late for an interview with a stock brokerage firm and has no shirt on. The conversation goes like this:

Martin Frohm: What would you say if man walked in here with no shirt, and I hired him? What would you say?

Christopher Gardner: He must have had on some really nice pants.

Well, what would you say if you interviewed someone and they wore a suit looking like this?

Aaron Igler shows off the suit to thunderous applause. Photo: Paul Adams

This is the end result of a project undertaken by Kelly Cobb, an educator and designer at Drexel University. The task was to try and create a suit using only materials and workers within a 100-mile radius. Here’s the full story from Wired (HT: Mises Economics Blog).

As the piece relates, “Cobb’s locally made suit turned into a exhausting task. The suit took a team of 20 artisans several months to produce — 500 man-hours of work in total — and the finished product wears its rustic origins on its sleeve.”

Seriously, it looks like an Unfrozen Caveman Lawyer suit or something. The exercise is really an object lesson in “the massive manufacturing power of the global economy.”

For most of us, that’s a good thing. Others, though, might think that “how far removed we are from what we wear” is an overwhelmingly negative feature of modern existence.

But if nothing else, the 100-mile suit should offend your aesthetic, if not your moral, sensibilities.

Blog author: jballor
Monday, April 2, 2007

A couple weeks ago the NYT magazine ran a piece by contributing writer Tina Rosenberg, which attempts to outline some of the ways in which “everyone in a wealthy nation has become the beneficiary of the generous subsidies that poorer countries bestow upon rich ones.”

What does she mean? In “Reverse Foreign Aid,” Rosenberg asserts that there are five major forms of poor-to-rich international subsidy. The first is the tendency among poorer nations to build-up great reserves of hard currency, often in the form of T-bills. The problem here is that there is an opportunity cost in holding the low-return but ultra-secure US Treasury bills: “All the money spent on T-bills — a very substantial sum — could be earning far better returns invested elsewhere, or could be used to pay teachers and build highways at home, activities that bring returns of a different type.”

A second form of subsidy is in the WTO requirements that member nations abide by copyright and intellectual property protections. “There are good reasons for countries to respect intellectual property, but doing so is also an overwhelming burden on the poorest people in poorer countries,” writes Rosenberg.

So-called “tax holidays” form a third kind of subsidy, in which poorer nations offer tax incentives and various other breaks to multi-national corporations to entice them to bring their operations to their country. Rosenberg writes, “Since deals between corporations and governments are usually secret, it is hard to know how much investment incentives cost poorer countries — certainly tens of billions of dollars. Whatever the cost, it is growing, as country after country has passed laws enabling the offer of such incentives.”

Rosenberg also describes brain drain as a form of subsidy, in which skilled professionals who are trained in poorer nations emigrate to wealthier ones. She also points out the adverse effects that domestic subsidies of various industries, such as agriculture, can have on poorer nations. Somehow or other this direct subsidy becomes a “reverse subsidy” because “corn, rice or cotton exported by rich countries is so cheap that small farmers in poor countries cannot compete, so they stop farming.”

And finally, Rosenberg calls the disproportionate negative effects of climate change on poorer nations the “ultimate subsidy.” She writes, “American energy use is being subsidized by tropical coastal nations, who appear to be global warming’s first victims.”

The essay is really a bit uneven. It’s hard to fathom why, for example, cheaper imports of agriculture commodities from wealthier nations should be seen as “reverse” subsidies. Just because a certain practice or policy negatively affects a poorer country doesn’t mean that it is a “reverse” subsidy. And just because wealth is created in the first world doesn’t mean that it comes at the expense of someone in the third world, although there are good reasons to see that Rosenberg is right about the consequences on agricultural sectors in developing nations.

With respect to the second form of “reverse subsidy,” Rosenberg is really describing a kind of competition between developing nations, and the beneficiaries aren’t so much wealthier governments but large multi-national corporations. Of course, many critics of the developed world can’t or won’t distinguish between these two (all the better to fit into the picture of a growing neo-liberal “empire”).

