Archive for April, 2019

History of the Swadesi soaps: Godrej No.1, No. 2 and Vatani…

April 30, 2019

Interesting piece by Himani Chanda in The Print.

She tells us how Godrej entered the field of soap making and used the swadesi appeal to sell their products:

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As cash usage declines, Riksbank proposes a review of the concept of legal tender…

April 30, 2019

One unintended consequence of decline in physical and rise of digital cash is legal tender. For a long time now, only central bank money is seen as legal tender. Not anymore especially in Sweden where cash may not be accepted for payments in future.

Sweden’s Riksbank is proposing a relook at the concept of legal tender:

For 350 years, Swedish society has relied on the Riksbank to provide the general public with various forms of the country’s currency, the Swedish krona. In addition, cash issued by the Riksbank has been legal tender since the 1850s. Cash use has decreased rapidly in Sweden and a scenario within the not-too-distant future, in which cash is not generally accepted, cannot be ruled out. This would be tantamount to a cashless society. The general public no longer having access to any form of central bank money can make it more difficult for the Riksbank to promote a safe and efficient payment system in Sweden, not just in times of crisis and war but also in peacetime. The Riksbank has previously expressed concern over this development and has therefore analysed the scope for introducing a Central Bank Digital Currency (CBDC), an “e-krona”, to which the general public has access.

“We think that the concept of legal tender should be technically neutral so that it fulfils a function even in a digital future”, says Stefan Ingves. 

The Riksbank therefore proposes that a committee with all-round expertise be tasked with performing a review of the concept of legal tender, the state’s role with regard to means of payment in a digitalised economy and the role and responsibility of both the state and the private sector on the payment market. The committee should propose the legislative amendments needed so that Sweden continues to have a stable and efficient payment market. As time is of the essence regarding this issue, the time-frame for the assignment should not be too long

The predictive power of real M1 for real economic activity in the Euro area

April 30, 2019

ECB is of the few central banks which still looks at Money supply as an indicator of economic/price activity.

In this short research, Alberto Musso of ECB looks at power of real M1 on real economic activity in Euroarea. This graph shows real M1 follows the business cycle quite closely:

The leading and pro-cyclical properties of real M1 with respect to real GDP in the euro area remain a robust stylised fact. These properties, which can be found for the relationship between real narrow money and real economic activity in both levels and growth rates, have been documented in various publications for earlier time periods.[1] An illustration of such properties can be derived from a visual examination of monthly data from January 1970 to February 2019 for annual growth in real M1, which is defined as the nominal narrow money aggregate M1 deflated by the HICP. Specifically, it is notable that this growth rate went well into negative territory for prolonged periods just before (or in coincidence with) all historical euro area recessions, as dated by the CEPR Euro Area Business Cycle Dating Committee (see Chart A).

Chart A Real M1 annual growth and euro area recessions (annual percentage changes)

Real M1 growth is again moderating in 2019:

Turning to the current juncture, a formal econometric analysis based on probit models exploiting the predictive power of real M1 does not point to significant recessionary risks in the euro area for 2019 and early 2020. On the basis of data since 1970, the probability of a contraction in euro area real GDP derived from a probit model based on real M1 (lagged by 12 months) increased sharply before all previous euro area recessions (see Chart D), providing strong evidence of the usefulness of narrow money in predicting recessions in the euro area. Forecasts based on this model point to recession risks increasing slightly in 2019, from about 1% in January 2019 to between 5% and 7% in the second half of 2019 before falling to below 5% in February 2020, that is to say remaining very low (blue line). Controlling for the slope of the yield curve changes results only marginally (yellow line). Overall, the current level of real M1 growth is still comfortably above the zone that would be associated with risks of a recession in the near future.[4]

Chart D

Euro area recession probabilities based on probit models with lagged real M1

(percentages)

Hmm..

Switzerland monetary policy since 2008: From one crisis to another

April 30, 2019

A spirited speech by Thomas J. Jordan, Chairman of the Governing Board of Swiss National Bank. He defends the policy of the central bank since 2008 which has moved from one crisis to another:

Ladies and Gentlemen, the global financial and economic crisis broke out eleven years ago,  and was followed by a marked decline in economic output and inflation. At that time, the SNB had to switch to an expansionary monetary policy stance in order to fulfil its mandate. We initially responded with conventional measures, and quickly lowered interest rates to virtually zero.

