Category: trade

What to do about China?

“China’s much anticipated post-pandemic recovery appears to have flopped, with signs of a significant slowdown after decades of supercharged growth and data flashing warning signs.” Bloomberg “China’s failing recovery”

“Signs of deflation are becoming more prevalent across China, heaping extra pressure on Beijing to reignite growth or risk falling into an economic trap it could find hard to escape.”

What, if anything, should the U.S. response be? That depends on whether we see China as a competitor or an enemy. That should depend on our assessment of China’s objectives. Does China want to expand its territory one way or another, or to expand its influence in the global order? China’s behavior might support either assessment.

China claims sovereignty over almost the entire South China Sea, including the Paracel and Spratly islands, which are also claimed by Vietnam, the Philippines, Malaysia, Brunei, and Taiwan. In 1947 China asserted its claims with a map depicting a U-shaped line covering almost 70 percent of the South China Sea, known as the nine-dash line. In 2016, an Arbitration Tribunal rejected many of China’s maritime claims as lacking a basis in international law.

The UK returned Hong Kong to China July 1, 1997, with the understanding that it would be self-governed independently of the Peoples Republic of China for fifty years. China violated this agreement with its full takeover in 2020.

In 1972 President Richard Nixon confirmed that Taiwan was part of the People’s Republic of China but would continue to govern itself independently until it agreed to merge its government with the mainland’s. In the Taiwan Relations Act of 1979, the U.S. committed to providing defensive weapons to Taiwan to defend itself from invasion (as opposed to the volunteer absorption into the Peoples Republic envisioned in the One China Act). What we provided instead were heavy weapons irrelevant to Taiwan’s defense but prized by America’s defense industries. “Taiwan-China policy assurances military” The U.S. has more recently seemed to even question its commitment to the One China agreement.

These aggressive moves by China are better seen as solidifying its borders (much in the same way the US worries about its borders with Cuba) than military expansions. On the other hand, China joining the World Trade Organization, pressing for representation in the IMF and World Bank that is more reflective of its economic size, and its Belt and Road, Asian Infrastructure Bank and BRICS initiatives reflect China’s desire to gain status in the global system comparable to that of the U.S. In short, they reflect the behavior of a rising economic competitor.

We seem to be treating China as an enemy rather than the trade and economic competitor they see themselves as. Among sportsmen, competition takes the form of doing your best—of being the best you are capable of. Within our economy we rightly see competition as good and healthy. With fair competition, both sides benefit. The world is made wealthier. Kneecapping our competition is the approach of bad guys. I explored this more fully in my blog “Competing with China”

But China is not competing fairly either. We would be wiser to use the mechanisms of the global system of rules to push and pull them into compliance. We should end our own tariff—industrial policy violation of these rules as well. We might start by restoring the dispute resolution body of the WTO. While there will be genuine security justifications for trade restrictions, they should be very limited.  They should not include taxing steel purchased from Canada. Trade is win, win.

A recent G-7 statement clarified that: “We are not decoupling or turning inwards. At the same time, we recognize that economic resilience requires de-risking and diversifying.” US Treasury Secretary Janet Yellen stressed this message during her recent visit to China. We should facilitate and encourage China’s economic rise as it contributes to our own. The opposite direction—treating China as an enemy—ends in war.

America’s Unipolar period has corrupted us. We demand that others follow rules that we violate ourselves when we don’t find them convenient. We have become a bully. My hope is that we adjust to the fact that we are no longer the world’s sole superpower by strengthening the rules we helped develop and competing fairly under them: “Goodbye unipolar world and good riddance”

Goodbye Unipolar World, and Good Riddance

“Power tends to corrupt and absolute power corrupts absolutely.” Lord Acton. The United States has accomplished a lot—a lot of it good—as the world’s indispensable nation.  But as Lord Acton said, power tends to corrupt and as the time of American dominance has gone on its diplomatic skills have eroded. It behaves more and more like a bully that expects to get its way. It is in our interest to recognize and adjust to our diminished relative power and to rebuild our diplomatic, soft power skills of persuasion. It will help us better adhere to the values and rules we preach to others but increasingly ignore ourselves.

