gains from trade

Multilateralism is alive and well in the Indo-Pacific

Tridivesh Singh Maini Current Events , , , , , , , , ,

Introduction

The Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) trade agreement, also known as CPTPP 11, consists of 11 member states (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam).

The TPP agreement was a brain child of former US President Barack Obama. The main objective of the agreement was to bolster Obama’s ‘Pivot to Asia’ vision, and it was signed in February 2016.

Significantly, one of the first decisions taken by US President Donald Trump upon his election was to withdraw from the agreement. The main reason cited by Trump for this decision was that the TPP agreement was not favourable towards US workers. During the Presidential campaign of 2016, Trump had repeatedly said that apart from leading to job losses of US workers, the agreement would undermine US independence.

In April 2018, Trump had stated that the US was willing to join the TPP if it was offered a better deal, but by then other countries which were part of the original TPP had moved on, and the CPTPP 11 came into force in the end of 2018 (after a majority of signatories, Australia, Canada, Japan, Mexico, New Zealand, and Singapore ratified the agreement).

How the agreement has enhanced trade linkages between member states

CPTPP 11 has helped in bolstering economic cooperation between a number of member states such as Japan, Canada, and Vietnam. During Shinzo Abe’s visit to Canada in 2019, Canadian PM Justin Trudeau made a mention of how the deal had enabled Canada to increase its exports threefold to Japan. Trudeau also stated that the deal had been beneficial for strengthening economic ties between Canada and Japan.

According to estimates, the agreement has also helped in bolstering trade not just between Vietnam and Japan, but also between Vietnam and Canada.

Efforts to keep supply chains intact

In the midst of the corona virus pandemic, CPTPP 11 member states like Japan, Singapore, and New Zealand have been working assiduously towards keeping supply chains intact.

Singapore has been exporting meat and medical products from New Zealand and has also been seeking to strengthen its economic ties with Japan in the midst of the pandemic. In April, several CPTPP 11 members — Singapore, Australia, New Zealand, and Brunei — issued a joint statement along with Myanmar (a non-CPTPP 11 member) on the issue of opening trade lines, including air and sea freight.

Singapore, Australia, New Zealand, and Canada, along with non-CPTPP 11 member South Korea, have also been exploring the possibility of resuming essential travel.

What is also interesting is the success of some of the CPTPP 11 member states in dealing with the coronavirus pandemic, especially Vietnam and New Zealand. As of May 16, 2020, Vietnam recorded 318 coronavirus cases and did not register a single death. The ASEAN nation began to ease the lockdown in the end of April. As of May 16, 2020, the number of coronavirus cases in New Zealand was 1149, and number of deaths was 21 (New Zealand ended a 7 week lockdown on May 14, 2020).

Efforts to rope in new members into the partnership

After the coronavirus pandemic, more countries are likely to get on board with the CPTPP 11, including the United Kingdom. In Asia, Japan is also trying to get Malaysia and Thailand on board with the CPTPP 11. The main aim of Japan, which will chair the CPTPP 11 in 2021, in getting these countries on board is reducing its dependence upon China (Tokyo imports over 20% of its intermediate goods from China). Thailand could be an important addition to the CPTPP 11 because it has been relatively successful in dealing with the pandemic as of now, and apart from its economic relevance, Thailand has been working closely with several CPTPP 11 members in their endeavor to resume essential travel.

Conclusion

The CPTPP is thus important for a number of reasons. First, it is providing an alternative narrative to China’s Belt and Road Initiative — especially in the context of the Indo-Pacific (Japan’s desire to get new countries on board is a strong reiteration of the same).

Second, the CPTPP is a clear reiteration that globalization in a post-corona world is not likely to be driven by Washington and Beijing (many members of the partnership, such as Japan, New Zealand, and Vietnam, have an important role to play).

Third, it is an interesting instance of an arrangement where not all member states have similar political systems, but are bound by common economic interests.

In the post-corona world, the relevance of the CPTPP is likely to rise, and it remains to be seen how Beijing and Washington react to this.