The global financial crisis was swiftly followed by the sovereign debt crisis in the euro area. The attendant uncertainty on the financial markets bolstered demand for the Swiss franc as a safe haven, thus putting appreciation pressure on our currency. To counter these upward forces, we had no option but to resort to unconventional means. We intervened on the foreign exchange market, and in September 2011 introduced a minimum exchange rate against the
euro.

From mid-2014 onwards, the international monetary policy environment began to change. On the one hand there were increasingly clearer signs that the US was about to adopt a tightening stance, whereas in the euro area a loosening of monetary policy was becoming more and more
likely. The euro subsequently depreciated markedly against the major currencies. As a result, by the beginning of 2015 the minimum exchange rate was no longer sustainable. To retain control over our monetary policy, we therefore decided in January 2015 to change tack. 

In that exceptional situation, we had to weigh up the pros and cons of using alternative unconventional instruments. It became apparent that we would have to lower interest rates below zero given that various other central banks had already done so. This was the only way we could limit the appeal of the Swiss franc. When we discontinued the minimum exchange rate, we thus also imposed negative interest of –0.75% on banks’ sight deposits held at the
SNB.

This then brought the level of interest rates in Switzerland back down below that in other countries. Coupled with our willingness to intervene in the foreign exchange market as necessary, the negative interest rate has taken the pressure off the Swiss franc and prevented a sharp drop in inflation.

Pros and cons of negative policy rates:

What would happen if we were to simply stop charging negative interest in the current environment?

Dispensing with the negative interest rate would have a substantial impact on the Swiss economy. Swiss short-term interest rates would again be higher than in other countries, which would clearly increase the attractiveness of Swiss franc investments. This is turn would cause the franc to appreciate, which would be detrimental to economic momentum in Switzerland and would see unemployment rise and inflation pushed into negative territory.

If we stopped charging negative interest, would that at least be beneficial for savers, pension funds, life insurers and banks? The marked weakening in the economy would cast a pall over the earnings prospects of Swiss companies, and Swiss equities would come under pressure.

Although short-term interest rates in Switzerland would no longer be negative, there would be little change in capital market interest rates owing to the deterioration in the economic outlook. All in all, the level of interest rates would thus remain low, and so too would the yields on long-term Swiss franc bonds. Ultimately, there would be scarcely any significant improvement for savers, pension funds, life insurers and banks.

The same goes for the real estate market. Although its momentum would be curbed somewhat if we were to cease charging negative interest, there would be little change in the low level of interest rates and the impact would therefore be limited. In the current situation, the risks to financial stability must be addressed with focused macroprudential measures. This will then curb demand for mortgages and real estate and strengthen banks’ resilience.

Ladies and Gentlemen, abandoning the negative interest rate in the current environment would weigh heavily on the Swiss economy. This would not help either savers or pensionfunds, nor would it be beneficial for financial stability. In other words, as things stand at present, removing the negative interest rate would not be in the interests of our country as a whole.

The critics of central banking will tell you that it is the very SNB interventions which have led to these problems at the first place.

A walk down memory lane: when Bombay went to the polls

April 29, 2019

Nice bit from Hindu newspaper’s archives:

The Hindu taps into its 140-year rich archives to bring you glimpses of Mumbai’s eventful past, and, lest we forget, remind us all how we got where we are today

When RBI Played Angel Investor To India’s Early Financial Institutions

April 29, 2019

Last week, RBI transferred its stake in NABARD and NHB to the Government. Now RBI just has three subsidiaries on its balance sheet.

However, there is a long history of how RBI played the role of VC in developing India’s Financial Institutions of different kinds. Perhaps RBI is of the few central banks which are unique in this aspect.

My BQ piece (behind paywall) tracks this interesting journey, which is one of several in RBI’s history.

From Fed Speaks to Fed Listens: Signaling change in central bank’s communications?

April 29, 2019

My new piece in Moneycontrol.

I argue how Federal Reserve ‘s new communication’s program named as Fed Listens is trying to reshape central bank communications. Earlier it was all about Fed Speaks where every word of the central bank was heard and interepreted. Now the central bank is trying to move to other side of the communications table of listening.

What comes as a breath of fresh air is how the Fed is nudging us to think that it is trying to listen and not just speak. Moreover, speaking was mainly restricted to market participants whereas listening is much broader. The idea is to signal that the central bank is not just open to communicating beyond financial markets but also listening and incorporating views of others. This implies that Fed communications, which were deemed as a one way street not long ago, is becoming a two-way street.

