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He also says that Free Trade don't work in practice.
http://articles.marketwatch.com/2012...ses-free-trade
http://articles.marketwatch.com/2012...ses-free-trade
The end of the WTO’s Golden Era: Andy Xie
Caixin Online
Trade disputes, stagnation indicate the system has become outdated
October 11, 2012|Andy Xie
BEIJING (Caixin Online) — Globalization has been on a rapid pace for two decades. Trade has been rising roughly twice as fast as global gross domestic product in the past two decades. The World Trade Organization’s rule-based system, though with many flaws, has played a critical role.
The total number of anti-dumping cases peaked in 2001 at 372 and was as low as 155 last year. However, the trend for China isn’t as favorable.
It suffered 49 anti-dumping cases, about the same as the ten-year average. Considering that China’s exports have been rising twice as fast as the global trade, the stable number of anti-dumping cases should be considered a good outcome. The WTO system has been beneficial to China’s trade development.
Some recent incidents suggest more bumps ahead in globalization. The Obama administration has brought a complaint to the WTO against China subsidizing the auto and auto parts industries. It recently ordered a Sany affiliate to divest its investment in a U.S. wind power project.
Both the European Union and the United States are considering sanctions against China’s solar power equipment exports. A U.S. House committee just said Huawei and ZTE pose security threats and, hence, could be barred from exporting to the United States.
These incidences could be viewed as part of election politics. Things may go back to normal after the U.S. presidential election next month. I suspect otherwise.
Economic theory justifies free trade. ... the workers that lose to outsourcing are worse off.
But the country as a whole should gain more if workers can find other jobs at similar pay. Unfortunately, when trade is large relative to GDP and growing fast, the theory doesn’t hold. Displaced workers may take huge pay cuts to find jobs. The reduction in labor income could be bigger than the gain in business profit.
Weak economic growth may play a bigger role than election politics in increasing trade barriers. Unless the global economy returns to a high growth rate soon, protectionism may escalate sufficiently to permanently cap economic growth, creating a vicious cycle of rising protectionism and weak economic growth.
Return of protectionism
Globalization has been on the rise for two decades. Almost every country believed that rising trade would increase prosperity. Prosperity did occur. When the going was good, no one questioned faith in free trade.
Economic theory justifies free trade. When trade occurs between two persons, they must be better off. Otherwise, the two sides wouldn’t agree. Extending the theory to two countries requires a twist to the theory, especially when the trade is due to outsourcing or replacing of existing economic activities.
Obviously, the workers that lose to outsourcing are worse off. But the country as a whole should gain more if workers can find other jobs at similar pay.
Unfortunately, when trade is large relative to GDP and growing fast, the theory doesn’t hold. Displaced workers may take huge pay cuts to find jobs. The reduction in labor income could be bigger than the gain in business profit.
Even when gain in business profit exceeds loss in labor income, redistribution is very difficult. In the United States few politicians dare to talk about raising taxes. In France, there is a scare over rich people’s mass exodus in response to the government’s 75% tax rate on income above 1 million euros ($1.29 million) (US:EURUSD).
London seems cutting taxes to attract business headquarters from Switzerland. Most highly paid financial professionals that serve China live in Hong Kong. In a globalized world, it is difficult to tax capital or mobile professionals. They happen to gain most from globalization. Hence, redistribution to spread the upside from globalization is difficult to accomplish.
Even though globalization generated lots of losers in the past two decades, it has prospered because bubbles covered up the downside. In the United States, Wall Street created financial instruments to allow average people to extract cash out of inflating property value. In Europe, the financial bubble allowed southern European governments to borrow at a low interest rate for distribution to their people.
The bubble income boosted their economic activities and created employment for the people displaced by globalization.
High unemployment rates have followed the bursting of the financial bubbles in the West. It is really a delayed manifestation of the downside of globalization. This is one reason that unemployment rates will stay high. The bubble jobs won’t return. It is a long slog to create so many jobs through normal economic activity.
