Source: “Free Trade Agreements and the Consolidation of Democracy” (April 2014) American Economic Journal: Macroeconomics. American Economic Association.
Source: Paul Krugman (1997) Enemies of the WTO.
This visiting American education professor who specialises in globalisation, claimed in the linked radio interview that real wages had fallen in the USA and Mexico. Even for the bottom 20% of the USA, their after-tax household incomes increased by 40% since 1979, with most of that after the signing of NAFTA.
Everything that is bad in crony capitalist Mexico is the fault of NAFTA if our visiting academic is to be believed despite trade tripling and investment increasing 600% because of NAFTA.
Women’s earnings growth has been perfectly fine over the last 40 years despite the horrors of NAFTA and the attack on unions and workers rights by a top 1% emboldened by NAFTA and globalisation, if our visiting academic is to be believed.
Gender analysis, gender analysis, where is his gender analysis of NAFTA? Few labour market statistics make sense without being broken down by sex because of the immense economic progress of women in the last 50 years. Can NAFTA claim credit for that?
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.
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
Despite all the passions about the TPPA, the correct starting post for an economist on regional trade agreements is lukewarm opposition. That is the position of Paul Krugman. Paul Krugman summarised the TPPA well recently from a standpoint of a professional economist:
I’ve described myself as a lukewarm opponent of the Trans-Pacific Partnership; although I don’t share the intense dislike of many progressives, I’ve seen it as an agreement not really so much about trade as about strengthening intellectual property monopolies and corporate clout in dispute settlement — both arguably bad things, not good, even from an efficiency standpoint….
What I know so far: pharma is mad because the extension of property rights in biologics is much shorter than it wanted, tobacco is mad because it has been carved out of the dispute settlement deal, and Republicans in general are mad because the labour protection stuff is stronger than expected. All of these are good things from my point of view. I’ll need to do much more homework once the details are clearer.
Krugman then reminded that a trade agreement is most politically viable when it is most socially harmful. This is the point that the opponents of the TPPA miss. They will not want to discuss how some trade agreements are good deals but others are bad. That would admit that trade agreements can be welfare enhancing, and sometimes they are but sometimes not.
The correct economic name for free trade agreements is preferential trading agreements. These agreements give tariff and other preferences to some countries over others.
Tariffs are lower for the members of the agreement, creating more trade, but there is also trade division.
CER offers a neat example of trade diversion. Instead of buying cars from the cheapest source and collecting tariff revenue, the hopelessly inefficient Australian car industry did not have to pay tariffs so it made New Zealand into a major export market until tariffs were abolished in 1998.
Less tariff revenue because of CER but we still paid way over the odds for Australian instead of Japanese cars. We were worse off. Less tariff revenue but car prices pretty much as high as before.
New Zealand tariffs are minimal these days. The TPPA reduces the key tariffs on our exports at an excruciatingly slow pace.
There is no discussion of trade diversion in the National Interest Analysis before this committee. For that reason alone, the National Interests Analysis is inadequate and should be returned to the Ministry for further work. Right now, it would not pass a first semester test in a basic international economics course because that most basic risk from trade agreements is not discussed.
Most of the TPPA is not about tariffs. Many of these other chapters are suspicious add-ons to trade talks.
Developing countries rightly regard trade and environment clauses in any trade agreement as a new form of colonialism.
Unions, the Labour Party and Greens happily demand these intrusions into the regulatory sovereignty of developing countries to protect special interests against import competition.
The sovereignty objections to trade agreements are no different to those that can be made to climate change treaties and International Labour Organisation conventions. It is all in the details – what do we get in return?
Consistency would help too. Trade agreements should not include labour or environmental standards as they, for example, limit our right to deregulate our labour market. Be careful for what you wish for when you oppose international agreements on sovereignty grounds.
The intellectual property chapters of the TPPA are truly suspicious. With each new day, the case for patents and copyrights is weakening in the economic literature. Some have made powerful arguments to abolish patents and copyrights altogether.
There are modest extensions of the term limits of drug patents and much more mischief on copyright terms. These should be watched carefully in future trade talks and one day will be a deal breaker.
Good arguments can be made against investor state dispute settlement provisions even after the carve-outs. These provisions have no place in trade agreements between democracies.
Foreigners can take their chances in democratic politics like the rest of us. They might occasionally get a short deal because of left-wing or right-wing populism but these gusts of xenophobia are mostly an occasional irritant in the rich fabric of Western democracies.
Developing countries sign-up to investor state dispute settlement to signal they are open for business. Foreign investors do not have to put up with their corrupt courts and bureaucracies and hopelessly venial politicians.
The logic of regional trade negotiations is we cut tariffs we should have cut long ago in return for others cutting their tariffs which they too should have cut long ago.
Much is made of the cost-benefit analysis of the TPPA. All the critics are really saying is cost benefit analysis is really hard and often imprecise.
If the econometric estimates were not in doubt in this or any other public policy field, the academics are simply not trying hard enough to win tenure and promotion. Academics make their careers by being contrarian.
For this lukewarm opponent of regional trade agreements, the TPPA is a so-so deal with small net gains. There is no harm in signing it.
New Zealand filmmakers have used trade treaties to pry open access to foreign markets by challenging failures to honour promises of nondiscrimination in trade and investment in the Federal Court of Australia.
This should please the Twitter Left because they are also a film going left as are most members of the educated middle class as a point of identity and snobbery.
Back in the day, New Zealand television programming was sold cheaply into the Australian market. Many cultural and other products are exported into foreign markets and sold for whatever they can get above the price of shipping or digital transmission. What else explains all that rubbish on cable TV?
Under the Closer Economic Relations agreement that creates a single market between Australia and New Zealand, New Zealand made television programming content must be treated the same way as Australian content so it was included in their 50% local content rules for commercial television back from whenever I remember this story from.
There was a Federal Court of Australia case that ruled that New Zealand television programming was Australian content programming for the purposes of the relevant media regulations because of Closer Economic Relations.
From the late 1990s, with revival of the New Zealand film and television industry, New Zealand content was starting to flood the Australian market, especially in the off-season in the summer when stations were looking for cheap content to fill a low ratings period.
Naturally, this Kiwi invasion did not please the rent seeking Australian television programme production industry and many a mendicant actor, writer and producer
Where there is a will, where there is a way: minimum quality standards are introduced into the Australian content rules defined by price – a price that happen to be above what the television stations used to pay for New Zealand made programming in the off-season.
This court victory in favour of various New Zealand film industry in enforcing a trade and investment treaty puts the Twitter left in a bit of a conundrum. Which is more important? The New Zealand film industry or their hatred of globalisation and the rule of law.
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.
Source: Edward Prescott.
One of my policy essays for my Masters of Public Policy Degree in Japan was on the social clauses of the GATT. I described the labour and environmental clauses is a new form of colonialism.
My classmates were government officials from all around Asia, more than 20 countries. As they spoke English as a second language, they were pleased to learn of a new way of describing social clauses in trade agreements in English.
A Filipino friend had a blunter way of referring to social clauses in trade agreements: “the whites are back, telling us what to do”.
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…
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About 1% more GDP but higher drug prices.
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.
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.