In the July, 2023 issue of Foreign Affairs, Justin Winokur offers an excellent review of the adjustments we need to make in The Cold War Trap How the Memory of America’s Era of Dominance Stunts U.S. Foreign Policy “Cold war trap-America foreign policy”

These days our most important international challenge is our relationship with China. While each sovereign nation is entitled to its own approach to its internal governance, its interactions with the rest of the world require mutual understandings and/or agreements. Following World War II, the rules for such cross border interactions have generally been developed by international organizations to which all or most countries are members, such as the UN and its many agencies, the World Bank and regional development banks, and the IMF. To take but one example, the skies full of telecommunications satellites would not be able to serve anyone properly without the rules and spectrum allocations via the International Telecommunications Union.

It is in America’s interest, as well as the interest of most countries, to draw China more fully into the international organizations established after World War II—the Bretton Woods and UN Institutions. “Chinese competition-Asia stability-institutional balancing”  But China is increasingly going its own way and creating its own international organizations. BRICS, China’s Belt and Road Initiative, Asian Development Bank, The Shanghai Cooperation Organization, Asian Infrastructure Investment Bank. Why?

Why have we failed to convince China that its interests are also serviced by joining and cooperating with the liberal international order? When China was admitted to the World Trade Organization on December 11, 2001, and requested help from the IMF with how best to satisfy the WTO’s rules, the IMF sent me. The officials I met with in China told me over and over that there was no differences of opinion in China over where it wanted to go (in joining the liberal international order). The debate was only over how fast to get there. In recent years this has changed. It has changed, in my view, in part because the U.S. has abused its dominance in the world and failed to yield (balance) appropriate power to China.

As I have spent most of my professional life with the International Monetary Fund, let me illustrate these points with the determination of IMF quota’s which is meant to reflect its members voting strength and financial contribution to world trade. A member country’s quota reflects its size and position in the world economy. The basic formula, which provided the base line for quota decisions is:  Quota = (0.50*GDP + 0.30*Openness+ 0.15*Variability  +0.05*Reserves)^K.

But when the IMF was created, the US wanted to ensure that it would dominate it. It insured that some important decisions could only be taken with super majorities. A few even required an 85% majority, such as to adjust quotas, or amend the IMF’s Article of Agreement.  The U.S. was initially given a quota well above that 15% that gave it veto power over these limited policies. As the rest of the world has grown, the size of the US economy relative to the whole world’s output has fallen from 40% in 1960 to 24% in 2019. “US share of global economy over time”  China’s GDP relative to world GDP, on the other hand, rose from 4.5% in 1960 to 16.3% in 2020. Thus, a strict adherence to the IMF’s quota formula should have significantly increased China’s quota and reduced the US quota.

Quoting from Wikipedia: “China has been trying to expand its political and decision-making power within the IMF. The IMF’s voting system weights each country’s vote based on the amount of that country’s monetary contribution to the Fund. China has been trying to raise its quota. In May 1980, the Chinese government appealed to adjust its IMF quota. With approval from the IMF board, the quota of China was increased from 1.2 billion SDRs to 1.8 billion SDRs. China also obtained a single-country seat on the IMF executive board, which expanded the number of IMF directors to 22 members. As of 2017 the quota of China in the IMF was 30.5 billion SDRs, giving it 6.09% of the total vote.

“To further rebalance power in the IMF, China appealed for changes that would transfer voting power to developing economies.[5] In 2010, the Chinese executive director of the Fund, Zhou Xiaochuan, addressed the board and asserted that giving more power to the emerging economies was critical for the group’s legitimacy, accountability and long-term health.” China and the International Monetary Fund – Wikipedia

Currently the IMF quota for the US is 17.43%, remaining well above the critical 15% needed to retain its veto power, while those of other larger economies are China 6.40%, Canada 2.31%, Germany 5.59%, Japan 6.47%, and UK 4.23%. This is not in keeping with the IMF’s base line quota formula.