Nightcap

Brandon Christensen Links , , ,
  1. ‘S’ is for Slander (‘P’ is for Palestine) Irfan Khawaja, Policy of Truth
  2. Ethnicity, Insurgency, and Civil War Fearon & Laitin, APSR
  3. John Locke and the Hebrew Bible David Conway, Law & Liberty
  4. Trading with the enemy: An American tradition Murray Rothbard, LRC

Nightcap

Brandon Christensen Liberty , , ,
  1. How the poor became blessed Pieter van der Horst, Aeon
  2. Learn to love trade with China Deirdre McCloskey, Reason
  3. “Degrowth” in a poor and unequal world Branko Milanovic, globalinequality
  4. Answers from the Sahel Quentin Lopinot, War on the Rocks

Do You have Silver?

Joakim Book Economics , , , , , , ,

In an episode of the Netflix medieval series The Last Kingdom, the protagonist Uthred, trying to purchase a sword from a blacksmith in a town he is just passing by, is instantly asked “Do you have silver?”.

In one scene, insignificant to the plot, the series creators neatly raised some fundamental questions in monetary economics, illustrating the relative use of credit and cash and the importance of finality.

For many centuries, the very payment system between people set severe constraints on what kinds of transactions they could – or dared – engage in. There are two main ways of providing payments (with quite a few variations within these categories): cash or credit.

Cash (sometimes referred to as ‘money transactions’) refers to payments with direct finality; the economic chain is instantly settled, and gives rise to no other economic relation. Examples here would be pure barter (where one object is traded for another) or commodity money (where an object is traded for a common media of exchange, with history providing countless fascinating examples: cattle, skin, olive oil, feathers, pearls etc).

The other category, credit, involves trading someone else’s liability or incurring a new one. Modern credit cards easily comes to mind: swiping that card settles the trade between the vendor and the customer who used the card only by creating two new (future) economic relations – a promise by the credit card company to transfer funds to the vendor, and a promise by the customer to pay the credit card company at the end of the month. The same features can be – and were – applied in many early societies; I give you some of my items, and you owe me; later I may transfer this “claim” to somebody else is the community in exchange for something I wanted, and instead of owing me, you owe them.

Some of the difficulties of monetary economics are here quickly revealed. In order for credit to work, a sufficient level of trust, repeated dealings or enforcement mechanisms must exist. If one or more parties do not trust each other, the two are unlikely to trade again or cannot socially or legally force the other into upholding his or her contract, they may refuse the deal up-front and lose the benefits of trade (the “backward induct,” in Game Theory-speak). Nevertheless going through with this transaction requires a different payment system: instant finality, such as provided with cash. Here’s the conundrum that troubles monetary economists:

The frictions that are needed to make money essential typically make credit infeasible and environments where credit is feasible are ones where money is typically not essential (Ugolini, The Evolution of Central Banking, p. 169)

If we trust each other enough (or have enough repeat dealings and a system of keeping track of everyone’s debts), there is no need for cash. If there is need for cash, that means we do not trust each other (or can’t keep track/enforce debts), indicating the presence of “frictions” that make us reluctant to use credit at all.

Let’s go back to our Last Kingdom protagonist. It is clear that the two characters are strangers (no previous dealings, no trust) and from simply passing through a village, no reason for the blacksmith to believe that there may be repeat dealings. A credit transaction is thus clearly out of question. Instead he directly asks for silver (cash), which initially seems to solve the problem. However, two further issues emerge:

  1. if all transactions were like this, the amount of cash everyone must carry around in the economy would be enormous. A common problem in medieval and even early modern societies were the lack of coins. If enough cash was simply not there and recourse to credit system unfeasible, we quickly realise how difficult transacting would be.
  2. even if the customer had enough cash, the very reason they were reluctant to use credit in the first place (no trust, no repeat dealings, no credible enforcement) harms their ability to transact in cash. Howso? Because both parties can opportunistically defect from the agreement. If the sword is paid for up front, the blacksmith can take the money and run – since they are strangers and unlikely to meet again, the cost of cheating is comparatively low. If the sword is paid for at delivery, the customer can easily renege on payment once delivery is obtained.

