Brexit: the unilateral free trade option

 

As the British and the Europeans renegotiate the European Union following a British referendum a number of options are being considered.  What will not be considered is the option which would in the long term give the best standard of living – unilateral free trade.

For a long time this blogger has believed the best way to do free trade is for a country to do it on its own by removing all barriers to imports.  “Free trade” agreements are not free trade, they are negotiated trade.  To get the full benefits of the law of comparative advantage there must be no barriers to imports. There should be no import duties, no quotas and health and safety restrictions should be genuine rather than to restrict imports.

Unilateral free trade could easily be done by any country as each country has the right to control its imports.  This will leave them open to “dumping” or subsidies by trading partners.  If another country wants to subsidize our standard of living, then we should say, “Thank you very much”.

The case for free trade is based on the law of comparative advantage which says that two countries will be better off if they specialize in their most efficient production and trade even if one of the countries is more efficient in all trading items.  With our background we generally think of better off as meaning more economic growth but it could also mean more leisure time.  The law still applies.

There are two major problems with unilateral free traded – our  commitment to economic growth and the difficulty in making employment changes.

This blogger believes there will be little if any future economic growth because we have used up the easily accessible energy and mineral resources.  There are lots left on the surface of this planet but they are so difficult to extract they are mostly useless.  I also believe many people are aware of this economic uncertainty even if they do not understand what is happening.  This is probably behind the British vote for Brexit, the United States election of Donald Trump,  the increasing popularity of extreme left and right wing politicians and the rise of dictatorships around the world and a lot of other unpleasant developments.

The fear of losing one’s job is highly emotional and this is the second big problem with free trade.  Free trade means changes in production and this means some people will lose their jobs and have to find new employment.  The other side of this problem is that economic changes are a fact of life and will happen regardless of free trade.  We try to deal with changing market conditions with subsidies, import quotas, health and safety restrictions on imports and other trade restrictions. In the long term market forces usually win.

Under current economic conditions a lot of people are likely to lose their employment and a lot of people are going to suffer.  The challenge should be to facilitate the changes and reduce the suffering.  Most people are going to have to accept a lower standard of living.  This blogger believes the best way to adjust is to introduce a basic income plan.  For more discussion of this please see the rest of this weblog and my book Funny Money: Adapting to a Down Economy.

This guy believes the British and the Europeans would benefit if the British were to use the referendum as an opportunity for unilateral free trade.  I also would not want to be a part of the negotiating team as there is unlikely to be a consensus as to what degree of trade to negotiate.  There is so much fear, so many emotions and so many conflicting interests that it will be difficult to come up with something most people will be able to accept.  There is likely to be a lot of turmoil.

 

 

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Conseqences of Greece leaving the Euro

It appears a Greek departure from the Euro would be a surprise to the Greeks but not to everyone else.  If it does happen what would be the impact on them and the rest of us?

As I believe economic problems should be analyzed in terms of the physical side of the economy lets start there and then look at financial concerns.

Following an exit from the Euro the Greek standard of living would depend upon the quantity of goods and services the Greek people would be able to produce divided by the number of people.   This does not mean they would have to be self-sufficient as they would still be able to trade.

There could be a problem. If they were currently producing enough for their desired standard of living they probably would not now be in a crisis.

There are a number of factors which might reduce or improve their standard of living.

Some of the outside money they have been receiving was probably  used to import goods and services.  This would probably be lost although if things are really tough they might be given some aid.

If there were to be massive emigration (not a sure thing) things would be better.

The standard of living could be reduced by an obligation to repay some of the current debt to foreigners.  This would be because money repayments would be followed by goods and services.

They would also be adversely affected by what happens in other countries.  If things get worse elsewhere the number of tourists could drop which would reduce the foreign money they have for outside purchases.

On the financial side it appears there will be a massive write off of debt which means a lot of people will lose a lot of purchasing power.  A lot of people will be a lot less rich than they thought.  Both in and out of Greece this will fall upon individuals in the form of lost or devalued pensions or investments.