This exploitation of American dominance is driving China away and dividing global cooperation to the detriment of the whole world, including the U.S. The current U.S. approach to “competing” with China is not consistent with our values nor our long run interest. “Competing with China”

Our economic and political success—the beacon on the hill that has attracted the best and the brightest to our shores—is the result of our individual freedom and rule of law, not our coercive power and its bullyish use. I hope that we wake up before it is too late. “Why do we promote growth in other countries?”

The politics of Trade

The post WWII history of international trade and the World Trade Organization has been one of gradual liberalization, i.e., a gradual roll back of tariffs and other trade restrictions. Each side offering freer imports in exchange for freer exports. But the game can work in revers as well. The U.S. has restricted –actually banned—the export to China of high end semiconductors that it fears might have military uses in China. China has responded by banning the export to the U.S. of rare materials needed to produce these chips. It sounds a bit like a joke—a bad joke.

Poor Janet Yellen, who is now visiting China. The Secretary is as sharp as they come but is in the middle of this impossible game.

“U.S. Treasury Secretary Janet Yellen criticized China during a visit to Beijing for imposing export controls on critical metals, expanding subsidies for state-owned firms, and imposing punitive measures on foreign businesses. Her harsh remarks spotlight the gulf between the U.S. and China, and the difficulty of translating calls for improved ties into actual improved ties. A top Chinese official told China Daily that the curbs on metals exports were “just the beginning” of efforts to combat U.S. restrictions on China’s semiconductor sector, and warned that Beijing could yet “escalate” if Washington were to toughen its rules further, a move it is reportedly considering” Semafor Flagship July 7, 2023

But as reported by Bloomberg she had more positive things to say as well:

“Yellen Says US-China Rivalry Not ‘Winner-Take-All’ Situation (Bloomberg)

U.S. Treasury Secretary Janet Yellen said competition between the world’s biggest economies is not a “winner-take-all” situation, and called for both sides to manage their rivalry with a fair set of rules. Yellen’s comments were delivered today during a meeting with Chinese Premier Li Qiang as she made a long-anticipated trip to Beijing, aimed at finding some common ground between the two superpowers. “We seek healthy economic competition that is not winner-take-all but that, with a fair set of rules, can benefit both countries over time,” the Treasury chief told China’s No. 2 official, adding that U.S. actions to protect national security should be “targeted.” Li also struck a note of optimism, telling Yellen he believed bilateral ties would eventually see a “rainbow,” after going through a period of “wind and rain.” He also urged Chinese entrepreneurs to brace themselves for “hardships” and “look further to the horizon.” From IMF News Report, July 7, 2023

Yes, these are from the same trip. How it turns out is anyone’s guess. But a return to freer trade is in everyone’s best interest—win win as we say. National security can be a legitimate (sensible) reason for restricting trade. But it must be very carefully applied if it is not to degenerate into counterproductive protectionism.

Independence Day

Six years ago, Ito and I celebrated the 4th of July at the American Ambassador’s residence in Rome as the guest of our friend David Zimov (Economic Councilor at the American Embassy in Rome). It was a very fun event with lots of hamburgers and hot dogs, beer, and a concert by the US Marine Band. The cost of this extravaganza to us taxpayers was truly trivial compared to the cost of one day of our many wars (or our “special military operations” as Russia likes to call its wars). And the benefit to America in the form of international good will, far exceeds any American benefit from our wars, if there is any.

Janet Yellen’s upcoming trip to China will also cost a small drop in the bucket compared to sending the Sixth Fleet with a benefit for American security and wellbeing many times greater. At the same time, the US Senate continues to stall the confirmation of nominees to critical diplomatic positions. Go figure.

