Tree Don't Care What A Little Bird Sings

I have not read much of Robert Fogel's work, not much at all, but I may need to read more of it. A Fine Theorem, one of the more under-appreciated blogs, has a summary of Fogel's Without Consent or Contract. Here's part of it:

... the paradox rests on the widely held assumption that technological efficiency is inherently good. It is this beguiling assumption that is false and, when applied to [American] slavery, insidious.”  

Roughly, it was political change alone, not economic change, which could have led to the end of slavery in America. The plantation system was, in fact, a fairly efficient system in the economic sense, and was not in danger of petering out on its own accord.

Here's the rest.

There are multiple views of the politics of technology. (Technology is, at its core, information aggregation.) One says that technology is liberating. Another says that technology is enslaving. Another says that technology is fueled by the state for purposes of control. (Oddly, skeptics of markets often make the first point of that point without understanding that the second point is the corollary.) Technology can destabilize the political equilibrium (but does that only apply if it goes in one direction? I doubt it). It's worth googling a bit for the views of Farrell, Drezner, and Lynch on this. It's worth noting that modern authoritarian regimes try to get to the technological frontier as rapidly as possible but they tend to have a tough time managing it. Francis Spufford's Red Plenty is on sale at Amazon right now, if you don't mind probably giving some of your metadata to the NSA.

Sarah Jaffe (on Twitter) asked for a political economy of the surveillance state. (Here's a short take, not very good.) I haven't got the time or background knowledge to build a real model, but if I was going to I'd start with Tilly and Scott and Weber at the foundation and ask what purpose this really serves. Knowledge is power, is it not? Power is needed for protection (in the Tillian sense), is it not? After that I'd go to Orwell like everyone already is, but not the dystopian cliches. Remember in 1984 that Winston Smith was pretty much the only one in society bothered by Big Brother. (Probably not, if you've read your Timur Kuran, but as far as Smith could tell he nearly enough was.) Everybody else just got on with it. The proles sang their songs and read their magazines. Sure, Julia was a bit inconvenienced by the whole thing, but it's not like she really had principles.

Now think about Havel. Now think about samizdat. Is information so easily controllable? Can the state not oppress on the basis of allegation, innuendo, or missing data? Can the citizenry not resist simply by living? Does the state need all information to "keep the locals in line" or just a vague threat -- the vaguer the better? Corey Robin addresses this and gives a precis of his book on the politics of fear. Stalin didn't have Bukharin's metadata... just the ability to credibly say "we know where your kids are". That hasn't changed. Yglesias is right: the biggest thing to fear from the surveillance state isn't the state, per se. But that's a micro story, and micro stories can dictate macro policies.

The U.S. public is not concerned about this. To the extent they are it's for partisan reasons, not out of principle. Note that this is not new. Note that, so far, it appears that these programs are legal at least in broad terms. Intellectuals are more concerned that the median pollee, as they should be, since they are much more likely to be targeted than a randomly-selected person. (If I was Glenn Greenwald I'd go back to snail mail and pay phones for a good long while.) But so? Democratic politics does not guarantee puppies and roses. As we debate whether or not this is constitutional we should remember that James Buchanon's insights do not only apply to economic policy. We should also remember that politicians and celebrities have been subject to heavier levels of scrutiny than this for as long as there has been human society.

Data, even metadata, can be used for ill. (Or good, as the case may be, since the 21st century version of Paul Revere is probably someone Healy wouldn't meet for a beer at Ye Olde Tavern. Possibly this isn't what Healy's driving at.) But let's not get carried away. The U.S. government is sophisticated in many ways, but this program has only $20mn in funding. Let's say they spend $5mn of that on high-powered computers (that's probably less than what the supercomputer I ran a bunch of my dissertation on cost), and the rest on twenty-somethings making $200k/year each (as Snowden apparently did). That's 75 guys trying to make sense of the 2.5 quintillion bytes of data created each day. Good luck with that. (No I don't believe only $20mn was funneled into this. Not for a moment do I believe that. But I'm not sure how much $20bn could really do absent some good old fashioned police work.)

So after you've read the Spufford (or even before) you might want to read some of the discussion at Crooked Timber on the book. See especially this wonderclass by Shalizi which has as much to say about social science theory and methods as it does about historical political systems or the contemporary political economy of the surveillance state or novels. The key question is Shalizi's first one: what is being optimized?

Then recall that Hayek's slippery slope is a logical fallacy to which the historical record is not kind. Should we be less concerned? Probably depends on how concerned you were in the first place... anonymity is a myth.

Remember too that the government oppresses and kills and makes terrible decisions when it doesn't have good intelligence. Given that, is the expected utility of (American or other) society better or worse with PRISM or without it? Apparently this program stopped one or more attacks at the London Olympics. What would the cost of those attacks have been? Was preventing them worth $20mn dollars plus some false positives? (The TSA spends $6.5 billion a year and probably gets almost nothing for it.) Could PRISM have stopped Nidal Hasan had it been better-implemented? If it could have, would it be worth it? We are quite literally behind the veil of ignorance at the moment (just a bit less in the wake of Snowden's leaks), but if we take engaged citzenry to be a desirable normative end in itself we need to put our Bayesian caps on now and start updating our priors.

What tail event has a greater probability: that this program is abused in such a way that it devastates liberal society, or that it prevents a significant attack the fallout from which would devastate the same society?

In the end the biggest repercussions of NSA spying might be felt in the US-EU trade negotiations.

Nevertheless, I oppose PRISM and related programs very strongly. I do so because I am not risk-averse.

I believe this is the most Cowen-esque thing I've ever written. I also believe that every link in this post is worth clicking on.

