I Annoyed a mercantilist


Trade creation and trade diversion for NZ lamb imports into the UK

New @ILO report: Labour provisions in trade agreements don’t hurt business

The anti-globalisation crowd will have to reconsider their position on social clauses and trade agreements if they are found to not harm trade.

Can free trade agreements help solidify emerging democracies?


Source: “Free Trade Agreements and the Consolidation of Democracy” (April 2014) American Economic Journal: Macroeconomics. American Economic Association.

The explosion of lead in the saddlebags of trade agreements @KennedyGraham @DavidShearerMP #TPPANoWay


Source: CONVERSABLE ECONOMIST: A Fundamental Shift in the Nature of Trade Agreements

@toddmcclaymp #MFAT hasn’t heard of trade diversion? @DavidShearerMP #TPPANoWay @KennedyGraham

Trade diversion occurs when preferential trading agreements cause imports to shift from low cost countries to higher cost countries. Rather than gaining tariff revenue from inexpensive imports from world markets, a country may import expensive products from member countries but not gain any tariff revenue. An example of trade diversion is when Britain closed its doors to New Zealand agricultural exports after joining the common market.

Preferential trading agreements are trade agreements between countries in which they lower tariffs for each other but not for the rest of the world. The mass media mislabel them free trade agreements.

Under trade diversion, the partner country benefits from this change as an exporter, but the importing country loses due to this higher cost, as does the third country whose exports fall.

The loss to the importing country is not visible to consumers, who find the higher-cost product cheaper due to the absence of tariff. The country as a whole loses, with that loss being lost tariff revenue – lost to cover the cost of the higher cost imports from a member of the new preferential trading agreement.

Source: Key Graph 10 Trade Diversion versus Trade Creation in Joining a Trade Bloc: US Market for Imported Compact Cars.

It does not take much trade diversion to make a preferential trading agreement welfare reducing because of this switch to high cost producers.


The New Zealand Minister of Trade and the Ministry of Foreign Affairs and Trade did not discuss this major risk even from the simplest preferential trading agreement in recent policy analysis of the TPPA as my Official Information Act request has revealed. The term trade version does not appear in any of their analysis.

Adherents of the natural trading partner hypothesis argue that preferential trade agreements are more likely to improve welfare if participating countries already trade disproportionately with each other. Opponents of the hypothesis claim that the opposite is true: welfare gains are likely to be greater if participating countries trade less with each other. The powerful critique by Bhagwati and Panagariya (1996) is now widely accepted and one hears little justification of on preferential trading agreements on the grounds of the natural trading partners hypothesis

The 1st @NYTimeskrugman on #TPPANoWay @Oxfamnz #JaneKelsey


If George Bush had not won the 2000 presidential election, Paul Krugman would have taken over as the best communicator of economics since Milton Friedman. Instead, he became patient number no.1 of George Bush derangement syndrome. Ann Coulter was patient no. 1 of Clintons derangement syndrome.

Source: Enemies of the WTO.

Development & Trade: Empirical Evidence @DavidShearerMP @oxfamnz @TPPANoWay


Original EU Labor Productivities Relative to U.S. @NickCohen4 @iainmartin1 @CapX


Source: Edward Prescott.

@HillaryClinton positions on #TPA trade deal over time

@jamespeshaw nails the #TPPA policy trade-off @NZGreens

About 1% more GDP but higher drug prices.


Source: No increased medicine costs under TPPA | Stuff.co.nz

The next best arguments James Shaw made were xenophobia about foreign investment in land and some vast conspiracy theory regarding endangered dolphins.

When your next best argument is foreigners are coming to buy up all our land, you are playing from a weak populist hand. About half of million New Zealand born live in other countries.

About 80% of these live in Australia, the great majority as residents rather than as citizens. These New Zealanders living in Australia and elsewhere need protection under international agreements to ensure they are not the victim of populist outbreaks against the sale of land to foreigners.


Source: Statistics New Zealand.

In addition, if a foreigner wants to pay over the odds for my house I am glad to separate a fool from his money.


Source: Statistics New Zealand.