We seem to favor military spending over diplomacy to the detriment of our security and to our wellbeing more generally. In testimony before the UN Security Council Max Blumenthal recently stated that “The Biden Administration knows that ‘it is escalating a proxy war against the world’s largest nuclear Power. Why are we tempting nuclear annihilation by flooding Ukraine with advanced weapons and sabotaging negotiations at every turn?’  For those US officials who personally benefit financially, ‘a negotiated settlement to this territorial dispute means an end to the cash cow of close to $150 billion in US aid to Ukraine.’”  https://expose-news.com/2023/07/03/us-officials-benefitting-from-ukraine-war/  

When I noticed that the small handheld American flags we were all given at the Embassy’s 4th of July party was made in China (they had a very conspicuous “made in China” tag on the handle) the person sitting next to us was appalled. I explained to him why he should celebrate a feature of American life that has helped make us freer and more prosperous: 1. Our tax dollars were prudently spent in buying the cheapest flags; 2. The money the government saved could be spent on other government priorities (or—God forgive—returned to us taxpayers); 3. The American workers who otherwise would have been diverted to make these flags at higher cost; would remain in their current more productive activities raising our standard of living; 4. The larger volume of world trade strengthened America’s standing in the world. Though I don’t know how the American Embassy was able to avoid the shortsighted “Buy American” requirement, I was glad that it had.

Why do we promote growth in other countries?

The world’s twenty largest economies give around $100 billion in aid to poorer countries each year, about 40% of which is to promote economic development. Promoting economic development and growth in other countries is not just charity or to buy peace. More prosperous countries, those that produce more, contribute to our own prosperity more directly as well. 

It is easiest to understand this fact if we think of growth within our own country or state or town. https://wcoats.blog/2023/01/22/trade-once-again/  When you sell something you made and/or own, you benefit from the sale or you wouldn’t have undertaken it. Similarly, the buyer benefits or it wouldn’t have made the purchase. As you have heard or read me and other economists state over and over again, trade is win-win.

But the benefits go beyond the win-win benefits of the transaction itself. Being able to buy some of what I need from others rather than having to make it myself frees up my time to specialize in producing for sale to others what I am best at. In short, and forgive me for repeating this for the umpteen time, world out increases from the specialization that trade enables. As the result of trade world GDP skyrocketed in just 50 years from $1.3 trillion in 1971 to $96.5 trillion in 2021. https://wcoats.blog/2018/03/03/econ-101-trade-in-very-simple-terms/

We benefit from the inventions of entrepreneurs anywhere in the world and should encourage such developments. Pfizer’s Covid vaccine was developing in Germany by BioNTech, with whom Pfizer partners to produce to large quantities demanded. China’s incredible growth over the last thirty years has contributed to our own growth as well. In 1991 the US exported to China $5.2 billion worth of goods, which had grown to $151.i billion in 2021. In 1991 the US imported $12.7 billion worth of goods, which had grown to $506.4 billion in 2021. Following Nixon’s famous trip to and recognition of China in 1972, I remember well a friend who asked “what would we possibly want to buy from China?” We should cheer the fact that China’s economy has grown dramatically to the benefit of us all.

In general, we should welcome and encourage the economic growth of all countries around the world. The exceptions might be for countries that threaten war on their neighbors or us. We might well block the export of our products and related technologies with clear military applications to countries that might pose a military threat. And we might be cautious not to rely on such products from such countries. While these would be sensible policies, they are also easily abused by domestic industries wanting to be protected from competition.

When I was in China in the summer of 2002 to help its compliance with the requirements of the World Trade Organization, those I met were excited about growing into the world trading system. China was a rising power, most certainly not an enemy. How did they become an enemy, if indeed they are. In a word, Taiwan. But I can see nothing China has done to violate their agree with the US about Taiwan as part of One China. If China has become an enemy—a threat to the US—we are largely responsible in my opinion by raising doubts about our commitment to the One China policy.

This is not to say that China has always behaved according to the rule. I and many others were there to help them move in the right direction. Now we have pushed them backward for no good reason. Hopefully the Biden administration is beginning to recognize this and we will return to promoting China’s growth rather than repressing it.   https://wcoats.blog/2022/10/23/competing-with-china/

The Dollar (again)

Any country selling its goods abroad could price and collect payment for them in its own currency. Foreign purchasers would have to buy the sellers currency in the foreign exchange market (a whole nether story) in order to make such payments.