Is there no way out?

Uthred and the blacksmith use a method most of us are familiar with – indeed, probably even used as kids – pay half up-front, and half on delivery, with the possibility of a bonus payment (tip) at the end. Risk-minimising, yet offering payoff through the gains from trade.

Good monetary economics does precisely that: illustrating how monetary systems, including payment systems, can facilitate transactions and expand rather than limit the available gains from trade. It concerns itself with one of those spheres of (economic) life that we don’t notice until they breaks down. Try completing everyday transactions in countries with small-change shortage for a neat flashback to eighteenth century Britain or U.S., or in countries impaired by hyperinflation or sanctions. Monetary economics, in essence, is fascinating in its complexity of otherwise quite mundane things. Thanks to The Last Kingdom team for illustrating that.

Nightcap

Brandon Christensen Links , , ,
  1. Imagining post-abortion America Rachel Lu, the Week
  2. A visit to Noah’s Ark Stephen Cox, Liberty Unbound
  3. Adam Smith as centre-left economist (and nothing else) Branko Milanovic, globalinequality
  4. Tequila and US-Mexican security relations Raúl Benítez Manaut, War on the Rocks

Nightcap

Brandon Christensen Links , , ,
  1. A profile of new NY Fed Chairman John Williams Tate Lacey, Alt-M
  2. How to win a trade war Oliver Roeder, FiveThirtyEight
  3. The road to Iranian democracy Luma Simms, Law and Liberty
  4. Where Arnold Kling gets his news Arnold Kling, askblog

From the Comments: More trade, more states?

Brandon Christensen Comments, Current Events , , , , , , , , ,

Nguyen Ha left this thoughtful comment about my post on protectionism in Africa that I am embarrassed I missed:

Would you care to explain how “stronger economic ties will hasten the demise of current African states’ superficial institutions”?

What a tough question! First, though, I stated that it was my hope that deeper trading ties would lead to more states, not my prediction. My hope is based on current trends around the world: stronger economic ties have led to more states (and more aspirations for statehood within existing states).

The best academic treatment on this topic comes from Giacomo Ponzetto, an economist currently at CREI in Barcelona (he’s been mentioned at NOL on more than one occasion, too), and especially the Introduction and Section 5 of his working paper titled “Globalization and Political Structure.” Here:

As globalization proceeds, localities remove borders by increasing the size of countries. The number of countries declines and the mismatch between each locality is ideal and actual provision of public services grows. Eventually, this mismatch is large enough to justify a move to a two-level governance structure. The world political structure shifts from a few large countries to many small countries within a world economic union. The two-level structure is more expensive, but it is nonetheless desirable because it facilitates trade and improves preference-matching in the provision of public services.

By “two-level governance structure” Ponzetto means one level, a locality, that’s focused on delivering public goods to that specific locality, and another level, a world economic union, that’s focused on protecting property rights and eliminating border costs.

You can see this concept play out in a few different federative structures, especially the EU, the US, India, and China. In the European Union, multiple localities have tried to separate from countries (Catalonia from Spain, Scotland from UK) while still remaining part of the international economic union in place. Deeper trade ties, more states.

Three new states were created in India in 2000, and China is currently grappling with federalism as a way to keep up with its predictable economic success. The US hasn’t seen any new states added since 1959, but that’s because its system does a good enough job overall to keep all its member states content (happy, even).

The free trade zone in Africa will be interesting to watch because there are so many different variables at play than in China, the EU, India, or the US. India was governed by one overseas empire; the EU has been able to maintain stability because of American military power and the security umbrella it provides; China has been unified on and off again for centuries; and the US is, for all intents and purposes, a polity underscored by British cultural, economic, and political mores. Africa has none of these traits, yet its various leaders recognize that free trade leads to prosperity and often (not always) to better diplomatic ties.