Management literature also shows how best leaders are not just great speakers, but great listeners too who empower their teams to achieve their objectives. The Federal Reserve seems to have taken a leaf out of that book. Given that it is the de facto leader of central banks, Fed Listens is a welcome change and others should follow suit.

This change will also be welcome by ornithologists! The central bankers are often categorised as doves, hawks, owls and so on based on their “nature of speak”. This analogy is flawed as birds are first great listeners and then speakers as they rely on listening skills to keep off threats.

 

Glory days to failed merger: Deutsche-Commerzbank’s 150 year history

April 26, 2019

After much hype, the merger talks of Deutsche Bank and Commerzbank failed to materialise.

Nicholas Comfort has this interesting timeline of both the banks. Interestingly, both started nearly 150 years ago in 1870.

Modeling Financial Crises needs to include 4 facts

April 25, 2019

Pascal Paul in this research note (based on his bigger paper), that research on fin crises should include four empirical facts:

This Economic Letter describes four empirical facts about financial crises: (1) crises are rare, (2) they occur out of credit booms, (3) they are severe macroeconomic events, and (4) they are not necessarily the result of large shocks. Macroeconomic models of financial crises should replicate all of these features to accurately reflect what occurs around a typical crisis. The model in Paul (2019) reproduces these real-world regularities and illustrates how standard macroeconomic models can be extended to incorporate occasional financial crises. Such a framework provides a suitable laboratory for additional research that can help policymakers understand how to reduce the likelihood and the severity of future crises.

 

Janet Yellen’ journey from a Fed economist to Fed Chair…

April 25, 2019

Interview of Janet Yellen on Dallas Fed website. She holds a unique role in Fed History:

Janet Yellen holds a unique place in Federal Reserve history. In addition to being the first woman to lead the institution and chair the Federal Open Market Committee (2014 to 2018), she is also the only person to have served as a Federal Reserve bank president (at the Federal Reserve Bank of San Francisco, from 2004 to 2010), Fed Governor (from 1994 to 1997) and Vice Chair (from 2010 to 2014). It all began with a year as a humble Fed staff economist from 1977 to 1978.

For more details on Yellen’s career, read this detailed transcript as well at Federal Reserve website.

Understanding the development of contemporary economics through major controversies

April 24, 2019

Really nice post by Beatrice Cherrier, who Undercover Historian:

This Spring I taught a history of recent economics course to undergraduate students majoring in mathematics and economics. The syllabus is here. I have reproduced the reading list with some links to papers and twitter summaries of my lectures below. Here are also a few comments on what I wanted to do with this type of course, what worked and what did not. Comments and suggestions to improve the course and set up new debates are much welcomed.

Though the course is tailored to a specific audience, I believe how the general narrative is conveyed through re-enacting landmark controversies in the history of economics can  appeal to many types of students. My goal was to highlight several characteristics of economics as a discipline:

(1) a contested science: economics is often perceived as contested from the inside (economists constantly arguing with each other)  as well as from the outside ( medias, politicians and civil society criticizing economics for being insular, neoliberal, cut from reality, useless, etc). Presenting how economists themselves have debated the foundations of their current practices (writing mathematical models using simplified behavioral hypotheses and confronting them with data) seemed a more fruitful window than the endless stream of post-crisis attacks and defense op-eds.

(2) a set of practices: students are introduced to what economists do through textbooks. By definition, a textbook presents a linear set of models which, in retrospect, seem obvious, crystal-clear, and deemed to win the battle of ideas. Teaching the history of economics through debates enable them to recover the messiness, the failures, the dissent, the disagreements, the trials and errors and the confusion that are essential characteristics of scientific endeavors.

(3) permanence and change, progress and choices: textbooks also nurture a sense that, because economics is a science, economists’ practices are no social endeavors, not influenced by historical contexts, and that “progress” will eventually help replace shaky practices with better ones (see for instance the current shared hope that better data, more powerful computers and advances in empirical techniques will eventually take ideology out of economics). Interestingly, studying decades-old debate raises awareness both to permanence and change in economics: on the one hand, the rise of mathematical and empirical economics are embedded in specific places, communities and contexts (a World war then a Cold war), policy debates, etc. To me, economic practices are born out of the interaction of contexts and technical affordances and constraints (available data and mathematical tools, for instance.  At the same time, it seems that fundamental questions on induction vs deduction, the use of mathematics, realism and objectivity resurface every 20 years or so, that many debates of the 1950s are being re-enacted in the 2010s, sometimes verbatim. My hope is that comparing 1950s and 2010s debates would help each student decide for her/himself how much permanence and how much change, how much of their future practice will be about harnessing progress and how much about making epistemological choices that no amount of scientific progress will wash away.