A Bunch of Acronyms and Some Trade Politics

Last February Sarah and I* speculated in a short National Interest article that a EU-US trade deal (Transatlantic Trade and Investment Partnership, or TTIP) could put pressure on the recent prevalence of investor-state dispute clauses (ISDs):

While ISD clauses are widespread, they usually exist within the context of treaties between states characterized by economic asymmetries. For instance, of the more than 2000 bilateral investment treaties (BITs) worldwide, none exist between two advanced industrial countries. The United States generally embraces investor-state dispute clauses; both their model free-trade agreement (FTA) and BIT contain such language. However, it is far from certain that a US-EU treaty would include an ISD clause. Generally, advanced industrial countries have shown they are more interested in promoting legal regimes that protect "their" multinationals while they are less willing to cede jurisdiction over investment disputes in which they might be defendants.

Today, via Simon Lester, we see that the EU is not super-thrilled with the idea of having an ISD in TTIP that is typical of US ISDs, although it's tough to know from the formal language exactly what the EU is after. Or as Lester puts it: 

What are the authors saying here? Are they saying: 

1. Investment protection and investor-state will only be included if high EU standards for investment protection, as opposed to the weaker U.S./Canadian standards, are met? 

or are they saying: 

2. Investment protection and investor-state will only be included if the usual provisions are weakened so as to ensure that public policy objectives can be pursued? 

I don't know the answer (perhaps Sarah could chime in?), but it seems clear that any ISD in TTIP will have to be different than that in the model US bilateral investment treaty. So far our article is holding up pretty well.

Meanwhile, Eyes on Trade doesn't like Obama's secrecy on another potential trade deal, the Trans-Pacific Partnership (TPP)**. They also nail the reason for the secrecy:

So why keep it a secret? Because Mr. Obama wants the agreement to be given fast-track treatment on Capitol Hill. Under this extraordinary and rarely used procedure, he could sign the agreement before Congress voted on it. And Congress’s post-facto vote would be under rules limiting debate, banning all amendments and forcing a quick vote.

Eyes on Trade think all of this is severely crippling democracy. In a way it is, it by "democracy" you mean legislators favoring parochial interests over the good of the nation as a whole. The Congress has often given the President fast-track authority. Clinton had it for part of his terms. George W Bush had it for most of his. The reason for this is so that individual Congresspeople can't fiddle with the deal in order to privilege local constituencies after its been agreed to by the negotiators of both sides. It's basically a legal way to curtail rent-seeking exceptions and other Congressional shenanigans. These are generally questionable on welfare grounds when things like tax bills are being debated, but when negotiating a trade deal they can be deadly: each new Congressional exception has to be approved by the foreign party, which will likely demand further concessions in exchange, which would have to be approved by Congress in turn, etc. Each iteration of this lowers the chance of any deal being reached. Fast track authority cuts that process out. Interested groups can still lobby the US Trade Representative, and Congress still has to approve any deal, so it's not exactly undemocratic. But fast track makes the policy process more efficient.

Obama hasn't been given fast track authority. Democrats have typically been skeptical of trade deals -- remember that renegotiating NAFTA was a big issue during the 2008 Democratic primary -- and Republicans seem intent on blocking anything Obama chooses to do on grounds of principle. It doesn't seem to have been a major priority for Obama until now, as he's preferred to focus on health care, immigration, and other issues first. But without fast track trade deals are much more difficult to complete. So much so that foreign countries often prefer not to negotiate at all because they know that whatever agreement they reach will end up being altered by Congress. Given that, what's the point of negotiating in the first place?

Although they are fairly obscure these issues are quite important. I continue to think there's a decent chance that Obama gets fast track, and if he does that some deals will get done. The business community is very interested in seeing agreements made, so they will likely push the GOP to give in to Obama. Democrats are a bit less enthusiastic, but are more likely to give Obama authority than they would be to lengthen Romney's leash. And if Sarah and my article is correct, there are not many important interest groups that oppose a EU-US deal. The TPP makes sense in a number of ways as well.

All of this remains to be seen of course, but I'm still pretty optimistic that we'll see some movement on trade during Obama's second term.

*Really Sarah. She knows much more about ISDs than me and wrote that part of the article more or less on her own.

**Yes I know. TPP and TTIP and ISDs, oh my.

US-EU Trade Negotiations Are Not Driven by Ideational Factors

Reading this update on the possible US-EU trade deal that Sarah and I wrote about previously, I am struck by two things:

1. French film subsidies are not going to ruin the chances of a deal, particularly since the US film industry takes advantage of tax credits and other subsidies as well (albeit at the state level, not the federal level). I have no idea why the FT led with that, except that . The biggest potential roadblock for this deal has always been agriculture, and it remains agriculture. That said, even these issues can be overcome. US agriculture wants to sell GMOs and hormone-pumped meat to Europe. Europe doesn't want that, and is unlikely to change its mind. So? Currently, EU law bans European growth of GMOs, but allows some imports. This is an okay position to be in for American farmers which grow GMOs. So all that has to happen is that the status quo is maintained, and this issue can be resolved as well.

Some of the rest of this just sounds silly. US wants Europe to not insist on "geographical indications" being allowed on cheese? I presume this means labels such as "A Product of France". This, again, is an issue which can be overcome fairly easily: just remind American cattlemen that if this becomes a precedent they won't be able to advertise "U.S. beef" and they'll balance the cheesemakers' right out.

2. Nothing in the proceedings suggests that the ideational turn in IPE studies of trade politics is beneficial for understanding real-world events. Instead, we see interest groups lobbying their representatives to get their concerns on the agenda, while the broader public barely notices. We see these groups forming along factoral and sectoral grounds, just as we'd expect. The standard materialist story works far better than... whatever sociotropic story is supposed to have replaced it.

