BWorld 222, Austrian thinkers and the G7 zero tariff challenge

* This is my column in BusinessWorld last June 14, 2018.

“To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.”

— Friedrich Hayek,

“The Pretence of Knowledge,” Nobel Prize lecture, Dec. 11, 1974.

This piece of advice from a famous classical liberal Austrian thinker should be a constant reminder to central planning-thinking leaders and officials in governments around the world, especially in communist and socialist societies like China, North Korea, Vietnam, Venezuela, and Cuba. It should also apply to global central planning-prone agencies like the UN and multilaterals.

Another famous Austrian thinker that advocated freeing individuals and private enterprises from too much regulations, taxation, and state nannyism is Ludwig von Mises.

In his book The Anti-capitalistic Mentality (1956), he extolled the value of competition and endless innovation in a free market economy:

“The characteristic feature of modern capitalism is mass production of goods destined for consumption by the masses. The result is a tendency towards a continuous improvement in the average standard of living… the market of a capitalistic society, the common man is the sovereign consumer whose buying or abstention from buying ultimately determines what should be produced and in what quantity and quality… Wealth can be acquired only by serving the consumers. The capitalists lose their funds as soon as they fail to invest them in those lines in which they satisfy best the demands of the public.”

The dramatic expansion of goods and services worldwide has resulted in substantial increases in global trade and investments. Consumers are the main beneficiaries of increased trade as they get access to more products and services from more suppliers and countries at competing prices.

Some governments, however, are less friendly to their own citizens and trade partners abroad by erecting various forms of restrictions, implicit and explicit, through high tariff and/or non-tariff barriers and measures (NTBs, NTMs) to products and services that enter their soil.

The term “trade war” has become famous recently because of the sentiments of US President Donald Trump to match the high tariff imposed by its G7 partners to some of its exports. He cited Canada’s 270% tariff on US dairy exports, the 10% tariff by the European Union on American car exports, the 25% China tariff for the same while US tariff for imported cars from EU, Japan, China, etc. is only 2.5%.

So during the G7 Summit in Canada last week, instead of having equalized high tariff (EHT) among the members (aka “trade war”), Trump proposed a second option – equalized zero tariff (EZT), zero subsidy.

Between these two options, EZT is the easier thing to do, for two reasons.

One, four G7 members are also EU members and they have zero tariff already among them in the EU. So they only need to extend the zero tariff to the three other G7 members, Japan, Canada and US.

Two, existing tariff rates are generally low and hence, closer to zero than 10%. Member-countries of the World Trade Organization (WTO) enjoy the most favored nation (MFN) privilege, meaning what one country imposes as tariffs on its favorite trade partner should also apply to all other members. Standard deviation of tariff rate (SDTR) means the extent of variation in tariffs, so the higher the SDTR, the more protectionist an economy is for certain products or commodities.

So for the G7, EZT is easier to implement and more preferable than EHT. It is China that is the most protectionist and hence, will have great difficulty moving towards EZT.

The works of Hayek, Mises, and other classical liberal thinkers like Adam Smith, David Ricardo, John Locke, and John Stuart Mill, the application of their thoughts to current issues like free trade vs protectionism, will be tackled in a lecture by the Students for Liberty Philippines (SFL) this coming June 16, Saturday in Quezon City.

Young minds are more receptive to classical liberal and free trade philosophy because they have experienced first hand the beauty of more consumer freedom, more mobility across countries, and more civil society action to social problems.

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See also:

BWorld 214, Disruption in global economic power, May 24, 2018 

BWorld 219, The US-North Korea summit and the global economy, June 20, 2018 

BWorld 220, Trade imbalances, protectionism and rhetoric, June 15, 2018 

BWorld 221, Mindanao power development, reality vs illusion, June 16, 2018

Free Trade 66, Trump's proposal of zero tariff in G7

This is good. Zero tariff, keep non-tariff barriers/measures to the minimum. EU, Japan, Canada, China, dare -- game?

https://www.wsj.com/articles/donald-trump-pitches-tariff-free-trade-zone-to-g-7-allies-1528556581

“We should at least consider no tariffs, no barriers — scrapping all of it,” Trump said, according to officials who were listening and taking notes.

Trump floated the idea — which was received as somewhat rhetorical — as the meeting was breaking up and was quickly challenged by Canadian Prime Minister Justin Trudeau, who asked, “What about subsidies?”

https://www.politico.eu/article/trumps-surprise-g7-pitch-we-should-at-least-consider-no-tariffs-steel-aluminum-trade/

"No tariffs, no barriers, that's the way it should be — and no subsidies," the president said at a press conference, before taking questions.

