"I have been a selfish being
all my life, in practice, though not in principle."
—Jane Austen
(British, 1775-1817)
Word for the day
Cognoscenti (n)
Persons who have superior
knowledge and understanding of a particular field, especially in the fine arts,
literature, and world of fashion.
(Source: Dictionary.com)
Malice towards
none
What is the raison d'être of Shiv Sena today?
Protecting the vulnerable
Indian government has raised tariff barriers on import of steel,
aluminum, vegetable oils, etc. in recent weeks to protect the domestic
manufacturers from global dumping.
This week India's three copper majors — Hindalco Industries,
Vedanta Ltd and Hindustan Copper Ltd—have reportedly warned (see
here) "the government that the sector is facing an imminent shutdown
in the face of a surge in cheaper imports from Japan and ASEAN countries, which
could jeopardise the Narendra Modi-led government's 'Make In India' initiative.
Operating at 75% of capacity, the industry has cautioned about
further cuts in production that could impact 10,000 jobs, blaming free trade agreements
or FTA which would allow an influx of duty-free copper by 2021, for making the
entire sector unviable.
The stock market has reacted very positively to these protection
measures. All major metal producers' stocks have surged 10-30% in past few days.
These protective measures may be desirable to protect the domestic
industry from temporary cyclical adjustments in the global markets. In fact
most developed countries have used these measures quite often.
However, in case of structural adjustments in global markets, the
utility and desirability of these measures is highly questionable.
In my view, it is matter of wider debate whether the current
slowdown is merely a temporary cyclical adjustment or it is part of a wider
structural adjustment necessitated by the damages inflicted on the global
economy by the recent global financial crisis (GFC).
The debate may remain inconclusive for many years, and may even
last till the adjustments are fully carried out.
Under the circumstances I do not find myself competitive enough to
comment on the desirability or otherwise of these protective measures in Indian
context. Though I feel bad that in this festival season my favorite sweets will
be expensive by 20% due to expensive ghee and sugar.
Insofar as the trading the up move in metal and sugar stocks is
concerned, I would prefer to let it go; despite being highly tempted to short
sell.
In this context, I would like reproduce a recent blog
post of my favorite Bob McTeer. Incidentally, I fully agree with his views.
"The Trans-Pacific Partnership: Are We Up To The Challenge?
“What protection teaches us, is to do to ourselves in time of
peace what enemies seek to do to us in time of war.” —Henry George
To close our borders to imports, that is. And to those who think
exports are okay but imports are not, and that countries who have a surplus in
trade with us are “killing us,” Henry also pointed out that:
“To have all the ships that left each country sunk before they
could reach any other country would, upon protectionist principles, be the
quickest means of enriching the whole world, since all countries could then
enjoy the maximum of exports with the minimum of imports.”
The Trans-Pacific Partnership trade pact is about to test the economic
literacy of the American public and politicians. I’m not optimistic that it
will pass because we all understand and appreciate the benefits of freer
foreign trade. Henry George would probably be disappointed. It may pass,
however, because the balance of lobbying power could tilt in its favor. In
other word, business interests desiring better access to foreign markets may
beat the protectionists. I’ll take it that way too, if necessary.
The TTP is a trade pact among 12 Pacific Rim countries: the United
States, Canada, Mexico, Peru, Chile, Australia, New Zealand, Brunei, Japan,
Malaysia, Singapore, and Vietnam. These countries reportedly account for about
40% of global trade. The TTP is supposed to represent the administration’s tilt
toward Asia.
I haven’t read the agreement and don’t know the details. I’m
pretty sure I would regard the safeguards included for labor and environmental
standards as watering it down. I’d rather have my trade pacts neat, but in this
day and age I understand that won’t happen.
My limited purpose here is to arm the good guys who favor freer
trade with some ammunition against specious arguments we’ll be hearing against
it.
The main argument proponents use against freer trade is that it
will cost jobs. Will it? Yes, of course some jobs will be lost as imports
substitute for domestic production. But just as many jobs will likely be gained
as exports expand. There will be job losses, but not necessarily net job
losses.
This offsetting of job losses with job gains doesn’t just depend
on luck. Automatic economic mechanisms will produce that outcome. When we
import more, the exporting countries earn more dollars with which to purchase
imports from us. If they don’t, on a multilateral basis, the dollar will
depreciate against foreign currencies and make our imports more costly in
dollars and our exports cheaper in foreign currencies. Flexible exchange rates
tend to promote balance between our job creating exports and job killing
imports. You can’t import without exporting an equivalent value over time. You
can’t export without importing an equivalent value over time.
The problem is that job losses from imports or movement of
production abroad are visible and easily identifiable. The job gains from
exports or import substitution are less so. It’s the old seen versus the unseen
problem.
So far I’ve concentrated on the jobs question. On production. We
should not forget that exports are the cost of trade while imports are the
benefits of trade. We are all consumers and we all benefit when output expands
because of increased trade, just as we benefit when new technology increases
production. All the focus in political debates is on the producer and jobs.
Some of us make a living by producing something that is exported. All of us
benefit from more plentiful imports.
Speaking of debates, ‘they are killing us’ usually refers to
countries that have a trade surplus with us. I guess for us to kill them we
have to have the surplus. This is silly.
I have a deficit with just about everybody I deal with. I buy food
at the grocery store, gasoline at my local service station, get hair cuts from
my barber. I have a deficit in trade with all of them because I don’t sell them
anything. I have a surplus with a couple of firms I sell my services to, witch,
so far, covers my deficits. My balance of trade is multilateral, not bilateral.
It’s the same with countries. We don’t have to match our purchases
from each country with sales to the same country. Our surplus with some covers our
deficits with others. The fact that we’ve had a trade deficit for several years
covered by a surplus in capital flows does not change the principles. In the
first place, its a fairly stable deficit. But, more importantly, The various
balancing mechanisms, including exchange rates discussed earlier, work on the
capital accounts as well. A deficit or a surplus tend to bring about their own
cures over time.
Consider trade between the citizens of Texas and the citizens of
California, or any other state. Since we don’t keep the records, we don’t know
which has a deficit and which has a surplus. But we can be confident that
corrective forces are at work, automatically, without policy intervention.
The two quotes from Henry George are devastating to the
protectionist argument. However, the most famous argument against protectionism
came from my hero, Frederick Bastiat, who fought the free-trade battles in
France in the mid-1800s. He used wit and sarcasm to make his case. He wrote a fictitious
letter to the French Parliament on behalf of the French candlemakers arguing
forcefully for the shutting out of the sunlight from houses to sustain the
prosperity of the candlemakers. The sunlight was, after all, unfair
competition. All they wanted was a level playing field."