*Yes, the link in that sentence goes to something called Beef Magazine. No, I wasn't aware that existed until now.

Understanding the Bangladesh Tragedy with Political Science

Matt Yglesias is being raked across the coals for this. It's understandable. The best time to parrot an econ 101 line is not immediately following a tragedy. Yglesias now understands this. But neither is this the best time to completely denounce neoliberalism or engage in the sort of extreme wishful thinking through which it is suggested that Bangladesh could (or even should) have levels of labor protection equivalent to the U.S. That is quite literally impossible: Bangladesh's GDP per capita is about $2,000 per year. Taken together, U.S.-level unemployment protections, retirement accounts, safety regulations, and other programs which benefit labor are more costly than that. So it's impossible.

Let's take this situation as it is. Bangladesh is not a bastion of neoliberalism. It has only recently, and after a long struggle, been able to consolidate a democratic regime (hopefully) which is in any case quite corrupt. Bangladesh is one of the poorest countries in the world, but it has been able to grow fairly rapidly over the past few decades by exporting textiles and people to the rest of the world: exports and remittances are about 12% of the economy. Roughly 40% of the labor force is "underemployed", working only a few hours per week for very low wages. It is a poor country, which means it has low domestic savings, so to generate the sort of domestic investments it needs to continue to develop it must import capital and in particular foreign direct investment. Most of that goes into the production of textiles.

It is commonplace to hear folks say that multinational corporations encourage a "race to the bottom" in labor and environmental standards: if you regulate them, the thinking goes, they will go to another jurisdiction. To get the capital they need to develop, poor countries must therefore deny worker protections. Here's an application of the argument to Bangladesh. The story has a nice logic to it, but it is false.

This question has been studied quite a lot by political scientists. The state of the art in the literature (much of the best of which has been done at UNC by Layna Mosley) is as follows: multinational corporations tend to improve labor standards, and exposure to multinational production chains tend to raise countries' de jure labor (and environmental) standards. Through the pressure of global civil society advocacy groups, "California effects", and other processes, standards tend to go up rather than down. But quite frequently de facto implementation of these standards does not keep up with the de jure enaction of them. This is especially true when multinational corporations subcontract with local firms: MNCs almost always have higher standards than local firms, especially if the MNC is from a highly-developed country (i.e. not China). As countries develop, local labor practices tend to improve to meet the standards.

Remember, these are poor countries. The local standards tend to be very low before multinationals come in. The capacity of governments to engage in inspection and enforcement is weak. Often, corruption is rampant. (These are basically other ways of saying that the country is quite poor.) This is not a problem that invoking the neoliberalism bogeyman can fix, however, nor would it be likely to improve if the country was shut off from the global economy. The problem was not created by neoliberalism -- it existed already -- and the best hope for rapid improvement it will come from participation in the global economy rather than autarky. State capacity cannot improve until incomes are higher, which requires growth, which requires participation in the trading system. Over the past two decades, since it has begun producing for export in earnest, Bangladesh has grown at about 6% per year; it has a long ways to go, but shutting itself off would be the wrong move. It is on the path to development, at long last.

Enforcing the laws already on the books is a necessary step. But it is hard to ask multinational corporations to take responsibility for more than their own production floors. They do not have the local authority to do this, and I don't believe anyone wishes to grant it to them. This is the governments' job. If the government does not have the capacity to perform it, they may ask for outside help from the ILO or other NGOs which operate internationally. (Keep in mind that enforcement requires resources, which means additional taxes. Practicably speaking, some of these costs would be borne by labor.) If the government does not have the interest to do so, then the entrenched power structure needs to be overturned. The best chance for this happening is by increasing the market power of foreign capital and domestic labor -- the groups which would both prefer higher standards -- and eroding that of domestic capital -- the group which, according to recent example and careful political science research, most prefers low standards. Thus, various suggestions to boycott products made from Bangladesh, or otherwise isolate the country economically, would almost certainly make the problem worse rather than better.

It appears that the Bangladesh garment factory was locally-owned, and had been subcontracted to do production for MNCs. The building was in violation of many laws -- the problem wasn't de jure but de facto -- and it appears that the owners will be arrested and prosecuted (as they should be). The multinationals, for their part, had engaged international third-party inspectors under E.U. code to validate the safety of the factories. The factories themselves passed inspection, but the building which housed them was not examined by the foreign inspectors.

This is, sadly, pretty predictable from the point of view of political science research. And that research gives us some indication of what needs to happen to improve the situation: consolidate the democratic regime in Bangladesh, reduce the influence of local capital owners, try to maintain rapid economic growth, and have some measure of patience. It takes a long time for poor countries to become rich countries. It will take a lot longer if well-meaning folks on the left cut out their best means of development.

UPDATE: In the comments, Latinamericanist provides some links to research on the effectiveness of international advocacy groups that are worth looking at.

A BIT (sorry) More on ISDs

A nice discussion of my article with SBD at The National Interest has taken place in comments at the International Economic Law and Policy Blog, mostly centering on the question of investor-state dispute (ISD) clauses in trade deals. A bit wonkish (okay very wonkish), but potentially very important as well.

Mark Kantor, who is affiliated with Georgetown and Columbia Universities, has disagreed with our take on ISDs, which is that a US-EU trade deal could precipitate a general decline in their usage. He raises some very good points; you should read them. He may very well be correct. (Although he's wrong to say that we don't take into account recent US and EU ISD behaviors, including the inclusion of ISDs in the model BITs of the US and EU; in fact we mention that specifically.)