If all goes well, and current trends elsewhere are any indication, Africa would see more states come into being to go along with its deeper economic ties. (This might be a major factor why Nigeria refused to join; Abuja fought a vicious civil war in the 1970s against separatists in Biafra and its leaders are probably tacitly aware of current global trends.) If all doesn’t go well, then violence and poverty will be just around the corner.

BC’s weekend reads

Brandon Christensen Links , , , , , , , , , , , , , , , , , , , ,
  1. Saudi-Iran Conflict Is Not America’s Fault
  2. Gains from trade: China and the United States
  3. How Bad Is Trump’s Brand of Authoritarianism?
  4. How Hiroshima Became A War Crime
  5. Art and Porn in Edo Period Japan
  6. The [True?] Meaning of Marxism

Does the EU promote liberalization?

Michelangelo Landgrave Current Events, Politics , , , , ,

This is in response to Brandon’s earlier post asking for literature on the EU’s effect on promoting liberalization. The short reply is the EU promotes liberalization – sometimes. Below are two pieces of the literature on the issue.

On a quick aside, I have mixed feelings towards the recent Dutch referendum on the Ukraine-EU Association Agreement. I don’t think that the EU should extend a hand to Ukraine. Namely because I think the Russians are much more willing to use force over the issue than West Europeans. Secondly, because I think it gives peripheral countries the idea that they don’t need to join/remain in the EU to receive its protection. Moral hazard if you will.

However I disagree with co-blogger Evgeniy Grigorjev that Ukraine, and other peripheral nations, should be denied EU affiliation until they reach certain benchmarks. I’m sure that Ukrainian politicians would consider EU association a victory and feel less compelled to act. However the long term effect of EU membership would be greater trade in goods, people, and ideas. With any luck liberal ideas. I would welcome the EU expanding into North Africa and parts of the Near East if it meant the expansion of liberal ideas to those regions.

The Effect of Labor Migration on the Diffusion of Democracy: Evidence from a Former Soviet Republic {LINK}

This empirical paper looks at the effect of return migration on political attitudes in Moldova. The basic idea is that return migrants bring with them new political ideas from abroad.

In the late 1990s Moldova experienced financial trouble that encouraged many of its laborers to migrate temporarily to Russia and the west (largely Italy) in search of work. Regions with more return migrants from Italy were found to have the least support for the Communist Party in future Parliamentary elections. Regions where migrants went to Russia had increased (albeit sometimes small and/or statistically insignificant) support for the Communist Party.

There are two take aways here:

(1) Trade in ideas matter.
(2) The type of ideas you trade matter.

The EU, and the Schengen area, can promote idea trading but what makes the EU important is that it is a liberal institution. An institution that needs reform, but one worth keeping.

Anchoring Democracy from Above? The European Union and Democratic Backsliding in Hungary and Romania after Accession {LINK}

This paper looks at the different responses the EU took towards Hungary and Romania when the national governments of both respectively introduced illiberal measures. Discusses some of the weak points in the EU and how it can be reformed to improve its ability to react to similar future events. As Evgeniy points out, the EU has a weakened ability to punish illiberal policies once EU membership has been granted. Intra-EU coordination is also difficult to achieve to use those tools it does have. The EU is not however impotent and reforms could be introduced to rectify this.

BC’s weekend reads

Brandon Christensen Links , , , , , , , , , , , , , , , ,
  1. Freedom of the Athenians (book review)
  2. The Myth of the Myth of Barter
  3. Trade Liberalization and Growth: New Evidence (pdf)
  4. From West Philly to Gulshan e Iqbal and Back
  5. Obama’s Witness for the Prosecution
  6. When Your Dream Lovers Die

BC’s weekend reads

Brandon Christensen Links , , , , , , , , , , ,
  1. A rifle’s journey from Belgium to Gaza
  2. No Libertarian Case for Empire (this is the piece that sparked my little tirade yesterday)
  3. A dust-up over dissenting views at Ohio State law
  4. What really happened on Thanksgiving (le duh; this screams “why Econ 101 is so important”)

You know what really grinds my gears?