Wow. Hope Beatrice puts up her course lectures on Youtube! I mean likes of Richard Thaler tweeted can they attend this?!

Public sector banks (PSBs) are more efficient than private sector peers in labour cost efficiency

April 24, 2019

K. M. Neelima, Radheshyam Verma and Preeti Asthana (research intern) of RBI in this paper (in Apr-19 Bulletin), estimate the labour cost efficiency of Indian banks:

The shift in emphasis from brick-and-mortar operations to digital modes, coupled with increasing per employee output, suggests an improvement in the labour cost efficiency (LCE) of Indian banks.

Using Data Envelopment Analysis (DEA) for the period 2005-2018, the results presented in this article show that LCE has not improved. Public sector banks (PSBs) turn out to be more efficient than private sector peers, reflecting deceleration in employment growth as also cost cutting through innovative techniques. Furthermore, large banks are found to be more efficient than small banks as they can reap economies of scale.

This finding provides an additional rationale for recent mergers of banks, both amongst PSBs and PVBs and suggests that further avenues of consolidation in the banking sphere may be explored.

Quite surprising to read that PSBs have done better than private counterparts on labor costs.

 

Why do we keep getting wrong in financial regulation: Complicated systems vs complex systems

April 24, 2019

A nice different speech by Brian Johnson of CFPB.

He asks this one question: Why do we keep getting this regulation bit wrong in finance? Why do we keep having crisis despite so much work on regulation? His answer is we have got the whole approach wrong. He brings concept of complicated systems vs complex systems:

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How the Chicago School changed the meaning of Adam Smith’s ‘invisible hand’

April 23, 2019

Glory Liu (postdoctoral research associate at Brown University) in this article:

You don’t have to look very far to find people invoking Adam Smith’s name in U.S. political debate. These days, trade policy with China, the Green New Deal and even energy policy have all led people to rally around his purported legacy: the virtues of free markets, the harmful effects of government intervention in economic affairs.

At the same time, political theorists and historians like me have argued that the Scottish moral philosopher didn’t just stand for free markets and that, in fact, Smith’s invisible hand wasn’t a warning about state intervention but state capture. Rather unlike the caricature of Smith who espouses unchecked economic growth, they’ve also argued that Smith was deeply worried about the moral consequences of growing inequality.

So how did Adam Smith become such a popular icon in the first place? And why did the “invisible hand” become such a powerful political catchphrase?

In a recent article published in Modern Intellectual History, I suggest that we can trace the popular version of the “free-market Smith” to the “Chicago School” of economics in the 20th century. Today the Chicago School (the economics faculty at the University of Chicago) is simultaneously famous for being one of the most decorated economics departments in the world (it can claim more Nobel Prizes in economics than any other institution) and infamous for its degree of free-market fundamentalism.

Within Chicago School, the blame is on Friedman but of course…

Does demographics explain decline in US natural interest rate?

April 23, 2019

Before 2008 crisis, there was thinking that US natural rate of interest is hovering around 2.5%. Natural rate is the rate at which economy grows without creating inflation.

As crisis struck in 2008, the Fed brought rates close to zero and as economy recovered, the idea was to push the interest rates to its natural level. But then there was a change in thinking that may be natural rates themselves have declined to below 1%. This leads to the thinking that may be Fed has tightened the rates a bit too much and needs to bring them down towards natural rates.

This piece by Sungki Hong and Hannah G. Shell in St Louis Fed research suggests demographics have a role in declining natural interest rates:

Demographics can affect the natural rate of interest through several channels. Remember, if potential output declines, the natural rate declines with it. An aging population and slowing population growth limit the supply of available workers in an economy. Therefore, holding labor productivity constant, a decrease in workers—a higher old-age dependency ratio—reduces the output generated by an economy. A smaller working-age population means fewer people with a lot of disposable income to consume. These factors decrease an economy’s productive capacity and thereby lower the natural rate. U.S. labor force participation is up compared with the 1960s, despite a long decline since the mid-1990s.1 By itself, this rising labor force participation would tend to raise the natural rate by increasing productive capacity and, in turn, the natural rate of interest. 