But I'm not quite ready to give up our claim just yet. Via Nathan Jensen, here's a recent report in Columbia FDI Perspectives by Joachim Karl of UNCTAD demonstrating, among other things, the increased costliness to governments (including those of developed economies) of ISDs. One highlight:

Governments face a dilemma. While many governments consider ISDS a key element of international investment protection, ISDS is becoming increasingly risky. For one, governments’ risk of being sued by foreign investors is growing. Second, when a dispute arises, the defence requires enormous resources; if a case is lost, damages can be very high. Third, governments live with an unpredictable arbitration practice without having the legal safety net of an appellate body like in the WTO. Fourth, complex domestic legal issues reaching beyond international investment law are examined by international arbitrators. Fifth, as more disputes are directed against countries with highly developed domestic judicial systems, governments need to ask themselves how positive discrimination of foreign investors in respect of ISDS can be justified.

Karl notes that many countries are in something of a holding patterns regarding ISDs: not ready to do away with them, but not exactly expressing enthusiasm for them either. He also notes that the US is one of the leaders in restrictions to and regulations of ISDs. As such, if the US decides to de-emphasize ISDs it could provide momentum for a more general movement in that direction. the Here's part of the crux:

Overall, the existing ISDS system is no longer recognized as an indispensable core part of IIAs. Discontent is not limited to a few developing countries, but has spread to G-20 countries, including some of the BRICs. Further momentum could jeopardize the ISDS system as a whole.

We suggest that, for political reasons, a US-EU FTA/BIT could be part of that momentum if it excludes an ISD, and there are good reasons to believe that it might. In fact, that is our argument.

We could be wrong, but it's nice to know that we're not the only ones thinking along these lines.

Outside Options

Apropos of my recent article with SBD in The National Interest is this, (via Jonathan Dingell):

UPDATE: There's some good discussion of our article over at the always-excellent International Economic Law and Policy Blog (my go-to source for information on trade disputes and agreements-under-negotiation). (ht: Simon Lester)

How Not to Write an Abstract

We've been blogging about trade and trade networks a decent amount lately, so I was interested to see a new NBER working paper titled "Multinational Firms and the Structure of International Trade". I clicked through and read the abstract, which is:

This article reviews the state of the international trade literature on multinational firms. This literature addresses three main questions. First, why do some firms operate in more than one country while others do not? Second, what determines in which countries production facilities are located? Finally, why do firms own foreign facilities rather than simply contract with local producers or distributors? We organize our exposition of the trade literature on multinational firms around the workhorse monopolistic competition model with constant-elasticity-of-substitution (CES) preferences. On the theoretical side, we review alternative ways to introduce multinational activity into this unifying framework, illustrating some key mechanisms emphasized in the literature. On the empirical side, we discuss the key studies and provide updated empirical results and further robustness tests using new sources of data.

Got it? No? Me either. The point of an abstract is to give a precis of the article's scope, method, and findings. This abstract mentions that there are findings ("provide updated empirical results and further robustness tests") but doesn't say what they are. Neither does it mention what empirical design it uses other than that there is a review of literature. It lists a few questions asked by that literature, but does not answer them.

I've read this abstract four or five times now, and all I want to know is what the structure of international trade is, and I can't tell.

I guess I'll actually have to read the thing.

Another Shameless Plug

Talk of a potential bilateral trade deal between the US and EU is heating up, probably because Obama gave it attention in his State of the Union Address. Matt Yglesias thinks the deal is going to be difficult, because it will focus on "thornier" issues like agriculture and regulatory policies. Tyler Cowen thinks that regulatory barriers makes a deal unlikely as well. The Financial Times also sounds a somewhat skeptical note. There's plenty more where that comes from if you look around the commentariat.

Well, in a stunning reversal of our typical demeanor, Sarah and I are here to make the optimistic case for a deal getting done. The full essay is in The National Interest, but the basic argument is that normal political problems standing in the way of a deal are reversed in this case: there are no easily-identifiable domestic interest groups likely to mobilize politically to lobby against it, it might provide the US and EU with much-needed leverage in WTO negotiations, and it could impact the future of international investment law.

Check it out.

More on Trade Politics

Continuing my mini-trend on research on the domestic politics of trade, here's a new one from Hicks, Milner, and Tingley in ISQ. Abstract:

Developing countries have increasingly opened their economies to trade. Research about trade policy in developed countries focuses on a bottom-up process by identifying economic preferences of domestic groups. We know less about developing countries. We analyze how economic and political variables influenced Costa Rican voters in a referendum on CAFTA-DR, an international trade agreement. We find little support for Stolper–Samuelson models of economic preferences, but more support for specific factor models. We also isolate the effects of political parties on the referendum, controlling for many economic factors; we document how at least one party influenced voters and this made the difference for CAFTA-DR passage. Politics, namely parties using their organizational strength to cue and frame messages for voters, influenced this important trade policy decision. Theories about trade policy need to take into account top-down political factors along with economic interests.

CAFTA's hot, apparently.

Quantum Gravity Trade Models

Richard Baldwin on the state of the art in empirical international trade economics:

The most empirically successful model in international trade – the so-called gravity equation – is based on “Newtonian” trade theory. The amount of trade between two nations varies with the product of the economic mass of the two nations and inversely with the distance between them. Strange as it may seem to students of Ricardo, Heckscher-Ohlin and the Krugman trade models, these three variables ‘explain’ well over 50% of all variation in bilateral trade flows. No other trade model comes even close. The gravity model, in short, works impeccably at the level of aggregation available to empiricists – until recently. ... 