New Zealand has a strong interest in protecting the rights of its own expatriates as well as New Zealand foreign investors to buy land in other countries. As David Friedman explains:

Much more commonly, [economic imperialism] is used by Marxists to describe–and attack–foreign investment in “developing” (i.e., poor) nations. The implication of the term is that such investment is only a subtler equivalent of military imperialism–a way by which capitalists in rich and powerful countries control and exploit the inhabitants of poor and weak countries.

There is one interesting feature of such “economic imperialism” that seems to have escaped the notice of most of those who use the term. Developing countries are generally labour rich and capital poor; developed countries are, relatively, capital rich and labour poor. One result is that in developing countries, the return on labour is low and the return on capital is high–wages are low and profits high. That is why they are attractive to foreign investors.

To the extent that foreign investment occurs, it raises the amount of capital in the country, driving wages up and profits down. The effect is exactly analogous to the effect of free migration. If people move from labour-rich countries to labour-poor ones, they drive wages down and rents and profits up in the countries they go to, while having the opposite effect in the countries they come from.

If capital moves from capital-rich countries to capital-poor ones, it drives profits down and wages up in the countries it goes to and has the opposite effect in the countries it comes from. The people who attack “economic imperialism” generally regard themselves as champions of the poor and oppressed.

To the extent that they succeed in preventing foreign investment in poor countries, they are benefiting the capitalists of those countries by holding up profits and injuring the workers by holding down wages. It would be interesting to know how much of the clamour against foreign investment in such countries is due to Marxist ideologues who do not understand this and how much is financed by local capitalists who do.

@JosephEStiglitz talks sense on flaws of the #TPPA @ItsOurFutureNZ @greencatherine @RusselNorman

Joe Stiglitz occasionally gets it right such as this week when he spoke about the downside of the Trans-Pacific Partnership Agreement. As he said:

The reality is that this is an agreement to manage its members’ trade and investment relations – and to do so on behalf of each country’s most powerful business lobbies.

Make no mistake: It is evident from the main outstanding issues, over which negotiators are still haggling, that the TPP is not about “free” trade.

Because of all the haggling over the trade-offs where you do something stupid in return for the other side doing something sensible in terms of liberalisation or something equally stupid in additional regulation, the gains in the agreement can be quite small. Again as Joe Stiglitz explains:

New Zealand has threatened to walk away from the agreement over the way Canada and the US manage trade in dairy products. Australia is not happy with how the US and Mexico manage trade in sugar.

And the US is not happy with how Japan manages trade in rice. These industries are backed by significant voting blocs in their respective countries. And they represent just the tip of the iceberg in terms of how the TPP would advance an agenda that actually runs counter to free trade.

The case for intellectual property rights over drugs is complicated but no one seems to be suggesting that patents should be lengthened.

Far more can be gained in terms of drug availability through regulatory reforms that streamline the drug safety approval process which is currently costing many people their lives.

Sam Peltzman showed in a famous paper in 1973 that the 1962 amendments to US Federal drug approval laws reduced the introduction of effective new drugs in the USA from an average of forty-three annually in the decade before the 1962 amendments to sixteen annually in the ten years afterwards. No increase in drug safety was identified.

The most bizarre part of drug approval processes is they go beyond the checking whether the new drug is safe. What is even more bizarre in New Zealand is the New Zealand drug safety agency duplicates safety processes already performed overseas. This is instead of automatically approving any drug or medical device approved in the USA, UK, Canada or Australia.

Drug safety regulators in the USA also check to see if the drug works – that the drug has its predicted effects. Drug safety is a health policy concern but whether the investors developed a useful drug is something between them and those interested in buying it. Drugs became available years after they were on the market outside the USA because of drug lags at the FDA. To quote David Friedman:

In 1981… the FDA published a press release confessing to mass murder. That was not, of course, the way in which the release was worded; it was simply an announcement that the FDA had approved the use of timolol, a ß-blocker, to prevent recurrences of heart attacks.

At the time timolol was approved, ß-blockers had been widely used outside the U.S. for over ten years. It was estimated that the use of timolol would save from seven thousand to ten thousand lives a year in the U.S.

So the FDA, by forbidding the use of ß-blockers before 1981, was responsible for something close to a hundred thousand unnecessary deaths.

