Free trade; not trade wars or negotiated trade

With a lot of Americans fearful for their jobs and their president saying he can protect jobs with tariffs, international trade has become a big emotional issue.

Trade is such an emotional issue because our economy is organized such that our physical and psychological well-being requires us to have steady employment. At the same time economic changes require employment flexibility. One way to deal with this conflict would be to have a guaranteed income scheme so that individuals can cope with changes. My committment to such a scheme stands behind the rest of this post and indeed all the posts on this weblog. If people can survive comfortably without employment then this fear should no longer be a factor.

We should also analyse economic issues in physical or real terms rather than financial terms. Trade is the exchange of goods and services, not money which is a tool to facilitate the exchanges. It is very easy to get a distorted picture of the economy when people analyse economic problems in financial terms.

For all merchant-pull-1398066_1920we talk about the market economy and our devotion to competition, we have a long tradition of restricting competition. One of the ways we do that is by imposing tariffs on imports from other countries. Other ways we restrict competition with subsidies and legislation.

The economics law of comparative advantage says countries are better off to specialize and trade, even if one country is more efficient in the production of all items. This is attractive to people who want economic growth. This blogger also likes the idea of efficiency so that we can have more time for leisure activities.

I also believe the best way to do free trade is unilaterally. To do free trade and get the full benefits Canada should abolish all tariffs and restrictions on foreign goods and services coming into the country regardless of what other countries do. If other countries want to subsidize our lifestyle, then that is up to them. If they do not want to buy from us, then that is saving our resource base for the benefit of our children.

The free trade agreements of which governments are so fond are in reality negotiated trade agreements. They are negotiated for the sake of special interests of producers. These are the same interests as those who want legislation to restrict competition – patents, copyright, licensing – and who want subsidies for their firms. To get a feel for the complexity of these negotiations look at this article in The Economist. Trying to negotiate to satisfy the special interests of multiple countries must be an impossible challenge.

International trade is not such an important issue for Americans because the United States is one large free trade zone and they are or have benefited from the law of comparative advantage.

Economics is a social activity and like all relationships, to be satisfying for all parties there needs to be a more or less equal exchange. Those Americans who promote trade wars are being anti social. To me that sounds un-American.

Lots of politicians and commentators worry about the dire consequences of American tariffs and the resulting trade wars. Yes. we are headed into some even more serious economic problems but they will not be caused by tariffs and trade wars. The basic problem is that we have used up the most easily accessible energy and mineral resources. Increased efficiency from free trade will help us cope with this issue but will not solve it.

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Trade, foreign exchange and big hamburgers

Foreign exchange and trade is hardly a sexy subject and it is one most of us would prefer not to think about. However, when people get excited about globalization or fear their jobs are threatened by trade, then we need to take it seriously.

Foreign exchange involves the financial transactions which go with trade with other countries.  Economics is a social activity and involves relationships even if some are very fleeting.  For any relationship to be satisfactory there needs to be a more or less equal two-way exchange.  This applies to trade with people from other countries.  Trade should be a two-way.

In analysing economic issues it is important to distinguish between physical transactions and financial transactions because sometimes the physical analysis gives a clearer picture than the financial analysis.  If this world had a perfect market economy each physical trade with a foreigner would be matched by a financial transaction.   Changes in prices would reflect changes in supply and demand and would be signals to producers to increase or decrease production or to even stop producing an item. This is true for domestic trade as well as international trade.

As exchange rates are based on supply and demand for currencies, financial only transactions distort the exchange rate and therefore distort prices. Not good.

An interesting approach to foreign exchange is the Big Mac index created by The Economist. I like this because it is based on a physical item, the big mac hamburger,  sold around the world.  If we had international perfect competition and everything were equal a big mac would cost the same in each currency.  The Economist compares the costs at current exchange rates to determine if a currency is over or under valued.

Obviously the world is not equal. Different countries have different values, different resources and different access to energy and mineral resources.

What happens if money is loaned or gifted from one country to another.  If the recipient uses the money to purchase goods or services from the first country, then the money becomes a part of the foreign exchange calculations.   If it is kept in foreign currency reserves,  it is removed from the money supply of the first country until it is used. If the money is exchanged and used to purchase local goods and services, it distorts the exchange rate.  If the money is kept and used to purchase local goods and services, it adds the second country’s money supply and subtracts from that of the first country.

Another complication is that a lot of people speculate about what will happen to the price of one currency in terms of another.  These transactions will be financial only in that they do not match exchanges of goods and services.  It could be that speculation smooths out fluctuations or they could distort prices.  It is hard to know as we do not know which transactions are speculative.  We do know that the volume of foreign exchange trades is massive. This writer suspects that if all financial transactions matched physical trades there would be little fluctuations in exchange rates as changes would take time.

This blogger has spent a lot of time and effort in trying to understand the economics of money, including a degree at the University of British Columbia.  Foreign exchange and trade are difficult probably because there are problems in the way in which we create money.  For more on this please get a free copy of my e-book Funny Money: Adapting to a Down Economy.  One of the problems is that our way of creating money gives some people a lot of power and control over others.  Vested interests are difficult to deal with.

 

 

 

 

 

Exporting back to economic growth

Some people give lip service to the idea that economies can export their way back to growth. It is lip service because it is not practical.

The idea is that if the local economy is sluggish, we can increase output by selling more to others.  There are two problems with this. The downturn is world-wide and it is going to be very difficult to find foreigners with spare cash.  The second problem is that trade has to be a two-way street.  Increased sales will have to be matched with increased purchases.