To communicate with each other they could also learn each other’s language. To communicate with everyone in their own language would require learning 7,000 languages. The economy of everyone adding English as a second language to their own is self-evident.

Rather than each trader dealing with several hundred currencies, there is huge economy in everyone dealing in one intermediary (so called vehicle) currency for pricing and payments of their cross-border transactions. But what currency?

When an exporter gives up pricing its products in the currency it pays its workers, it takes on a valuation risk. The choice of its invoicing currency and currency of payment needs to be attractive to potential buyers and of minimal risk to itself. The currency needs to have a relatively stable value for a large number of goods. The U.S. economy is large, and its goods are priced in dollars, which has a relatively good track record of price stability.

But to pay for imports with someone else’s currency the importer must have some of it. He must either take the risk of buying it in the foreign exchange market at whatever its current exchange rate might be or keeping some in reserve. Keeping a reserve of the international pricing and payment currency requires having safe assets with stable values in that currency, with deep and liquid markets in which they can be bought and sold. Currently the US dollar wins hands down. The Empire and the Dollar – Warren’s space (wcoats.blog)

The militarization of the dollar to serve U.S. foreign policy objectives increases the risk to others of holding and using dollars. How much that potentially undermines the dollar’s reserve currency status depends on how broadly the foreign policy objectives of the U.S. are shared and how well alternative currencies measure up to the value and market advantages of the dollar.

Reducing CHIP Supply Risks

When semiconductors where invented in the U.S. in the late 1950 and began to replace vacuum tubes in electronic circuits, the world of electronic circuitry changed dramatically forever (from the computer I am composing this note on, to the mobile phone on which I might discuss it with you or the electronics in the car I might drive to meet you while listening to the radio these chips made possible, not to mention of submarines, planes, and satellites they empower).

American companies continue to lead the world in the design of the most sophisticate chips and semiconductor circuits. However, they have increasingly found it more economical to outsource their manufacture to facilities in foreign countries. Almost all the most sophisticated chips (still designed in the US) are now produced in Taiwan by TSMC, which produces about 56% of world output of semiconductors.  Especially given the increasing suggestion, even by the President of the United States, that the U.S. might renounce its acceptance of China’s claim to Taiwan, such reliance on TSMC for our most advanced chips is an economic and security risk we should reduce.

What is the best way to reduce the risk of our heavy dependance on Taiwan’s supply of such Chips? The rest of this note briefly compares the market approach with the government (socialist/industrial planning) approach to reducing that risk.

American and other firms concentrated the manufacturing of the chips they designed and/or needed where it was cheapest to produce (and deliver) them. Where China violated the WTO rules of fair trade via state subsidies, importing countries are allowed by WTO rules to impose tariffs at levels designed to neutralize such artificial advantages. WTO rules also allow the use of tariffs to diminish the risk to national security of dependance on foreign supplies.

The opposite approach is for a government to subsidize the otherwise uneconomical manufacture of semiconductors (or whatever) in their own country.  In the U.S., the CHIPS and Science Act of 2022 appropriated $280 billion in part to subsidize factories to produce such chips in the U.S. Why was so much needed to get firms to produce chips in the U.S.? “’It’s much cheaper to build the chips and the factories in Taiwan than it is in the United States,’ former Google CEO Eric Schmidt told Semafor. ‘Similarly, the workforce quality is not as good as it is in Taiwan.’” “Chip war-US-Taiwan”

The Biden administration’s industrial policy approach suffers all the well-known disadvantages of industrial policy. First, like China’s subsidies, it violates WTO trading rules, which the U.S. seems all too willing to do when it is the violator rather than someone else. Second, it, rather than market factors, must decide who gets the subsidies (and tax breaks), either by establishing the rules for access or by outright picking winners. Governments’ records at picking winners, especially picking technologies, have historically been poor compared with the search for profit by entrepreneurs, most of whom fail and quietly fade away without further cost or waste. Third, when governments pick winners, they establish an economic incentive for corruption by those seeking to be “picked”. Governments, like everyone else, tend to bend to such temptations.