Standard gravity theory, the distance matters since it affects relative price (distance proxies for all manner of trade costs that raise the price of imported goods relative to local goods) and the destination GDP matters since it effects total expenditure on all goods in the market. In the new ‘quantum’ gravity theory (expounded by, for example Melitz, Helpman and Rubinstein, or Chaney) a key new feature is the impact on firms’ decision to enter a market or not. Importantly, this decision depends upon the fixed cost of establishing a beachhead in a new market – what I have in the distant past called, ‘beachhead costs.

Plenty more here. For political scientists these "beachhead costs" might contain some of the most interesting features of trade regimes. These costs may be natural or artificial (i.e. political), and they may be strengthened or lessened by governments. While trade is not my primary area of expertise, I know of no applications of quantum gravity models in political science despite the prevalence of "Newtonian" gravity models. (If I am incorrect about this I'm sure I'll be corrected in the comments.) This could be a rewarding avenue for future IPE research, and it is a nice illustration of the importance of structure interacting with agency to condition outcomes as discussed in Oatley's recent post on the reductionist gamble.

Potential US-EU Trade Deal Inverts Typical Trade Politics

Standard stories of trade politics often begin with reference to Olson's logic of collective action, which argues that small groups with common interests may be able to effectively mobilize politically, thus influencing policy in ways which benefits them at the expense of the majority. Trade generates diffuse benefits for large numbers of consumers but concentrated costs for smaller numbers of (comparatively disadvantaged) producers. Consumers will find it more difficult to overcome collective problems and mobilize politically than affected producers. Therefore, the logic of collective action expects trade policy to be protectionist absent two conditions:

1. A countervailing small group of comparatively advantaged producers that is able mobilize politically in favor of open trade, at least for their goods/services.

2. An international negotiating process that allows states to reciprocal concessions: you liberalize your comparatively disadvantaged markets and I'll liberalize mine.

But the trade deal that the US-EU are negotiating inverts this dynamic. According to the NY Times, because trade between the US and EU is already relatively liberalized, the benefits and costs of further liberalization are diffuse:

Tariffs on goods traded between the United States and the European Union are already low, averaging less than 3 percent. But companies that do substantial amounts of trans-Atlantic business say that even a relatively small increase in the volume of trade could deliver major economic benefits. 

“The reason we care about this is because these base line numbers are so huge,” said Karan Bhatia, a former deputy U.S. trade representative who is now vice president for global government affairs at General Electric in Washington. “This could be the biggest, most valuable free-trade agreement by far, even if it produces only a marginal increase in trade.”

As a result, the normal political dynamic does not exist, and all of the major parties seem to be in support:

There does not seem to be any broad-based political opposition to an E.U.-U.S. trade agreement, as there was to Nafta.

Indeed, the political push seems to be for more liberalization rather than less:

Last week, a coalition of food and agricultural groups led by the National Pork Producers Council in the United States wrote to Mr. Kirk, expressing concern that a free-trade agreement might leave them out.

The council complained that in the past, Europe had blocked imports of genetically modified corn and soy products and objected to American companies’ use of product descriptions like “Parmesan” cheese. In Europe, that label is reserved for cheese that comes from the Parmigiano-Reggiano region of Italy.

Presumably Italian cheese producers would be opposed to this, but because the margins are so low they may not be willing to pay the high costs necessary to build a broad enough coalition which would be able to meaningfully impact the bargaining process. And, in fact, it seems as if no such coalition has yet formed:

“I haven’t heard anyone say it doesn’t make sense,” said Peter Beyer, a member of the German Parliament from Ms. Merkel’s party, the Christian Democrats, and a major advocate of an agreement.  

That could always change as details from the plan emerge. Technical details can matter quite a lot in these negotiations, particularly if the negotiators start harmonizing technical standards on goods like pharmaceuticals. But because the underlying dynamic is different -- diffuse benefits and costs rather than diffuse benefits but concentrated costs -- this negotiation may go more smoothly than other trade deals.

Finally, this deal could invert trade politics in another way: by bringing other countries back to the WTO table to complete the Doha round. I wrote about the potential for that previously.

US/EU Trade Deal?

The news that the US and EU will begin negotiating a bilateral trade treaty next year is welcome to me. This could be a big deal. For all the talk of China and emerging markets the US and EU are still the most important parts of the global economy:

EU-U.S. commercial links are unrivalled. Transatlantic trade in goods and services is worth $700 billion a year.

Total U.S. annual investment in the European Union is higher than in all of Asia, while EU investment in the United States far outstrips EU investment in India and China combined.

Some, like Jagdish Bhagwati, decry the proliferation of bilateral trade deals, believing that they pull momentum from the WTO and therefore limit the possibilities for widespread trade liberalization. This may or may not be true. What is true is that the Doha round of WTO talks is all but dead, as the politics remains intractable. If there are tangible gains to be found in other forms of liberalization then there is a compelling case to take them. A US/EU deal has the potential to have a big effect. It appears that the focus of the US/EU talks will mostly revolve around regulatory issues:

Businesses on both sides would like an agreement in which a car tested for safety in the United States would not have to be tested again in Europe, and a drug deemed safe by Brussels would not have to be approved as well by the U.S. government.

Small companies who make household appliances, lighting and wiring equipment say prohibitive costs of certifying products for different requirements in Europe and the United States make it impossible currently to export, according to a public consultation by Brussels-based lobby group Business Europe.

These types of restrictions make little sense on welfare grounds, and lifting them will almost surely have a positive effect on efficiency. Also true to form is that lifting agricultural restrictions is off the table:

But both sides appear likely to leave much of the highly sensitive agricultural sector out of the agreement altogether, diplomats say. Washington maintains a 15-year-old ban on EU beef imports imposed because of American concerns about mad-cow disease. The European Union says the ban breaks World Trade Organisation rules.