"We don't want to pay anything — why should we pay?" Trump said. "Ultimately, that's what you want. You want a tariff free, no barriers and you want no subsidies."

https://www.cnbc.com/2018/06/09/trump-says-at-g-7-summit-trade-should-be-tariff-free-barrier-free-subsidy-free.html

“No tariffs, no barriers, that’s the way it should be, and no subsidies,” Trump said during a 30-minute press conference on the sidelines of the meeting in La Malbaie, Quebec. "I did suggest it and people were -- I guess they’re going to go back to the drawing board and check it out."

https://www.bloomberg.com/news/articles/2018-06-09/trump-turns-tables-on-g-7-allies-with-free-trade-proclamation

“No tariffs, no barriers — that’s the way it should be. And no subsidies,” Mr Trump said at a brief press conference before departing from the G7 summit at the Québec resort town of La Malbaie. “We’re like the piggy bank that everybody’s robbing, it’s got to end.”

https://www.ft.com/content/ba0aa2c4-6bf6-11e8-92d3-6c13e5c92914

"Also on Friday, Trump floated the idea of ending all tariffs and trade barriers between the US and its allies - a pitch that wasn't exactly expected, according to Politico. Trump offered the proposal at the end of a "contentious" meeting on trade disputes. Most G-7 members remain furious with Trump over his decision to impose tariffs on aluminum and steel imports, and his threats to impose more trade restrictions. Merkel responded positively to Trump's suggestion, saying she would consider it."

https://www.zerohedge.com/news/2018-06-09/trump-g-7-closing-remarks-were-piggy-bank-everybodys-robbing

Other reports:

https://www.aninews.in/news/world/asia/trump-pitches-ending-trade-tariffs-at-g-7-summit-reports201806090959380003/

https://www.bbc.com/news/world-us-canada-44423072

https://edition.cnn.com/2018/06/09/politics/trump-g7-tariffs-trade/index.html

Tweets by @realDonaldTrump, June 8:

Please tell Prime Minister Trudeau and President Macron that they are charging the U.S. massive tariffs and create non-monetary barriers. The EU trade surplus with the U.S. is $151 Billion, and Canada keeps our farmers and others out. Look forward to seeing them tomorrow.

Prime Minister Trudeau is being so indignant, bringing up the relationship that the U.S. and Canada had over the many years and all sorts of other things...but he doesn’t bring up the fact that they charge us up to 300% on dairy — hurting our Farmers, killing our Agriculture!

Why isn’t the European Union and Canada informing the public that for years they have used massive Trade Tariffs and non-monetary Trade Barriers against the U.S. Totally unfair to our farmers, workers & companies. Take down your tariffs & barriers or we will more than match you!

Tweets by @realDonaldTrump, June 10:

Just left the @G7 Summit in beautiful Canada. Great meetings and relationships with the six Country Leaders especially since they know I cannot allow them to apply large Tariffs and strong barriers to...

...U.S.A. Trade. They fully understand where I am coming from. After many decades, fair and reciprocal Trade will happen!

The United States will not allow other countries to impose massive Tariffs and Trade Barriers on its farmers, workers and companies. While sending their product into our country tax free. We have put up with Trade Abuse for many decades — and that is long enough.

Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!

PM Justin Trudeau of Canada acted so meek and mild during our @G7 meetings only to give a news conference after I left saying that, “US Tariffs were kind of insulting” and he “will not be pushed around.” Very dishonest & weak. Our Tariffs are in response to his of 270% on dairy!

Zero tariff is good, it is happening. EU countries have zero tariff among themselves; ASEAN countries have zero tariff among themselves too; other regional blocs in Asia, S. America, Africa, Europe (like EFTA) do it among themselves; also various bilateral FTAs. However they don't do it with countries outside their regional blocs and bilateral FTAs, they practice protectionism. Except HK which has zero tariff for all countries except for a few regulated products (guns, bombs, chemical/poisonous substances,...)

The anti-trumpistas just hate any policy he takes. If he slaps high tariffs to trade partners, they are angry. If he suggests zero tariff, they are still angry. Seems they are more confused, more double-talkers than the man they hate.

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See also:

Free Trade 63, Dealing with anti-trade lib, anti-TPP activists, February 06, 2016 

Free Trade 64, PH experience in manufacturing growth, November 04, 2016 

Free Trade 65, On the US withrawal from the TPP, February 19, 2017 

BWorld 130, Mobility of goods, capital, and people in Asia, May 13, 2017 

BWorld 137, ASEAN trade expansion and RCEP, June 20, 2017 

BWorld 167, Multilateral, bilateral, or unilateral liberalization, November 27, 2017 

BWorld 175, Trends in global and Philippine trade, January 05, 2018 

BWorld 180, Has East Asia liberalized its trade enough? January 19, 2018

Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes

Just a continuing proof that BIG government is wrong, is also the continuing debt and financial turmoil in Europe. Of course, the same heavy debt burden is also experienced in North America, Japan and other developed economies, regardless of their forms of government -- parliamentary, presidential, federal, centralized, unitary, etc.