Rather than paying hundreds of billions of American taxpayer’s money for more costly Made in American products, imposing tariffs on imported chips sufficient to reflect the existing sole source risk would leave it to the market to find the best alternative and more diversified sources (India, Korea, Japan, Viet Nam, etc.). The full cost of lower living standards from industrial policies will only be felt in the longer run. “The slippery slope”

The same economic forces and arguments apply to slowing or preventing further global warming. A carbon tax reflecting the global warming externality of carbon producing activities leaves to the market the search for the best technologies for reducing carbon emissions without loss or with minimal loss of output.

The Slippery Slope

Beyond defining and protecting property rights, most governments dip into the private market for one reason or another (e.g., national defense) to some extent.  In doing so, they reward (e.g., subsidize) or penalize (e.g., tax) specific firms and/or industries. These firms have a MUCH stronger incentive to protect their interests than do the general public with regard to these activities. As a result of this asymmetry, firms spend more (fight harder) to protect their privileges than do the general public to protect a fair and competitive marketplace. As a result of these incentives, government privileges tend to grow over time and are hard to reverse. Governments keep getting bigger and bigger. Worse yet, if taxes do not match these increases in government costs, i.e., if the government borrows to finance them, these asymmetric incentives are even stronger.

These realities are now being confronted by the Republican Party as it attempts to agree on which government budget items to cut in order to reduce the fiscal deficit without raising taxes. As Steve Clemons reported in this morning’s Semafor Principles: “When Speaker Kevin McCarthy only has four votes of wiggle room in passing GOP legislation, the corn caucus can be as powerful as the Freedom Caucus. After a proposed repeal of biofuels subsidies prompted a rebellion by Midwestern lawmakers, leadership is making changes to a bill they presented as non-negotiable”

The Chips Act of 2022 provides an even costlier example that will be almost impossible to get rid of. The Act provides $52 billion in manufacturing grants and research investments and establishes a 25% investment tax credit to incentivize semiconductor manufacturing in the U.S.”  It makes financially attractive what was on its own an inefficient and costlier way to acquire these produces than buying them abroad. It makes us poorer as do other “Buy American” requirements.

Especially now with a labor shortage (we should increase legal immigration), moving workers to subsidized areas means taking them away from producing what the market found more profitable. It reduces overall output and our standard of living. If we insist on producing our own tanks and airplanes for national security reasons, that is a cost we should probably bare.  But for 5G phone service, Tik Toc, steel from Canada, or whatever???? Tell your congressman to stop subsidizing these special interests. And if they are really justified by national security, pay the cost properly with tax revenue.

Buy American

In recent years the U.S. government has become more protectionist (protecting its domestic firms from foreign competition). Last year it even provided billions of dollars to subsidize chip production and other designated products in the U.S., an example of industrial policy (state directed development). The CHIPS Act passed last year will shell out over $200 billion over the next five years to subsidize domestic chip production.

To add insult to injury, the so called “Inflation Reduction Act” may violate World Trade Organization rules: “We have concerns about a number of discriminatory elements in this Inflation Reduction Act which puts requirement for local content, for local production,” Dombrovskis, who also is a European Commission vice president, told Bloomberg in Prague.” EU Is Assessing If US Inflation Act in Breach of WTO Rules – Bloomberg Did we really think that we could cheat and Europe and the rest of the world would just roll over and play dead.

President Biden has proclaimed that these expensive policies are needed to create jobs in American. This is bazar given that we are currently suffering from a labor shortage.  Manufacturing output in the U.S. is at an all-time high. U.S. employment in manufacturing has gradually declined in recent decades because our workers have become more productive. But that is surely a good thing, resulting in an increase in our standard of living. President Biden has taken steps to lower our standard of living in order to create American job. Take a deep breath. If we don’t significantly increase legal immigration, you can count on the continuation of long waits on the phone to talk to a real service person.