An aging population also impacts the natural rate of interest through the savings rate. A higher savings rate increases the supply of loanable funds that banks can lend out, therefore decreasing interest rates. As life expectancy increases, the time individuals spend in retirement increases as does the amount of money they will need to last through retirement. If working-age individuals believe social safety nets will fail, they are likely to save more to offset the risk.2 The U.S. savings rate did increase somewhat from 2005 to 2008; however, for the most part, U.S. household savings has declined since the 1970s. 

 

Tracking churning in Indian capitalism via the history of BSE Sensex

April 23, 2019

Another nice piece by Niranjan (Cafe Economics):

The Indian equity market was in the midst of turmoil a hundred years ago, as the speculative boom after the end of World War 1 ended. The colonial government set up a committee in 1923 to take a closer look at the operations of the Native Share and Stock Brokers’ Association of Bombay, aka the Bombay Stock Exchange. The report of the committee has data on perhaps the first index of tradable securities — dominated by textile companies — with July 1914 prices as the base. “Considerable difficulty was experienced from the absence of daily official lists … It is desirable that the Bombay Stock Exchange should publish daily official lists on the lines of the London Stock Exchanges and similar exchanges. Where considerable fluctuations take place it is desirable that the opening, closing, highest and lowest prices should be known,” the committee members complained in their report.

Such a lack of basic price information is worth recalling at a time when a lot of attention has been focused in recent days on the fortieth anniversary of the benchmark BSE Sensitive Index (Sensex). As Narendra Nathan pointed out in the Economic Times, the Sensex was set up only in 1986, though its base is 1979. The Reserve Bank of India constructed an index of traded securities in 1949, but Indian investors had to wait till 1986 for a credible daily gauge of market movements.

The list of 30 companies that make up the Sensex have changed since 1986. The changing composition of the benchmark index offers interesting clues about the changing nature of the Indian corporate sector.

The first iteration of the Sensex was dominated by the Tata Group. There were as many as six Tata companies in the index — ACC, Tata Power, Tata Steel, Tata Motors, Voltas and Indian Hotels. The extended Birla Group had another five — Century Textiles, Grasim, Indian Rayon, Hindalco and Hindustan Motors. The Sensex now is less dominated by a few groups although there are still three Tata companies in the list.

There has been a lot of churn in the Sensex over the decades. Corporate power in India seems to be more fragile than usually understood. Only a handful of companies such as Tata Motors, Hindustan Unilever, Mahindra & Mahindra, ITC, and Larsen & Toubro have managed to hold their place in the index. Many of the older industrial houses such as the Thapar group, the Walchand group and the Kirloskar group have slipped out of the benchmark index. Even the real estate and infrastructure giants who had a strong presence in the Sensex a decade ago — Jaiprakash Associates, Reliance Infrastructure and DLF, for example — are no longer in the index.

….

The changing composition of the Sensex tells us two big stories — of the rise of a new generation of Indian firms as well as the shift from manufacturing towards services.

Lots of business and economic history in the piece….Read the whole thing…

Competence and not nationality should determine the next ECB chief…

April 23, 2019

Nice interview of Mr Benoit Couvre of ECB.

He says competence alone should be the basis for next ECB chief:

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The IMF 30 Years After Brady

April 22, 2019

Rhoda Weeks-Brown and Martin Mühleisen on the 30 years of Brady plan which restructured Latin American Banks:

Last month marked the 30th anniversary of the announcement of the “Brady plan”. In response to the 1980s Latin American debt crisis, this plan, named after then US Treasury Secretary Nicholas Brady, allowed countries to exchange their commercial bank loans for bonds backed by US Treasuries, bringing an end to a tumultuous period with possible systemic consequences for the global banking system at the time. In what was then a novel approach, banks agreed to provide much needed debt relief—the average write down was 35 percent—in exchange for risk-free tradable instruments.

The IMF played a crucial role, consistent with its mandate to help member countries resolve their balance of payments problems and regain external viability.

It not only oversaw countries’ adjustment plans and provided financing to buy back debt and secure payments on the swapped bonds—it also provided a forum for creditor-debtor negotiations and incentivized better creditor coordination through a change in its own policies. Before the Brady plan, any private creditor could hold up IMF financing by refusing to restructure its claim. That changed with the IMF’s adoption in 1989 of its “lending-into-arrears” policy, under which it could lend to a country that was in arrears on financing from private creditors, so long as the debtor was negotiating with its creditors in good faith.