Free trade is based on the law of comparative advantage which states that two countries will produce more if they specialize in items at which they are most efficient and trade even if the other country is more efficient at the items they are not producing.  This is usually interpreted to mean total output will increase but I think it could also mean more efficient production leaving more time for other activities such as leisure.

The big problem in implementing free trade is making the adjustments as some people will lose their employment and have to make changes.  Most of us most of the time, think and act in our own short-term interests.  Most economists are in favour of free trade but I have never heard it suggested that economic advice should be included and outsourced to another country.  If we really wanted to try free trade the best way would be for a country to do it unilaterally.  We should remove all subsidies and other barriers to imports and not worry about what other countries do.  If they want to support our consumption, we should not object.

This guy figures the major economic issue facing the world today is that we have used up the most easily accessible energy and mineral resources  Yes, there are lots left but they are so difficult and expensive to extract that they are probably not useful to us.  The result is that we are heading into a prolonged period of economic decline.

If this is true then trying to increase production will consume the remaining resources even faster and will bring forward a major economic collapse.  The way to deal with the crisis is an orderly reduction of production and standards of living.  Not likely to happen.

More likely people will blame Brexit and the results of the U.S. election for continued economic problems.

What ever happens and whatever the reason it appears we are in for an extended time of economic decline.  What we most need is clear and realistic thinking about economic issues.  What we least need is desperate attempts to return to growth and scapegoats.

Trading freely or controlled

Free trade is a controversial topic which won’t go away.  The Canadian government is currently negotiating with the European Union and the United States is thinking about it.  Some Canadians are still debating the North American Free Trade Agreement.

ShippingFree trade is attractive because the law of comparative advantage tells us that two countries will be better off and have improved production efficiencies if they specialize and trade.  Also we can  observe that countries which have tried free trade have done very well.

The difficulty is that introducing free trade means some people may have to change their occupations or even spend the rest of their lives unemployed.  This wouldn’t be so serious if we would arrange our economy so that life didn’t depend upon having a job.  It would also be nice if the improved efficiencies were to result in more leisure time.

The term “free trade agreement” is something of an oxymoron.  It is really a negotiated, controlled trade agreement.  There is nothing free about it.

If a country really wants to benefit from free trade it should do it unilaterally.  Just remove all restrictions on imports and don’t worry if other countries don’t reciprocate.  If they don’ want the benefits of free trade, that is up to them.

The evil Wal-Mart and offshore competition

Some people love to bash Wal-Mart.  This article is from 2003 but I suspect a lot of current critics would like it very much.

If you want to make money by far the best way is to go into a field where government legislation restricts competition – become a doctor or a teacher or something with  patent and copyright legislation.

There probably isn’t much legislation to restrict competition in retail sales so firms in that business have to sharpen their pencils or use marketing tactics.  Reading this article it is clear that Wal-mart is or has been very good with the pencil.  I am more opposed to legislation that restricts competition and marketing tactics than I am to firms that use sharp pencils.

On the theory that firms relying on legislation to restrict competition would be heavy into lobbying, I googled “Wal-Mart lobbying.”  It appears Wal-mart has not put much effort into lobbying although it is now starting to campaign for online retailers to be required to collect sales tax.

The issue appears to be that offshore competition, showing up in Wal-mart, is forcing some American manufacturers to go out of business putting their employees out of work.  Firms going out of business is a normal, and sometimes necessary thing.  The way to deal with that is a universal income scheme such as the negative income tax proposed by Milton Friedman or my own proposal for universal subsistence payments.

We should not feel guilty about buying things made in other countries.  Trade is a social activity and we want other countries to buy things from us.

I’m not a fan of Wal-Mart but I do occasionally go there.  I pride myself that most of the time I leave the store with only those items I had planned on buying.  I also know from experience they don’t always have the lowest prices and I can’t recall ever seeing Wal-Mart advertise quality.

In the retail segment of our economy there are lots of firms and lots of competition.  They all use marketing tactics to give them an edge. Therefore we should remember the old saying: “Buyer beware.”

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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.

Okanagan Indians. religion and trade

Early in the 1900s a Scotsman named James Alexander Teit studied and wrote about a number of the British Columbia interior  Indians includng those who lived in the Okanagan valley which runs through southern British Columbia and into Washington State.

He reports (page 253) that these people “claim that  the earth was made by the ‘Father mystery’ or ‘great mystery’ –  a mysterious power with masculine attributes ….”   I like the word “mystery” as I figure religion attemps to explaine things we cannot know by empirical observation.

“He (the great mystery) said that everything on earth should be subordinate to the people, and everything would be for their use as they were all his children; and all the people should have equal rights in everything, and would share alike.  This is why all food was shared among the people, and no one thought of  debarring any one else from access to anything required for life.”

I wish this were a part of our current religion although one can speculate the natives did not have an over population problem.  There are numerous reports that they were very helpful to the first white people to enter their territory.

Horses were probably introduced early in the eighteenth century.  It appears horses had considerable impact on the social and economic life of the people.  Previously travel was on foot or by canoe. (Some of them had access to extensive water ways.) Horses allowed more people to travel greater distances and to carry a greater quanitity of goods.  Horses also allowed new methods of hunting and transportation of food over greater distances.  There was greater intertribal trade and even intermarriage.

Today these people are mostly Roman Catholic or fundamentalist,   they live on reservations,  have to deal with terrific social problems including alcohol and drugs. I have been told that 90 percent of them were sexually abused as children. I usually get depressed every time I deal with any of them.

Franz boas and James Teit, Coeur D’Alene, Flathead and Okanogan Indians, Fortyififth Annual report of the Bureau of American Ethnology,  1927-1928,  United States Government Printing Office, Washington, 1930.

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