When economic hardship is visible and long lasting, the attitude towards globalization or trade is bound to change. What’s happening in the U.S. presidential election could just be the beginning. More may follow afterwards. Any trade that disrupts a local economy is likely to be stopped. It would be extremely difficult for any country to gain market share in the future.
Stagnation as the Norm
The global economy is fairly close to recession and may remain so for years. The United States’ GDP growth rate is stuck around 2%, which will barely create enough jobs for labor growth and can’t whittle down the existing pool of unemployed.
Europe is in recession and may remain so for the foreseeable future. Japan is probably in recession too, as it has been for the past two decades and probably will be for the next two decades. Emerging economies have cooled off from the bubble-inflated growth rate of 2010-11 and are probably growing at 3% to 4%.
This picture of developed economies at close to zero growth and emerging economies at 3% to 4% may stay with us for years. By past standards, this is close to recession.Economics believes in the self-healing power of a market economy. When a disruption like bubble-bursting occurs, the price mechanism will reallocate economic resources to reach a new equilibrium that fully utilizes all resources including labor. Hence, the unemployment rate should decline on its own over time. When a high unemployment rate persists, economists tend to blame institutional factors like high unemployment benefits that discourage employment. This is not the whole picture
I see two factors that could prolong the employment crisis in the West. First, global competition may result in an equilibrium wage not sufficient to meet necessities. The cost of living varies widely around the world because big expenditure items, e.g. housing, education and health care, are locally determined. When one’s wage is globally determined, but expenditure isn’t, the former could be below the later.
If a country wants to solve its employment problem, it must lower the cost of living. This is what Germany has done well. German wages are frighteningly low, especially for youth. They accept such low paying jobs because they don’t suffer with student loans, high rents or health insurance premiums. But it is difficult to reform health care, education or housing. This is why the unemployment crisis will last for a long time.
Second, information technology will continue to displace white-collar workers in developed economies, adding to the labor market disruption from globalization and financial crises. Technology is a good thing in the long run. It makes people more productive overall. But when it replaces people who have invested in their skills for decades, the disruption can’t be easily smoothed through redistribution.
Most middle-class jobs in developed economies are in information processing. IT development is advancing so rapidly that most such jobs could become redundant in the foreseeable future. From paralegals and executive assistants, to market information gatherers, IT can do better than people. This disruption to the labor market may take a generation or longer to absorb.
The current economic crisis requires difficult structural reforms — not just time — to resolve. The ongoing technology revolution disrupts the labor market on a massive scale. These two factors are likely to trap the global economy in a slow growth or recessionary state for years to come.
End of the Golden era
While the WTO system provides a platform for globalization, multinational companies have led it. Their pursuit of profit maximization has caused trade to grow twice as fast as GDP. This is why they are in good shape despite multiple global crises. And they continue to report record profits in a global recession.
Multinational companies are the big beneficiaries of globalization. Their political influence in the West is the key to the success of the WTO system.
The global financial crisis of 2008 soon became a global economic crisis and has become a political crisis. Redistribution through tax has become a focal point in recent elections in the West. But businesses resist rising taxes. They can redistribute profits around the world to low tax havens like Switzerland or Singapore. Their resistance is bound to have political repercussions.
When the pie is growing, tax dodging is viewed as being clever. When most people are suffering, such activities will be viewed very negatively. While politics is slow relative to business, it eventually catches up. This is why multinational companies may lose influence in their original home countries.
For example, the EU is bound to coordinate tax rates for the foreseeable future. If Britain doesn’t like it, it will have to leave the EU. The rules for profit calculation are likely to be tightened up to stop tax haven shopping.
The difficulties in resolving the inequities from globalization through increasing taxes will eventually shift politics to focus on trade directly. The rules for governing multinational activities will become more complicated in future. The barriers against outsourcing will multiply. Import duties may rise. Selective use of anti-dumping cases will be used more frequently to protect existing industries.
