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February 05, 2020

Comments

Patrick Kirk

Perhaps ecomomists are just condtioned to always say "Free trade = good" ? This is the first time I have ever seen a coherent argument that trade frictions are not stupid and harmful.

Staberinde

Hmm. If trade frictions are so good, maybe we should have some between London and Manchester, Scotland and England, Kidderminster and Bishops Stortford?

Is there an optimal level for trade frictions, or are more better?

Dipper

why is it good for the EU to have restrictions on trading outside the EU, but not good for the UK to have similar restrictions?

Almar

I haven't got the numbers to hand, but how much of the increased German trade surplus and the Spanish deficits are with other EU countries (where the single market reduced trading costs) and how much with non-EU countries? You also need to look at relative inflation rates since the start of of the Eurozone.

droog

And whilst Johnson may be imposing custom checks at the moment (aka when cake meets reality), how would this argument for trade frictions sit with the open position of the Britannia Unchained crowd? Just this week Johnson was lecturing the USA on the perils of trade wars.

It's hard to see this duality going on indefinitely. On the one hand a hard no-deal Brexit will lead to controls on both sides of the UK-EU divide, whilst on the other the free-marketeering wing of the Tory party wants to drop barriers for any and all items coming from anywhere in the world.

One tiny difference I see between Johnson's move and Trump's current war with China is that the friction caused by custom checks is not the same as straight-up tariffs. I guess Johnson is introducing friction where the monetary costs are incidental to the divergence he seeks, whereas with Trump making costs punitive is the whole purpose of the exercise. Johnson's goal would then be to introduce as much divergence and friction for as little costs as possible, whilst Trump wants costs to increase as much as possible. Nonetheless, I still can't see how this approach towards the EU would leave room to be more permissive with other non-EU partners. In other words, just because you are doing things differently from Trump doesn't automatically mean you're making sense.

Robert Mitchell

"An important transmission mechanism here has been proven by Ben Friedman: economic stagnation, he has shown, leads to intolerance, xenophobia and anti-democratic sentiment."

Isn't this in contradiction with the Easterlin paradox?

"every seller needs a buyer: I can only dump my holdings of UK equities if somebody buys them. My effort to shift capital out of the UK is therefore offset by somebody else shifting it in."

Say a foreign investor borrows dollars with printed local currency, buys your UK equities, then they go up. Dollars flow to his account. "Every seller needs a buyer" ignores leverage: the buyer can borrow dollars to buy and never repay but someone keeps their balance sheet expanded indefinitely, thus turning credit into money.

KG

Your initial instinct was right: trade frictions are bad. If current account imbalances are "small" for big countries it is because product ranges (and investment prospects) for said countries are pretty similar. And the "Okun" costs of the GFC ignore the (unsustainable, but real) benefits of the above-trend growth that preceded it.

georgesdelatour

Thanks for considering this, Chris.

A number of economists, especially from Cambridge, have been Free Trade Sceptics (FTS). Recently they’ve gone a bit quiet. Wasn’t J.K Galbraith a FTS? Isn’t John Eatwell? The most famous FTS today is probably Ha-Joon Chang, in his book “Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism”.

There’s an argument which goes all the way back to Friedrich List, which says that pure free trade tends to entrench the dominance of the already successful economies. List thought Germany could only afford to have free trade with Britain after a long period of protectionism had allowed German industry to build up its domestic competitive strength. He said that, without protection, the German people would end up as “drawers of water and hewers of wood for Britain”.

America grew to be the world’s largest economy while it was heavily protected. Chang likes to quote President Ulysses Grant, who remarked that “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade”.

Intriguingly, it’s List’s Zollverein which is the direct inspiration for the EU, not the Manchester free-traders.

Jonathan

georgesdelatour
FTS at Cambridge goes back to Keynes.
Gudgin there has done Brexit work broadly in this tradition which does indicate negative consequences but also suggests these are likely to have been overstated:
https://www.cbr.cam.ac.uk/fileadmin/user_upload/centre-for-business-research/downloads/working-papers/wp483.pdf

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