The Brady deals forever changed the landscape of sovereign finance in two fundamental ways. First, sovereign bonds, held directly or indirectly by a diverse set of possibly thousands of creditors, became the preferred financing instrument for countries, replacing much of sovereign bank loans. Second, the official sector assumed a central role in sovereign debt restructuring.

 

Bank of Jamaica uses reggae to explain its monetary policy and investors dance to the tunes…

April 22, 2019

Move over RBNZ which for long has had the tag of being the coolest central bank around for the number of things it has pioneered.

Now, Central Bank of Jamaica has upped the coolness quotient by several notches. It has been using reggae music to communicate benefits of its inflation targeting to the Jamaicans: video 1, video 2, video 3. You immediately switch to singing Buffalo Soldier…

The music with stability in the economy has led to the island becoming a darling of international investors:

The best-performing stock market in 2018 was an unlikely contender — and better known for its beaches than its economy.  The Jamaican Stock Exchange sits on the waterfront in Kingston and has surged more than 300% over the last five years. Last year, the main index tracking the country’s stock exchange rose 29%. 

Economic numbers are not the only things coming out of Jamaica that have garnered global attention. The Central Bank of Jamaica has become something of a viral sensation online by using the reggae music that the island is famous for to communicate monetary policy. Consider a band’s take on the importance of keeping prices under control and predictable:“Low and stable inflation is to the economy what the bass line is to reggae music!” the singer belts out.

Nigel Clarke, Jamaica’s finance minister, said no one anticipated the videos to receive as much attention as they did, but he was pleased with the effectiveness. “It’s very important to communicate to the Jamaican people in the best way possible,” he said. “When you’re in Jamaica, whether you’re communicating about a glass of juice or beer or you’re communicating complex monetary policy, music helps the communication effort.

On the Bloomberg podcast “What’d You Miss This Week,” Scarlet Fu, Joe Wiesenthal, Caroline Hyde and Romaine Bostick spoke with Clarke about this streak of success. He credited a series of fiscal and monetary reforms the country has taken “Jamaica is emerging from a period of high debt and low growth over a long period of time,” he said. “Now we’re seeing growth at a level of 2%, and we’ve had 16 consecutive quarters of economic growth, the longest such stretch of quarterly growth since we started measuring.” That success for Jamaica has not stopped in 2019. In January, Fitch upgraded the island’s debt to a B+ rating with a stable fiscal outlook.

🙂

History of US Trade Policy as an instrument of Foreign Policy: Paradigm lost under Trump?

April 22, 2019

Came across this interesting speech by Alan Wolff, Deputy Director of WTO on February 5, 2018.

Wolff points how US has used its trade policy as a mix of foreign policy and economic policy:

For most of the last 100 years, the United States has entered into trade negotiations based upon the belief that open markets foster democracy which in turn supports the maintenance of world peace. This grand credo – that increased trade bolsters the prospects for peace – indicates that U.S. trade policy – aside from its announced goal the opening of foreign markets – has also had an important foreign policy component.  In fact, trade policy has been a bedrock of U.S. foreign policy dating from the Second World War.  If this is no longer the objective of U.S. trade policy, this largely unnoticed change in policy is nothing short of revolutionary. 

Some clarifications are in order to keep the overarching policy objective in perspective: First, the fact that this high foreign policy aim was embraced by political leaders did not regularly affect actual detailed trade negotiations. In the trenches, U.S. trade negotiators, at least for the last several generations, have apparently been oblivious to the greater purpose that their efforts served.  They simply sought to open foreign markets for U.S. goods, services, and investment.  Second, foreign policy objectives can be served not only by opening markets but, as has been the case, through weaponizing trade though the imposition of sanctions.

The question examined today is whether the grand article of faith – that obtaining more open markets leads to the creation of democracies which in turn improves the prospects for world peace – is still accepted U.S. dogma and whether it is operational as current policy.  If it is not, and the evidence suggests that this might be the case, the change in policy, is profound.  If there has been a loss of faith, it is likely to have occurred through erosion over time, and is not solely a question of a new administration coming into office as a result of the 2016 Presidential election. 

This paper attempts to trace the thread of trade policy for peace from its inception, and provide some evidence of whether somewhere along the way that policy was forgotten or discarded.  If so, it is a paradigm lost. 