The golden era of the WTO system is coming to an end.
Indeed, trade disputes could multiply sufficiently to overwhelm the WTO system. Economists tend to blame the trade protection policies of the Western economies for causing or worsening depressions. The reality is probably more complicated. The labor market has limited capacity to cope with globalization. The political backlash against globalization is inevitable when the later moves too fast.
The golden era of the WTO system is coming to an end. Indeed, trade disputes could multiply sufficiently to overwhelm the WTO system.
Economists tend to blame the trade protection policies of the Western economies for causing or worsening depressions. The reality is probably more complicated. The labor market has limited capacity to cope with globalization. The political backlash against globalization is inevitable when the later moves too fast.
Trade has grown twice as fast as GDP in the past two decades. This relationship is unlikely to continue. The best scenario is for the two to grow at the same pace. The global economy will probably be stuck around 2% to 2.5%. So would trade.
China’s overcapacity
If China can maintain its export growth at twice the global rate, this would mean a 4% to 5% export growth rate in volume. Inflation will make the nominal number higher than that. This means that China cannot export out of its current economic difficulties.
The current manufacturing overcapacity is probably equivalent to $1 trillion in output value or 50% of the total exports. If China increases incentives for exports, trade disputes are bound to multiply.The current approach towards overcapacity isn’t reassuring. Most local governments try hard to maintain production levels, pushing up inventories. This delaying tactic increases the cost of eventual adjustment.
Local governments and banks should stop intervening in the market adjustment process. Inefficient companies should be allowed to go bankrupt. Only when capacity is shrunk to match demand can the economy resume normal growth and the banking system enjoy a safe environment.
Some popular ideas for solving overcapacity are dumb and harmful. Investment stimulus, for example, may increase demand in the short term. But it leads to more capacity down the road, causing a bigger crisis later.
“Retiring inefficient capacity” through government fiat would lead to its replacement with “efficient” capacity quickly. Unless the investment process is reduced by market forces, the overcapacity problem will only get worse.
The global environment has changed. China’s economic approach cannot be business as usual. Any illusion about this reality could lead to catastrophe.
Caixin Online
Trade disputes, stagnation indicate the system has become outdated
October 11, 2012|Andy Xie
BEIJING (Caixin Online) — Globalization has been on a rapid pace for two decades. Trade has been rising roughly twice as fast as global gross domestic product in the past two decades. The World Trade Organization’s rule-based system, though with many flaws, has played a critical role.
The total number of anti-dumping cases peaked in 2001 at 372 and was as low as 155 last year. However, the trend for China isn’t as favorable.
It suffered 49 anti-dumping cases, about the same as the ten-year average. Considering that China’s exports have been rising twice as fast as the global trade, the stable number of anti-dumping cases should be considered a good outcome. The WTO system has been beneficial to China’s trade development.
Some recent incidents suggest more bumps ahead in globalization. The Obama administration has brought a complaint to the WTO against China subsidizing the auto and auto parts industries. It recently ordered a Sany affiliate to divest its investment in a U.S. wind power project.
Both the European Union and the United States are considering sanctions against China’s solar power equipment exports. A U.S. House committee just said Huawei and ZTE pose security threats and, hence, could be barred from exporting to the United States.
These incidences could be viewed as part of election politics. Things may go back to normal after the U.S. presidential election next month. I suspect otherwise.
Economic theory justifies free trade. ... the workers that lose to outsourcing are worse off.
But the country as a whole should gain more if workers can find other jobs at similar pay. Unfortunately, when trade is large relative to GDP and growing fast, the theory doesn’t hold. Displaced workers may take huge pay cuts to find jobs. The reduction in labor income could be bigger than the gain in business profit.
Weak economic growth may play a bigger role than election politics in increasing trade barriers. Unless the global economy returns to a high growth rate soon, protectionism may escalate sufficiently to permanently cap economic growth, creating a vicious cycle of rising protectionism and weak economic growth.