The writing off of debt will also mean a loss of money supply both in and out of Greece.  As there appears to be a lot of unused credit around this might not be too serious a problem

If Greece leaves the Euro its government will have to manage the replacement money and will have to be very careful not to create too much.  The consequences of too much money is inflation, maybe even hyperinflation.   Inflation is a loss of purchasing power just like the writing off of debt.  It can be a sneaky way for governments to steal from their people.

If I were a Greek politician I would want to write off all debt and start over with a national exchange trading system as outlined in my essay “LETS go to market”>

In working on this post I am very grateful I was born and raised in Western Canada.  However, I have to recognize our turns is probably coming soon.

Who’s to blame and what do we do about the economy?

One thing of which there has been no shortage during this economic crisis is words with lots of scapegoats and ideas as to what to do.  Here’s my attempt to summarize.

Who is responsible for this mess?

The two favorites are greedy Wall Street bankers and incompetent politicians who aren’t following the policies which would most benefit the speaker.  The bankers may be greedy and the politicians may be incompetent but are they any more so than their predecessors who ruled during the golden age of prosperity?

The next groups to blame are those who won’t approve stimulus spending and those who object to spending cuts. Sometimes both groups are blamed for refusing to compromise.

Others who can be blamed are the ratings agencies who gave false assurances,  those making negative statements who are thus creating a negative feedback loop and those who spreading lies to create profit opportunities for themselves.

What can we do about the economy?

One approach is to cut government spending especially that which benefits poor people or those whose finances are precarious..  Of course we don’t want to cut government spending which finds its way into our own pockets.

The second approach is to stimulate the economy.  There are several ways of doing this including government spending, creating more money (quantitative easing and the National Infrastructure Bank) or encouraging exports and restricting imports to protect jobs. We could also use people with DBS degrees (the D stands for doctor) to convince us there is no real crisis and everything will be okay.

Now here are the answers to these two questions in the view of the author of this blog.

We are all to blame.  The basic problems is that humans have used up a lot of resources, especially those that are easily accessible,  and most of us have had a part in this.  Most of us have had nice homes, designer cars, interesting vacations, frequent restaurant meals and lots of other things.  Most of us have been demanding high returns on our pensions and savings.

So what should we do about the crisis?

If the problem really is with the resource base,  stimulating the economy will only make things worse and socking it to the poor is mean – and many more  people are likely to join them.

Therefore my vote is that everyone should be expected to accept a lower standard of living starting with those with higher than average incomes supported by taxpayers (most of whom get their high incomes from belonging to a union in a monopoly field) and those with high incomes resulting from legislation that restricts competition.  This includes people whose income comes from copyright and patent legislation and those whose income is protected by licensing requirements.

It is my fear that not enough of us care enough about our neighbors for this to actually happen.

So there you have it.  This post has added 489 words to the economic hot air.

Import or export motivated trade

The following quote about trade is from an essay on economics at the time of Odysseus in archaic Greece. It is interesting to note that at that time trade was motivated by a need for imports whereas to us it is based on the need to export in order to maintain or create jobs.

Here in British Columbia where a lot of our economy has been based on forestry, mining and fishing, we might be better off if we had taken the first approach and looked for other ways for out people to have a comfortable standard of living.

Odyssean trade differed from the various forms of gift-exchange in that the exchange of goods was the end itself. In trade things changed hands because each needed what the other had, and not, or only incidentally, to compensate for a service, seal an alliance, or support a friendship. A need for some specific object was the ground for a transaction; if it could be satisfied by other means trade was altogether unnecessary. Hence, modern parlance, imports alone motivated trade, never exports. There was never a need to export as such, only the necessity of having the proper goods for the counter-gift when an import was unavoidable.

(The quote of from M.I. Finley, The World of Odysseus, Chaper 3 , reprinted in Tribal and Peasant Economies, Readings in Economic Anthropology, edited by George Dalton and published in 1967, page 411.)

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