Why is this so very important?  It means that the basis for U.S. support for the multilateral trading system must now be found in pragmatism, in narrower commercial self-interest, and perhaps much less if at all on the basis of America’s foreign policy interests. 

If the sole motivation for participation in the world trading system is obtaining reciprocity, can the system be maintained, much less improved?  Which countries will act and to what extent for the global public good?  This question is independent of providing “special and differential treatment” for developing countries.  The answer to the question of how much countries will be willing to act on the basis of a broader definition of national interest is fundamental to the well-being of all. 

He starts the history from Woodrow Wilson era where subsequent Presidents used trade policy to push foreign policy agenda. However, those on the other side would argue US used trade policy for neither foreign or economic purposes but to just puts its nose in all global matters.

Is Trump era doing a reversal of this trade driven agenda:

It is too early to judge what the foreign policy of the Trump Administration will be, nor anticipate the potential for interaction of this administration’s foreign and trade policies. (21)  What do we know so far?  I have not seen any reference to date from the Administration of its espousing the formula to which Woodrow Wilson, Franklin Roosevelt, and their successors subscribed to – namely that international trade fosters the growth of democracies which in turn leads to enhanced prospects for world peace. 

If there is a discontinuity, why did it occur?  What has changed? 

First and foremost, the current administration has announced that it intends to redress what are taken to be imbalanced trade relationships with other countries.  This, the primary announced goal of current U.S. trade policy, clearly resonates with a not inconsiderable number of American voters.  These supporters of the President, concerned with their own failure to participate in the benefits of globalization, are likely to believe that America has done enough for the world trading system.  More pointedly, in the view of some, it is time for America to be paid back for the investments it made for the global public good.  This is not a majority public view according to polling data.  Members of the American public, when asked whether they back free trade agreements, say that they do. (22)  There is not a lot of evidence of a widespread movement toward isolationism which critics of the Administration feared in the early days of this presidency.

Second, there is little belief at present, in American policy circles, that movement in the direction of free markets, at least in the foreseeable future, is accompanied by movement toward democracy.  The progress toward greater political freedom does not appear to be linked to rising standards of living and greater market orientation.

The WTO has 164 members.  By signing up to the WTO, the trade of each acceding country is freer than it otherwise would have been.  The trend to democracy, however, is not encouraging.  According to one source that measures progress toward democracy in the most recent period, seventy-one countries suffered net declines in political rights and civil liberties, with only 35 registering gains in 2017.  And 2017 marked the 12th consecutive year in which declines outnumbered improvements. (23)  According to the IMF, world GDP growth has averaged nearly 4% per year since 1980, including this eleven-year period. (24)  The march to prosperity does not seem to be in lockstep with the march to democracy based on present data. What the future holds, decades from now, is not available.  Suffice it to say that in the case of the largest developing country that joined the WTO, U.S. policy makers would not say that the paradigm is working. 

If freer trade is not leading to greater democracy, than the logic of free markets leading to democracy then peace, does not hold. 

third answer may be that it is felt the post war reconstruction has accomplished all that it could accomplish through trade.  The case is not being made that the Trans-Atlantic Trade and Investment Partnership (TTIP) is needed to shore up European security. (25)  During the Cold War, European reconstruction was seen as critical to preventing a slide to communist domination.  Similarly, trade is not seen as a foreign policy tool with respect to Japan.  During the Korean War, accelerated development of the Japanese economy was seen to be in America’s interest. 

The United States and China have massive bilateral trade and are at the same time enhancing their armaments as a priority for the contingency that these weapons may be needed primarily with respect to each other. The U.S. and China each view their major trading partner as a strategic competitor with which conflict is likely to occur.

The U.S. government does not see external threats to smaller countries where it has interests solved through enhanced trade.  As a result, it is not seeking trade agreements to bolster any particular regime, either because more is needed than a trade agreement, or nation building is no longer considered desirable or feasible, or both.  As an example, the stability of Mexico, a concern when NAFTA was being negotiated, has not been articulated as a current U.S. motivation for re-negotiation of NAFTA. 

Enhanced U.S. trade with Russia and Iran are not seen as practical inducements to change their current conduct in international affairs.

fourth answer may be that the U.S. does not have much more to give in terms of lowering trade barriers in an era where industrial tariffs are on average very low for all developed countries. (26)  The world of trade has become multi-polar.  The U.S. is no longer the largest trading country, and adding in the European Union as a whole, it is only the third largest trader.  

Hmm..

Lot more in the speech…


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