Here are some news headlines yesterday, June 5, from BBC, CNN, FT, WSJ. They look self-explanatory.

A good chart from The Economist, Crunch Time, May 28th 2012.

...According to The Economist's credit-crunch index, credit is now tighter in the euro area than it was at the height of the financial crisis (see top-left chart). This is having a detrimental effect on the real economy, as demonstrated in the following three charts. When the index was last at a similar level during 2008-09, economic output tanked, unemployment shot up and stockmarkets plummeted. Unless policymakers find a lasting and credible solution soon, it seems likely that the same will happen again.

Another chart below from the same magazine, A rebalancing act, May 22nd 2012.

GREECE is in a bind. Because it is stuck with the euro, it cannot become more competitive by currency depreciation. Instead it must lower its real exchange rate, by cutting prices and wages. This is proving a painful process. One measure of progress, unit labour costs (the average cost of staffing per unit of output), is declining and will continue to do so, according to the OECD’s latest Economic Outlook. Cheaper labour should result in cheaper goods, making Greek exports more attractive to foreign buyers and helping to improve the trade deficit. But with less money in workers’ pockets domestic demand—the sum of consumption, investment and stock-building expenditure—is likely to fall further. The OECD recommends that trade-surplus economies, such as Germany and the Netherlands, push up costs. This would make Greece more competitve, without dragging on Greek workers' incomes.

And one more chart, also from The Economist, The German motor, May 15th 2012.

(Germany's) economy surpassed expectations by managing to grow by 0.5% during the first three months of the year. As a whole, the euro area registered stagnant growth, and without Germany its economy would have declined by 0.2%. Germany accounts for about 28% of euro-area output, yet its contribution to euro-area growth has increased markedly since 2004. It was responsible for 65% of the region's growth in output on average since 2007. Meanwhile the euro zone's peripheral countries—Portugal, Ireland, Italy, Greece and Spain—have seen their contribution decline from a pre-crisis average of 45% to a drag of 10% since 2007.

Look at that, a 0.7 percent GDP growth is already "high" in EU situation these days. The economic contraction, negative change in GDP size, has spilled over beyond the PIIGS, now covering Britain and the Netherlands.

Being an advocate of lean and limited government -- for limited coercion, regulations, restrictions and taxation -- it does not make me happy either to see these figures of bad economic performance by those economies under BIG governments.  But since those governments and the respective political parties and political groups and NGOs that support them, cannot be convinced easily of the mistake of further expanding government size and costly welfarism, we have to allow the natural course of events to teach them, the public, some hard lessons.

Some libertarian anarchist friends would question, "Why have limited coercion, why not zero coercion by abolishing government entirely?" Well, sports and gun clubs, rotary and other civic clubs, village and professional associations, etc. are mini-governments actually. They have their own bureaucracies, their own set of rules and regulations with respective rewards and punishments, collect mandatory annual dues and other fees that appear like taxes. In the event of conflict among their leaders, or an inter-club (say gun club) disputes, there is a need for a bigger force with its own coercive power, to settle disputes with finality. And we are referring to the promulgation of the rule of law, enforcement of contracts, between and among people, private enterprises, various civil society organizations, as the main "raison d etre" of government.

Suffice it to say that somehow we need government, but it should be a lean one focused on implementing very few functions. Big and expansive, highly intrusive government is wrong.

Ok, one last data for now. The world's largest economies in terms of GDP size, in trillion US$ current prices, 2001, 2006 and 2011.

Source: CNN Money

* Trivia: If the basis for G8 membership is being the "world's largest economies", then Russia and Canada should be out of G8 and China and Brazil should be in. One way to correct this is to expand the association to G10 and Russia and Canada can remain. But it's all about politics by the G8 member-governments.
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See also:
Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011
Fiscal Irresponsibility 18: Greece Bailout, October 29, 2011
Fiscal Irresponsibility 19: Rich Countries' Debts, November 24, 2011
Fiscal Irresponsibility 20: Trade and Budget Balances, January 06, 2012
Fiscal Irresponsibility 21: Eurozone Debt, GDP and Unemployment, March 06, 2012
Fiscal Irresponsibility 22: China Borrows, China Lends. April 16, 2012
Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012