Brain drain is a real problem for the developing world, but as is the case with so many of these instances of “reverse subsidy,” Rosenberg is pointing to a legitimate issue or concern but failing to ask the right kinds of questions, and thus providing some questionable solutions (a neo-Keynesian answer for T-bill stockpiling?). Why, for instance, are professionals leaving developing nations to work in places like the United States? In many, if not most, cases money surely is a motivation. But there certainly are other factors at work, and the potential for greater income isn’t a sufficient explanation as to why so many people leave their home, friends, and family to go live in a foreign country. Indeed, large-scale migration out of a nation is a pretty reliable indicator that something is wrong in the native country.

And maybe the fact that poorer nations don’t respect copyright and IP rights is as much a contributor as it is an effect of their lower economic status. How can you expect to be a country that fosters innovation if there are no legal protections for innovation and invention?

A recent NBER paper, “Globalization and Poverty,” examining some of these issues makes the case that globalization is a complex phenomenon and that in some cases segments of the poor can be made worse off. This is no doubt true, and the merit of Rosenberg’s piece is that it points out some of the real-world issues that a globalized economy faces. The question remains, however, whether at least some of these negative effects might be mitigated by a freer and more liberalized system of trade rather than one which relies on subsidies, tariffs, and protectionism.

Google recently announced that it has purchased the Trendalyzer software from Gapminder, a Swedish non-profit (HT: Slashdot). Trendalyzer is the brain-child of professor Hans Rosling, who was lecturing on international development “when it struck him that statistics were an underexploited resource, often presented in an incomprehensible fashion. To solve the problem he developed – along with his son – a new kind of software.”

One interesting aspect of this purchase is that the software’s inventor won’t profit from its sale, since it was run under the auspices of a non-profit and was financed by public money. “It’s not an operating business that was sold, just the software and a web site. Although I would gladly accept that kind of money,” said Rosling.

To see the software in action, see the video of a lecture given by Rosling in February of 2006. Don’t just pay attention to the software, however. Rosling has some pretty important observations about how the West views the “developing” world.

The NYT editorializes today that Venezuelan president Hugo Chávez is, at worst perhaps, a necessary evil given the current political climate: “if it takes Mr. Chávez’s demagogy to spur Washington toward more enlightened policies in the Americas, so be it.”

Oh yeah, and more US foreign aid to Latin America equals “social justice.”

“Mr. Bush deserves praise for doubling the assistance to Latin America, to $1.6 billion a year. But much of this has been for security programs in Colombia. A lot more will be needed if promoting social justice is to be more than a sound bite.”

In any case, I think it may in fact be true that President Bush’s “reputation in the hemisphere [is] nearing its modern nadir” if in a comparison of Bush and Chávez the latter comes off looking favorably. Or maybe it says more about the discernment of those making such judgments than it does about Chávez’s objective quality.

Blog author: jspalink
Wednesday, February 7, 2007

Make trade, not war? In an excerpt from his new book “The Commercial Society,” Sam Gregg examines the long held view that nations engaged in trade are less likely to wage war. He notes that nations which are busy with commercial pursuits, instead of war making, may also be more vigilant about “protecting the fabric of freedoms upon which commercial societies depend.”

Read the commentary here.

A NYT editorial informs us today that retail prices for coffee products are rising (HT: Icarus Fallen). We are assured, however, that the price rise has been “relatively modest” and that an important factor is “changes in supply and demand in a global economy.”

No kidding.

The bad news in the editorial, at least for the fair trade crowd, is that these same forces of suppy and demand are raising the price for the commodity itself.

According to the International Coffee Organization, the composite price of coffee rose over 36 percent from the beginning of 2005 to the end of 2006. The organization predicts a down year for the Brazilian coffee crop, which could lead to a supply shortfall and even higher prices this year. While world demand has grown at annual rates of 1.5 to 1.8 percent over the last five years, it has been rising at a much faster clip of roughly 15 percent for smaller players like Russia and China. As more people enter the global middle class, the demand for coffee rises, putting upward pressure on the price.

I have argued previously that the very low price of coffee internationally was a pointer to the fact that we had a global glut in the bean supply.

That trend seems to be reversing and the rising commodity price for coffee is thus undermining the long-term viability, relevance, and credibility of fair trade coffee.

For an opposing perspective, check out Black Gold, a new movie on the fair trade coffee movement, which I have not yet seen (HT: The Advocate).