Where does the “Buy American” impulse come from? It seems that some people see American nationalism as keeping everything at home whatever the cost, while I see it as enjoying the fruits of our largely free society to work and innovate and flourish as we each see fit for the benefit of all.

Several years ago, Ito and I celebrated the 4th of July at the American Embassy in Roma at the invitation of our friend David Zimov, at that time Counselor for Economic Affairs at the U.S. Embassy in Rome. It was really a fun event overflowing with hot dogs and hamburgers. While listening to the Marine Band and waving the little American flags we were all given, I noticed that the flag had been Made in China (clearly tagged). I am guessing that the American nationalists I referred to above were appalled. I, on the other hand, was grateful that my tax dollars were being spent as carefully and wisely as possible—on this occasion at least.  https://wcoats.blog/2023/01/22/trade-once-again/

Trade once again

Everyone understands that without trade they would be dirt poor. If everyone had to be self-sufficient, they would be lucky to survive. It’s almost as obvious that the wider we can trade the more we can specialize in our comparative advantage raising the incomes of everyone. Where many stumble is at their national borders (though within national borders of large countries some regions restrict trade with other national regions to protect otherwise less efficient enterprises thus lowering incomes in general).

Why should trade be restricted across national borders? Three reasons stand out: two legitimate and one not. A potentially legitimate reason concerns national security. Requiring that products necessary for defense be domestically produced, even at greater cost, reduces the risk of supply chain disruptions. The risk is that this excuse is easily abused to the extent that such protection can turn illegitimate or corrupt.

A second legitimate reason also concerns resilience. The most efficient allocation of productive resources must take account of the risks of disruption to supply chains. We buy insurance for many assets and activities, thus incurring a certain cost, to protect our incomes from risks (large or small) of interruption and potentially larger losses. When buying goods or inputs from cheaper producers located far away, we are exposed to larger risks of supply interruptions. American manufacturers, for example, take these risks into account in deciding where to produce and purchase inputs to their products sold in the U.S.

A government bestowed financial favor on a firm or industry (trade protection, industrial policy) is always part of a quid pro quo. The firm delivers favors to the politicians who favor it.  Government protection of otherwise uncompetitive firms increases their viability and profits but at the expense of lower income for the rest of us. Countries that heavily indulge in such protection have suffered lower levels of income. “Trade protection and corruption”

Following World War II, and the establishment of what became the World Trade Organization, barriers to trade (domestic protectionism) were gradually reduced via bilateral and multilateral trade agreements. In the 62 years from 1959 to2021, real United States’ per capita personal income, when measured in constant 2012 dollars to adjust for inflation, increased 297.1%, from $13,971 in 1959 to $55,477 in 2021. This huge increase is the result of increased productivity per worker. But such productivity gains are only possible because of trade (within or across national borders).  “The case for trade”

Weaknesses in government programs to facilitate worker adjustments that are a necessary part of a dynamic, growing economy and other geopolitical factors are undermining the freest and most efficient trade (domestic and global) that our prosperity has depended on. “Geo Economic Fragmentation and the Future of Multilateralism”  “End globalization?”

The Economist magazine has argued that: “One problem [with protectionism and industrial policies] is their extra economic costs. The Economist estimates that replicating the cumulative investments of firms in the global tech-hardware, green-energy and battery industries would cost $3.1trn-4.6trn (3.2-4.8% of global gdp). Reindustrialisation will raise prices, hurting the poor most. Duplicating green supply chains will make it costlier for America and the world to wean themselves off carbon. History suggests that vast amounts of public money could go to waste…. Yet rescuing the global order will require bolder American leadership that once again rejects the false promise of zero-sum thinking. ”  “The destructive new logic that threatens globalisation”

Misinformation and corruption are undermining the basis of our incredible prosperity just when we need to pull together to deal with global warming. We must resist and fight back to restore and preserve our efficient market economies.  They would not exist without trade.