Rick Weber Liberty , , ,

Let’s say you’re going to buy a T-shirt. You’ve narrowed it down to two identical shirts, one of which costs $12 and was made by a surgeon and another which cost $10 and was made by a poor high school dropout. You can spare a couple extra bucks so you’ve decided to make your decision based purely on ethics. I think most of us would agree that you should buy the $10 shirt. First off, whoever made it probably needs the money more than the surgeon. Perhaps more importantly, you shouldn’t be encouraging the surgeon to waste her capacity to create value by saving lives.

Okay, what if the poor dropout is really really poor? Same decision. Shirt costs $5? Same decision.

Alright, what if the more expensive shirt isn’t made by a surgeon, but by someone who is ten times as wealthy as the person who made the $5 shirt? Same decision. Five times as wealthy? Twice as wealthy? Same decision, same decision.

This is why that marketing gem “Made in the USA!” really grinds my gears. American workers are lucky enough to work in a place with good institutions and a capital structure that allows them to be incredibly productive while working in comfort. Using this productivity to deny opportunities to the poor is morally reprehensible. Using this productivity to do something a poor person wants to do is morally reprehensible (okay, none of us want to go to work, but we’d all prefer some jobs to others or to no job at all).

Caveat: If something is made in the USA and is higher quality I’m fine with that if the selling point is the quality and not that it was made by rich (in relative and historical terms) Americans.

From the Comments

Brandon Christensen Comments, Current Events, Economics, Liberty , , , , , ,

Co-editor and Economics professor (who happened to predict the economic crisis of 2008 in a book a year before it happened) Fred Foldvary makes a very important point regarding some of the common fallacies associated with trade deficits and tariffs:

The reason the US has a big trade deficit is that US taxes make exports more expensive. Most other countries have big value added taxes, which get subtracted from export prices. WTO rules allow for the deduction of VAT but not of income taxes from exports. If the US shifted from income taxes to either VAT or LVT (land value taxation), the trade deficit would largely disappear.

But given current taxes and WTO rules and the trade deficit, high tariffs on imports would destroy US comparative advantages, artificially boosting high-cost industries. The US would have to abandon the WTO, and other countries would retaliate with tariffs against the US.

If California has a big trade deficit with New York, would a tariff against imports from NY help? If not, then a tariff against China is likewise counterproductive. The law of comparative advantage works regardless of borders. I have a big trade deficit with my local grocery store; I import their food and they get no products from me, only a money asset. Would a tariff on the food store’s exports help me? Sure I would buy less of their food, but I want their food, and I want it cheap!

Two things I would like to draw attention to in this great piece of insight: 1) income taxes are horrendous and 2) the avowed internationalism of the freedom message.  I would like to repeat a basic insight that Dr. Foldvary provides to readers: “If California has a big trade deficit with New York, would a tariff against imports from NY help? If not, then a tariff against China is likewise counterproductive. The law of comparative advantage works regardless of borders.”

One of the best ways to tell a “real” libertarian from a “fake” libertarian is the defense of internationalism that is given for any argument.  Nationalism is a vulgar and often extremely harmful way of thinking and has destroyed countless lives and restricted countless others from attaining affluence and dignity.  It feeds the growth of the State at the expense of the individual and contributes to malice in foreign affairs.  The concept of international trade as it is spelled out by Dr. Foldvary is especially important.  Also remember, if you have any questions regarding subjects, don’t hesitate to ask.  This is a blog run (mostly) by intellectuals, and one of the goals of this consortium is to help educate the intelligent layman on sophisticated subjects.

My prompt regarding democracy also produced a number of great insights, and so far I have found subconch‘s input to be the most thought-provoking:

“The individual is core in a democracy, and the process should not be beyond his reach, or overwhelm him so, that he may not select his representative by reason, or further recognize intrusion on his or his neighbor’s liberty. The people are the ultimate check and balance on the system, but if they be separated from it, the scales will continually tip toward tyranny.”

I highly recommend reading the whole ‘comments’ section.