The United States, in turn, faces prohibitively high tariffs for its beef and pork products, running into Europe's complex definitions of high-quality meat.

Genetically engineered foods are also contentious, with the United States in favor of developing the industry but with the European Union against. "They will not be part of the deal," said one EU diplomat in Brussels.

It's worth remembering that the GATT -- the precursor to the WTO -- only had 23 members at first. These members were predominately the later EU members (and the remnants of their empires) and the US*. The WTO now has 157 members, with a wide range of conflicting interests, plus a rule of unanimity. That makes it very difficult to get a comprehensive deal passed.

So in a sense a bilateral US/EU deal is a step backwards. It could also be a precursor to future action. If the US/EU successfully pass a bilateral deal it might provide an impetus for their antagonists in the WTO to make further concessions to get a multilateral deal through the WTO process rather than be locked out of trade arrangements. This deal is the US/EU exercising its outside option. Having good ones increases bargaining leverage. So Bhagwati could actually be wrong: bilateral trade deals could actually be a force for completion of WTO rounds.

This is less than certain of course, and perhaps this US/EU deal will either fall apart or be less than transformative. But it's at least a possibility that the conventional wisdom is wrong.

*The full list is Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, Czechoslovakia, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, United Kingdom and the United States.

A Trade Story IPE Folks Should Love

This NY Times article is over a month old now, but I'm highlighting it anyway because it is illustrative of trade politics dynamics that we often emphasize in IPE. It would make a good case study for an introductory class. Here's the issue:

The United States on Thursday announced the imposition of antidumping tariffs of more than 31 percent on solar panels from China.

Here's the ostensible policy process:

The American decision was made by civil servants in a quasi-judicial process that is heavily insulated by law from political interference and does not represent a deliberate attempt by the Obama administration to confront China on trade policy. But that distinction has been largely lost in China, where the solar panel issue has been one of many causes embraced online by the country’s vociferous ultranationalists, who put heavy pressure on Chinese officials to respond forcefully to perceived snubs to China.

Here's the materialist policy process:

SolarWorld Industries America, which led the coalition of manufacturers that filed the solar dumping case, welcomed the department’s ruling. The decision “is a very positive step in the process. It’s also in line with what we expected,” said Ben Santarris, a company spokesman. “We consider this a bellwether case. It underscores the importance of manufacturing to the U.S. economy.”

Here's the opposing domestic force:

Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that inexpensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops. The new tariffs are likely to mean a substantial increase in the price of solar panels here.

Here's the opposing foreign force:

“This is really a surprise,” he said in a telephone interview. “It’s really dangerous.” Mr. Li said that Chinese companies would “certainly” retaliate by filing a trade case at China’s commerce ministry accusing big American chemical companies of dumping polysilicon, the main ingredient in solar panels, on the Chinese market.

Here's the supporting ideational force:

“China’s method is straightforward: it sets forth industry-specific Five-Year Plans and then uses all forms of national and local subsidies and other governmental support to quickly transfer jobs, supply chains, intellectual property and wealth, to the permanent detriment of U.S. and global manufacturers,” he said. “China’s ability to ramp up and overwhelm an industry is unique and particularly devastating with new and emerging technologies, where global competitors may be less established and can be knocked out more easily and quickly.”

Here's the opposing ideational force:

Chinese officials have been indignant at American criticism of their solar power industry, pointing out that the United States has urged China for years to embrace renewable energy as a way to reduce air pollution, combat climate change and limit the need for oil imports from politically volatile countries in the Mideast.

There's more good stuff at the link, including a bit of historical context. Pedagogically speaking, it would be nice if this ends up being settled at the WTO. Then we could bring in all of interests, ideas, and institutions into one nice, compact little story.

Why Has US Finance Grown? Because The World Is Not a Monad

Guesting at Noah Smith's place, Dan Murphy seeks to explain why the financial sector grew to be such a large component of the US's economy during the 2000s. He offers three possibly explanations: finance became better at "making markets" by matching buyers and sellers, the need to manage risk became more important, and that people became convinced that employing financiars would help them boost their investment portfolios. Murphy suggests that the first two are not good explanations because they are static variables unable to explain change. He doesn't seem to think the third is as well, although it seems that way to me.

I don't think this is the right way to think about this. Instead, I'd rather embed finance into the broader US economy and then embed the broader US economy into the broader global economy. What changes have been taking place in the global economy over the past decade-plus that could help explain this? Two prominent things immediately come to mind:

1. The opening of capital accounts around the world, which began in the 1990s but accelerated dramatically during the 2000s.

2. Changes in the global trading system, particularly the expansion of the GATT -- which added many new members following the end of the Cold War -- and the transition from the GATT to the WTO.

The cumulative effect of these two factors both forced encouraged the US to pursue its comparative advantage in high-skilled service labor (e.g. finance) and increased the market into which the US could sell its comparative advantage. The result is thus entirely predictable: finance becomes a bigger size of the US's economy, while comparatively disadvantaged sectors shrank. Factor in positive feedback dynamics in global financial markets and this isn't much of a mystery at all.

