Wednesday, 11 April 2018 09:37

Trump and Trade Wars

Donald Trump is on a self-proclaimed quest to “make America great again”. He has pledged to tear up trade agreements that do not benefit the USA. Thus far he has, amongst other things, withdrawn the US from the Trans-Pacific Trade Partnership, threatened to withdraw from NAFTA (North American Free Trade Agreement) and imposed billions of dollars of trade tariffs on China, who have of course retaliated. Let’s take a look at the economics behind trade and protectionism.

 

Economists usually view free trade as beneficial for all parties. The country who is most efficient at producing a good makes it cheaply and gains revenue from exporting and the country who is less efficient obtains the good more cheaply than if they had made it themselves and can focus on producing goods and services that they are more efficient at. Everyone benefits. For a more technical explanation of this you may wish to read up on the theory of absolute advantage (Adam Smith, 1776) and the theory of comparative advantage (David Ricardo, 1817).

 

Most economists contend that to impose tariffs (taxes on imports) would diminish these benefits or eliminate them. However, there are some situations in which many would consider protectionist (anti-trade) policies:

1)      Infant industries - temporarily protecting new industries until they are developed enough to compete on their own.

2)      Sunset industries – declining industries that we may wish to let go more slowly so that workers have time to retrain and the economy can adjust.

3)      Strategic industries – sectors that are so important to the security of an economy that we might be prepared to produce less efficiently in order to keep control of them.

4)      Anti-dumping – protecting firms against foreign goods that are being sold below cost price either because too many have been produced or in a deliberate effort to damage competitors.

 

It is these last two that Trump is claiming as justification. The US has regularly accused China of dumping surplus goods or of giving state subsidies to firms, which, they say, amounts to the same thing. Trump also claims that steel, an industry that has declined significantly in the US over recent years, is a strategic industry as it is needed for national defence.

 

It is not the first time that the US has looked to protectionist policies. The first US Treasury Secretary, Alexander Hamilton (1755-1804), oversaw a raft of protectionist measures that many have credited as highly successful in building the fledgling United States.

 

Critics of the Trump administration would suggest a degree of hypocrisy in the anti-dumping argument and point to the $25bn a year that the US pays out in farm subsidies and the generous defence contracts given to some firms that allow them to subsidise other products. Some have also suggested that the steel the US has traditionally produced cannot be considered a strategic industry,1 as they have traditionally focused on lower grades of steel, not the very high grade steel required by defence industries, which they have always imported.

 

Trump’s trade theory then; is he getting tough to defend American interests or is this a naked attempt to appeal to core voters who have lost manufacturing jobs in the Rust-Belt? Does it make good economic sense or is Trump destined to increase costs for US businesses and condemn the economy to focus on inefficiently producing goods and services that it is ill-equipped to produce instead of importing them?

 

Further Reading:

BBC Radio 4’s “The Long View” considers the early history of US protectionism and whether Trump’s policies are likely to have the same beneficial effects. You can listen to it here: http://www.bbc.co.uk/programmes/b09xjtd8

 

EconplusDal has some excellent YouTube videos on the benefits from trade and the theories of comparative and absolute advantage. You can find these here: https://www.youtube.com/watch?v=aPJTi3gGOHs

 

You can find Adam Smith’s original publication of the theory of absolute advantage here: https://www.ibiblio.org/ml/libri/s/SmithA_WealthNations_p.pdf

 

You can find David Ricardo’s original work on comparative advantage here: http://www.econlib.org/library/Ricardo/ricP.html

 

BBC News have some excellent articles on Trump’s approach to trade, including this one: http://www.bbc.co.uk/news/business-43635623

Published in Economics
Thursday, 03 October 2013 09:26

Aid - How Much?

The UN target for overseas development aid (ODA) is for countries to give 0.7% of GNI so how well are we doing? 

ODA/GNI of selected countries 2011

Since these figures were released by the OECD last year the UK has increased aid spending to meet the target but still only 6 countries reach it and only 3 exceed it. The average spend on ODA is just 0.3%, less than half of what the UK wants. Click on the image to explore the OECD website.

Even this figure flatters, however. Much of this aid is 'tied aid'. It is only given on certain conditions, for example it may only be given if the money is used to buy the required goods and services from companies based in the donor country. The OECD estimate that tied aid reduces the benefits from the aid money spent by over 20% Many countries make use of tied aid. Again here the UK comes out well with no tied aid at all. The USA is at the other end of the scale. A huge 96% of US aid is tied aid. The UN estimates that 42% of aid in 2009 was tied aid.

Tied Aid by Country

The headline figure of about $2 trillion in ODA over the last 50 years sounds like a lot but with much of it tied aid and US GNI for 2012 standing at $15 trillion, that figure is sounding very small.

Published in Blogs
Friday, 04 October 2013 00:00

Aid - Why do we Give Aid?

 It is an important question. Godfery Bloom, the former UKIP MEP tried to raise debate on this issue rather in-eloquently but sadly his use of the generic description of unworthy aid recipients as 'Bongo Bongo Land' rather distracted from discussion he was seeking to have (at least that is the charitable view of his media gaff).

 The usual answer most people give if they are asked why we should give aid is that we have a moral duty to help people less fortunate than ourselves, a colleague of mine described it as the international version of buying the Big Issue. An informal survey during a class discussion  showed all bar 2 of the 30 or so there agreed with that way of thinking.

Some take a more self interested approach. Some will argue that the reason to give aid is one of self-interest. This may happen directly through 'tied aid'. The provision of aid may be directly linked to favorable trade deals for firms from the donor nation but it need not be so blatant. Aid may be given purely to improve infrastructure in areas that companies from the donor country operate or to build a customer base for future exports.

There is an alternative, however. Africa has globally important stocks of raw materials - precious metals, oil and gems yet the countries that have grown rich from exploiting these tend to be western countries. Could it just be possible that the reason Africa is poor is because we are rich. Aid spending may be developed nations giving generously or it could be wealthy nations trying to assuage their guilt.

The history of European and North American involvement in Africa is one of interference, slavery, colonialism and exploitation. Could it be that guilt, or even worse, further self gain through tied aid is the reason for the current focus on aid flows?

Published in Blogs