It is a pity that the far left movement ranted against the TPP focused on conspiratorial theories about investor state dispute settlement rather than the risks of this trade deal to the cost of drugs to the health sector. Only late in the game did the far left start talking about drug availability and the costs of drugs to the health budget of the government if patent lives were extended under the TPPA.

A campaign against the TPPA on the basis of its impact on drug availability because of longer patent terms running up against the limited budgets of pharmaceutical purchasing agencies would have appealed across the entire political spectrum. As Joe Stiglitz explains:

The TPP would manage trade in pharmaceuticals through a variety of seemingly arcane rule changes on issues such as “patent linkage,” “data exclusivity,” and “biologics.”

The upshot is that pharmaceutical companies would effectively be allowed to extend – sometimes almost indefinitely – their monopolies on patented medicines, keep cheaper generics off the market, and block “biosimilar” competitors from introducing new medicines for years. That is how the TPP will manage trade for the pharmaceutical industry if the US gets its way.

The health sector can only so much to buy drugs. If drug patents last longer, there is less money to go around because the generics become available later than otherwise.

TPP – Trojan Horse in a global race to the bottom

I can’t think of a single fact that this crank got right in this clip on the Trans-Pacific partnership agreement (TPPA).

Robert Reich, a Democratic party hack, referred to the TPPA as the biggest trade deal ever. He ignored a large number of multinational trade deals under the World Trade Organisation and the GATT such as the Uruguay round and the current Doha round.


Reich claims the deal is negotiated in secret and later talks about its submission to the Congress for fast track.

Robert Reich claims that investor state dispute settlement allows challenges to any regulation and compensation for unfair reductions in profits. It is a far narrow criteria than that involving discrimination against foreigners.


Currently, about 3000 international treaties give the ability to sue governments. Some 2700 of these are Bilateral Investment Treaties. The rest are trade treaties, including NAFTA. These treaties have spread rapidly around the world since the 1990s.

The TPP draft chapter says that the point of investment protection has long been “to encourage and promote the flow of investment…as a means to promote economic growth.”

At the same time, the TPP draft chapter specifically highlights “the inherent right to regulate…to protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, and public morals.”

HT: People are freaking out about the Trans Pacific Partnership’s investor dispute settlement system. Why should you care? – The Washington Post.


Robert Reich talks about the Trans Pacific Partnership and its implications especially if it is signed. It would be the largest trade deal in history representing 792 million people and accounting for 40% of the world economy. Well worth a look.

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Jane Kelsey opposes handcuffs on the democratic choices of future governments! Does she oppose labour and environmental standards in trade agreements too?

Jane Kelsey in a television interview said she opposes the reductions in sovereignty in trade agreements that result from investor-state dispute settlement (ISDS) provisions because they limit the democratic choices of future governments.

If so, she must oppose environmental and labour standards in trade agreements and, more importantly, binding the hands of future governments with climate treaties. All international treaties are about restrictions on sovereignty.

Environmental and labour clauses in trade agreements and climate treaties all limit the powers of governments to legislate on environmental and employment law in accordance with the will of the people as expressed in the most recent election and change of government. Power to the people.


Jane Kelsey would do better focusing on those parts of the TPPA deal that lowers the net value of the deal such as those extending the term of patents over the drugs. All international treaties are about trade-offs.

The most important reason for focusing on intellectual property law in trade agreements is Kelsey is likely to actually win people over that are not on the far left, including many on the right of politics over to her cause. Kelsey is too busy rounding up the usual suspects.

Ranting about big corporate conspiracies and the investor state dispute settlement clauses puts people off.

These gusts of paranoia lose support on issues where there is common ground to be suspicious about the growing scope of trade agreements and their reach behind borders.

Regulatory harmonisation is advisable only when there are compelling reasons such as the prevention of hazards or technical compatibility of products – do the plugs fit into each other? As Sykes argues:

as a normative matter, harmonization is inferior to a legal system that tolerates regulatory differences subject to legal constraints, and that relies on mutual recognition where appropriate (the exception to this claim being matters of technical compatibility between products).

Related, as a positive manner, harmonization will often lack any political constituency and thus instances of true harmonization will be rare.

The first Paul Krugman (1997) on what trade negotiators negotiate about


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