Score Another One for the Materialists

A couple of years ago I posted a link to a paper by Mansfield and Mutz that called into question basic materialist explanations for trade preference formation. The argument of the paper was that attitudes towards trade are formed along sociotropic, rather than individual, lines. I said at the time that I was interested to see whether this study would hold up to future scrutiny. Well, former UNC PhDs Ben Fordham and Katya Kleinberg suggest that it might not in a recent IO article:

Recent research on the sources of individual attitudes toward trade policy comes to very different conclusions about the role of economic self-interest. The skeptical view suggests that long-standing symbolic predispositions and sociotropic perceptions shape trade policy opinions more than one's own material well-being. We believe this conclusion is premature for two reasons. First, the practice of using one attitude to predict another raises questions about direction of causation that cannot be answered with the data at hand. This problem is most obvious when questions about the expected impact of trade are used to predict opinions about trade policy. Second, the understanding of self-interest employed in most studies of trade policy attitudes is unrealistically narrow. In reality, the close relationship between individual economic interests and the interests of the groups in which individuals are embedded creates indirect pathways through which one's position in the economy can shape individual trade policy preferences. We use the data employed by Mansfield and Mutz to support our argument that a more complete account of trade attitude formation is needed and that in such an account economic interests may yet play an important role.

Against Knee-Jerk Attitudes Towards Trade

It's been awhile, but I used to tussle with Public Citizen a some. I kind of stopped paying attention to them, however, as I found their knee-jerk approach to the political economy of trade to be intellectually unsatisfying. It is satisfying, on the other hand, to see someone else knock them down as well as Daniel Ikenson at the shell that used to be Cato does here:

Contrary to the characterization that Wallach and other anti-globalistas have been trying to paint for years, the WTO is not some faceless bureaucracy issuing edicts that run roughshod over national sovereignty and local laws. The WTO has no special power to compel any member state to do anything. Contrary to Wallach’s claim that a WTO “Tribunal” (sounds like a military junta, no?) “ordered” the United States to “dump” a “landmark” anti-smoking law, the WTO Appellate Body merely requested (see above) that the United States bring a specific clause of the law into conformity with U.S. treaty obligations. WTO Panels and the AB only recommend or request. ...

The WTO did not rule that the United States cannot have an anti-smoking law – only that that law was not being applied evenhandedly to domestic as well as foreign companies. By banning clove cigarettes, which have been sourced principally from Indonesia over the years, but not menthol cigarettes, which are produced primarily in the United States, the U.S. law discriminates against producers from another country – namely, Indonesia.

I understand why people are opposed to trade. I understand why people are skeptical of the WTO. Trade creates winners and losers, interest groups (and governments in thrall to them) try to game the system, etc. The WTO was set up largely by powerful states that were seeking to further their interests. I do not, however, understand why people are opposed to trade or skeptical of the WTO as a general principle that leads to opposing trade or the WTO in any and every context. Particularly for folks on the left making reference to WTO rulings like this one, which is clearly good for producers in developing countries. And, if they lead the U.S. to change anti-smoking laws to be more inclusive, may be good from the perspective of public health as well.

In situations like this I often refer to Krugman's old article on comparative advantage. It's far from perfect -- and I imagine he'd disown it these days -- but I really think he has a point. Some people just don't like trade because they don't want to like trade.

Word Games

Dani Rodrik has an op-ed on attitudes towards trade and ethics:

In the very first meeting, he had asked the students how many of them preferred free trade to import restrictions; the response was more than 90%. And this was before the students had been instructed in the wonders of comparative advantage! ... 

Or maybe they did not understand how trade really works. ...

I began the class by asking students whether they would approve of my carrying out a particular magic experiment. I picked two volunteers, Nicholas and John, and told them that I was capable of making $200 disappear from Nicholas’s bank account – poof! – while adding $300 to John’s. This feat of social engineering would leave the class as a whole better off by $100. Would they allow me to carry out this magic trick?

Those who voted affirmatively were only a tiny minority. Many were uncertain. Even more opposed the change.

Rodrik takes this as evidence that peoples' views of trade are muddled. I'm not so sure. His for-instance in the case is not about trade but about something much closer to theft: for no explained reason Nicholas is made worse off and John better off, but there has been no exchange involved. "The class as a whole" is not better off under this scenario -- i.e. it is not Pareto-improving -- except under a very specific and narrow definition of "better off" that does not reflect what happens during trade. Nicholas is better off, John is worse off, and everyone else neither gains nor loses.

More likely students were confused ("many were uncertain") or objected to the capriciousness of the redistribution. Another, later, thought experiment of Rodrik's seems to bear that out:

Let’s assume, I said next, that Nicholas and John own two small firms that compete with each other. Suppose that John got richer by $300 because he worked harder, saved and invested more, and created better products, driving Nicholas out of business and causing him a loss of $200. How many of the students now approved of the change? This time a vast majority did – in fact, everyone except Nicholas approved!

This example is much clearer and also more closely resembles real-world trade dynamics, at least as we often conceive of them. From this Rodrik concludes:

So the students were not necessarily against redistribution. They were against certain kinds of redistribution. Like most of us, they care about procedural fairness. ...

Too many economists are tone-deaf to such distinctions. They are prone to attribute concerns about globalization to crass protectionist motives or ignorance, even when there are genuine ethical issues at stake.

Or maybe not. Maybe, as Rodrik notes in his piece, his sample was of Harvard students who possess high human capital and are thus exceptionally likely to benefit from open trade. When they did not, as in some of Rodrik's other thought experiments, it was because their comparative advantage was being eaten away by some policy or other. The majority of Americans don't have the same preferences, possibly because they do not work in fields with a strong comparative advantage. So maybe "crass protectionist motives" are salient after all.

Perhaps not. I do not doubt that some attitudes towards trade involve ethical concerns. But Rodrik isn't able to separate out what's driving what in this discussion, so tossing off the old models of trade politics is a bit premature.

Slower Chinese Growth Could Be Good for the Global Economy

One thing that we hear a lot is that global economic performance increasingly depends on the BRICSAM countries, particularly China which is now the world's second largest economy. If China's astonishing growth slows, this thinking goes, then they can drag down the rest of the world.