Return of protectionism
Globalization has been on the rise for two decades. Almost every country believed that rising trade would increase prosperity. Prosperity did occur. When the going was good, no one questioned faith in free trade.
Economic theory justifies free trade. When trade occurs between two persons, they must be better off. Otherwise, the two sides wouldn’t agree. Extending the theory to two countries requires a twist to the theory, especially when the trade is due to outsourcing or replacing of existing economic activities.
Obviously, the workers that lose to outsourcing are worse off. But the country as a whole should gain more if workers can find other jobs at similar pay.
Unfortunately, when trade is large relative to GDP and growing fast, the theory doesn’t hold. Displaced workers may take huge pay cuts to find jobs. The reduction in labor income could be bigger than the gain in business profit.
Even when gain in business profit exceeds loss in labor income, redistribution is very difficult. In the United States few politicians dare to talk about raising taxes. In France, there is a scare over rich people’s mass exodus in response to the government’s 75% tax rate on income above 1 million euros ($1.29 million) (US:EURUSD).
London seems cutting taxes to attract business headquarters from Switzerland. Most highly paid financial professionals that serve China live in Hong Kong. In a globalized world, it is difficult to tax capital or mobile professionals. They happen to gain most from globalization. Hence, redistribution to spread the upside from globalization is difficult to accomplish.
Even though globalization generated lots of losers in the past two decades, it has prospered because bubbles covered up the downside. In the United States, Wall Street created financial instruments to allow average people to extract cash out of inflating property value. In Europe, the financial bubble allowed southern European governments to borrow at a low interest rate for distribution to their people.
The bubble income boosted their economic activities and created employment for the people displaced by globalization.
High unemployment rates have followed the bursting of the financial bubbles in the West. It is really a delayed manifestation of the downside of globalization. This is one reason that unemployment rates will stay high. The bubble jobs won’t return. It is a long slog to create so many jobs through normal economic activity.
When economic hardship is visible and long lasting, the attitude towards globalization or trade is bound to change. What’s happening in the U.S. presidential election could just be the beginning. More may follow afterwards. Any trade that disrupts a local economy is likely to be stopped. It would be extremely difficult for any country to gain market share in the future.
Stagnation as the Norm
The global economy is fairly close to recession and may remain so for years. The United States’ GDP growth rate is stuck around 2%, which will barely create enough jobs for labor growth and can’t whittle down the existing pool of unemployed.
Europe is in recession and may remain so for the foreseeable future. Japan is probably in recession too, as it has been for the past two decades and probably will be for the next two decades. Emerging economies have cooled off from the bubble-inflated growth rate of 2010-11 and are probably growing at 3% to 4%.
This picture of developed economies at close to zero growth and emerging economies at 3% to 4% may stay with us for years. By past standards, this is close to recession.Economics believes in the self-healing power of a market economy. When a disruption like bubble-bursting occurs, the price mechanism will reallocate economic resources to reach a new equilibrium that fully utilizes all resources including labor. Hence, the unemployment rate should decline on its own over time. When a high unemployment rate persists, economists tend to blame institutional factors like high unemployment benefits that discourage employment. This is not the whole picture
I see two factors that could prolong the employment crisis in the West. First, global competition may result in an equilibrium wage not sufficient to meet necessities. The cost of living varies widely around the world because big expenditure items, e.g. housing, education and health care, are locally determined. When one’s wage is globally determined, but expenditure isn’t, the former could be below the later.
If a country wants to solve its employment problem, it must lower the cost of living. This is what Germany has done well. German wages are frighteningly low, especially for youth. They accept such low paying jobs because they don’t suffer with student loans, high rents or health insurance premiums. But it is difficult to reform health care, education or housing. This is why the unemployment crisis will last for a long time.
Second, information technology will continue to displace white-collar workers in developed economies, adding to the labor market disruption from globalization and financial crises. Technology is a good thing in the long run. It makes people more productive overall. But when it replaces people who have invested in their skills for decades, the disruption can’t be easily smoothed through redistribution.
Most middle-class jobs in developed economies are in information processing. IT development is advancing so rapidly that most such jobs could become redundant in the foreseeable future. From paralegals and executive assistants, to market information gatherers, IT can do better than people. This disruption to the labor market may take a generation or longer to absorb.
The current economic crisis requires difficult structural reforms — not just time — to resolve. The ongoing technology revolution disrupts the labor market on a massive scale. These two factors are likely to trap the global economy in a slow growth or recessionary state for years to come.
End of the Golden era
While the WTO system provides a platform for globalization, multinational companies have led it. Their pursuit of profit maximization has caused trade to grow twice as fast as GDP. This is why they are in good shape despite multiple global crises. And they continue to report record profits in a global recession.
Multinational companies are the big beneficiaries of globalization. Their political influence in the West is the key to the success of the WTO system.
The global financial crisis of 2008 soon became a global economic crisis and has become a political crisis. Redistribution through tax has become a focal point in recent elections in the West. But businesses resist rising taxes. They can redistribute profits around the world to low tax havens like Switzerland or Singapore. Their resistance is bound to have political repercussions.
When the pie is growing, tax dodging is viewed as being clever. When most people are suffering, such activities will be viewed very negatively. While politics is slow relative to business, it eventually catches up. This is why multinational companies may lose influence in their original home countries.
For example, the EU is bound to coordinate tax rates for the foreseeable future. If Britain doesn’t like it, it will have to leave the EU. The rules for profit calculation are likely to be tightened up to stop tax haven shopping.
The difficulties in resolving the inequities from globalization through increasing taxes will eventually shift politics to focus on trade directly. The rules for governing multinational activities will become more complicated in future. The barriers against outsourcing will multiply. Import duties may rise. Selective use of anti-dumping cases will be used more frequently to protect existing industries.
The golden era of the WTO system is coming to an end.
Indeed, trade disputes could multiply sufficiently to overwhelm the WTO system. Economists tend to blame the trade protection policies of the Western economies for causing or worsening depressions. The reality is probably more complicated. The labor market has limited capacity to cope with globalization. The political backlash against globalization is inevitable when the later moves too fast.
The golden era of the WTO system is coming to an end. Indeed, trade disputes could multiply sufficiently to overwhelm the WTO system.
Economists tend to blame the trade protection policies of the Western economies for causing or worsening depressions. The reality is probably more complicated. The labor market has limited capacity to cope with globalization. The political backlash against globalization is inevitable when the later moves too fast.
Trade has grown twice as fast as GDP in the past two decades. This relationship is unlikely to continue. The best scenario is for the two to grow at the same pace. The global economy will probably be stuck around 2% to 2.5%. So would trade.
China’s overcapacity
If China can maintain its export growth at twice the global rate, this would mean a 4% to 5% export growth rate in volume. Inflation will make the nominal number higher than that. This means that China cannot export out of its current economic difficulties.
The current manufacturing overcapacity is probably equivalent to $1 trillion in output value or 50% of the total exports. If China increases incentives for exports, trade disputes are bound to multiply.The current approach towards overcapacity isn’t reassuring. Most local governments try hard to maintain production levels, pushing up inventories. This delaying tactic increases the cost of eventual adjustment.
Local governments and banks should stop intervening in the market adjustment process. Inefficient companies should be allowed to go bankrupt. Only when capacity is shrunk to match demand can the economy resume normal growth and the banking system enjoy a safe environment.
Some popular ideas for solving overcapacity are dumb and harmful. Investment stimulus, for example, may increase demand in the short term. But it leads to more capacity down the road, causing a bigger crisis later.
“Retiring inefficient capacity” through government fiat would lead to its replacement with “efficient” capacity quickly. Unless the investment process is reduced by market forces, the overcapacity problem will only get worse.
The global environment has changed. China’s economic approach cannot be business as usual. Any illusion about this reality could lead to catastrophe.
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