That could be true, but it doesn't have to be. There is a scenario in which slower measured Chinese growth is actually good for the global economy, and also good for the Chinese. I do not refer to beggar-thy-neighbor mercantilism, in which the rest of the world expropriates from China, but to an arrangement that is Pareto-improving in aggregate. To see why we just need to remember our Econ 101 national accounting device:

GDP = C + I + G + (X - M)

See that minus sign in there? If China increases its imports without anything else changing then its measured GDP growth would be negative. Yet this would in no way be a bad thing... everyone agrees that Chinese citizens should be consuming more, some of which should probably be imported goods, and many also argue that the macroeconomic imbalances contributed to by China's large trade surplus increases financial instability. Meanwhile, many countries outside of China would like to increase the exports in order to boost job growth. Narrowing the gap between 'X' and 'M' would be a positive for China and for the rest of the world as well. Some of this might be happening. Chinese consumption has been growing faster than GDP, and imports had been growing faster than exports until last month. A prolonged, multi-year trend of this sort would be good for everyone... and would also show up in the data as a slowdown in Chinese GDP growth.  

A broader point is that we often pretend that GDP measures one thing -- the well-being of a society -- when it's really measuring something different -- the composition of economic activity in a society. Well-being can increase under a variety of scenarios including the increase of imports, which drags down the GDP measure. Or GDP could increase in a way that doesn't benefit society, if e.g. the government spends $100mn building a skyscraper then another $100mn knocking it down. Broad measures like GDP are often useful as proxies for other quantities we're interested in, but not always.

There Is No Such Thing As a Free Market

Matt Yglesias starts with a cute little point about trade politics -- the Marvel corporation has defined the X-Men as mutants rather than humans so as to exploit the difference in tariffs between human dolls and non-human "toys" -- but then, I think, misses an opportunity to explain something more significant about how the world works:

It's remarkable, incidentally, the extent to which the politics of "trade deals" have gotten away from the fundamental issues of free trade as seen in an economics textbook. What we have here is a federal 12% sales tax on dolls, but only if the dolls are made in foreign countries, and a different -- arbitrarily lower -- 6.8% federal sales tax on toys, but again only if the toys are made in foreign countries. There's no good reason to have special higher sales taxes on toys made in foreign countries, and there's certainly no good reason to tax dolls and non-doll toys at different rates. It's nuts and it could and should be addressed by a unilateral acts of congress. The amount of revenue that would be lost to the federal government by repealing these taxes would be tiny, and it's trivial to think of better ways to raise the money. And yet this core -- and quite simple -- trade policy issue is a world away from the incredible complexity of the trade deals of the past decade.

This goes back to what I was driving at in my old post arguing that "The Problem with Economics Is the Economists". The standard welfare case for trade assumes that through specialization in comparative advantage each country can consume more via trade than they can via autarky. That's where economics stops, unless they go on to mutter about something about "distributional consequences blah blah politics blah". In other words, economics books don't spend much time noticing that those employed in the sector/factor that does not have a comparative advantage all get put out of business.

In reality the distributional consequences drive everything. The length and specificity of trade agreements is mind-boggling. The "schedules" of tariffs from the last completed WTO negotiating round (the Uruguay round) is over 30,000 pages, and it's full of thousands of cases like the dolls/toys distinction Yglesias is describing. Each one has a highly-motivated domestic interest group behind it, who will fight to keep in each and every provision that benefits them even tangentially. As there is generally no countervailing force, Congress will listen to whoever is talking to them.

The reason why Congress does not, and will not, step in to change these rules is because there is no political reason why they should. Maybe it's "nuts" and maybe it isn't, but there is some group in this country for whom each of the rules represents the difference between profit and loss. For example, if Marvel can sell X-Men as "toys" rather than "dolls", then they get an immediate competitive advantage over DC Comics, who has to factor in the higher tariff rate when it produces Batman dolls. So Marvel will lobby Congress not to change the tariff schedule. Because, as Yglesias notes, the issue is really pretty trivial for almost everyone in the country (except for Marvel) the likelihood of it being changed is pretty low.

Issues which are generally of very high salience to a small group and low salience to a larger group are high susceptible to capture by the small group. There's a ton of political economy research developing this point (Mancur Olson made a prominent career out of it), but it doesn't seem to have captured the public's mind. Or the mind of many economists.

Here is what it means: there is no such thing as a free market, anywhere or in anything. The reason why is because of politics. To the extent that economics ignores this, economics is irrelevant.

UNC Everywhere

Layna Mosley, one of our IR profs, has a very good op-ed in the NY Times that summarizes some of her recent research on the effect of international trade on labor rights.* Many would be surprised by the results of this work. Gist:

There is, however, a more general way in which trade agreements — and the economic ties they generate — benefit workers in developing nations. As Colombia and Panama expand their trade relationships with the United States, workers stand to gain more than just the job creation and higher wages that often come with expanded trade. Research I conducted over the last several years with the political scientists Brian Greenhill and Aseem Prakash suggests that trade with developed nations helps developing countries expand labor rights themselves.

Why? International trade gives producers incentives to meet the standards of their export markets. When developing nations export more to countries with better labor standards, their labor rights laws and practices tend to improve. Our findings, which are based on newly collected measures of labor rights around the world, demonstrate a “California effect” on workers’ rights, in which exporting nations are influenced by the labor rights conditions that prevail in their main trading partners.

Read the whole thing.

*I guess Layna didn't want to get shown-up by her husband, UNC Prof Andy Reynolds, who recently had an op-ed on Libya in the News and Observer.