There is a great article by Richard Baldwin looking at the debate over the offshoring of services jobs. The article looks at the other side of Alan Blinder's estimate that 30 to 40 million American services jobs will become offshoreable as new technology makes possible international trade in services that were previously firmly located in one place.
The one take-away that has stuck with me from Blinder's widely-read Foreign Affairs article from 2006 is that if you want to avoid international trade, consider a career as a personal trainer. Baldwin points out that the US is rather good at providing services and runs a significant trade surplus - and that the opening up of service sectors to international competition actually offers mutually-enhancing opportunities. It's an argument that our Ambassador's recent trade speech in Baltimore concluded with.
This week sees the inaugural World Trade Week UK, which aims to highlight the importance of global trade in creating jobs and growth during these difficult economic times. It’s an idea that draws heavily on FDR’s 1933 initiative to designate the third week of May as National Foreign Trade Week, following up on the promise in his Inaugural Address to ‘spare no effort to restore world trade by international economic readjustment’. Actually it is surprising to look at the full text of FDR’s language on international trade in the Inaugural Address, where he sees international trade relations as secondary to national economic recovery - as if the two are somehow separate challenges.
In advance of World Trade Week UK our Ambassador, Nigel Sheinwald, gave a major speech on trade in Baltimore last week. The speech underlines our on-going concerns about the risks of the global economy being compartmentalised into national boxes. To take one example, we have been hearing from a number of British companies worried about how the Buy American provisions in the fiscal stimulus are being applied. Under the terms of the Congressional legislation, British companies and goods should not be affected by Buy American in most states because the UK has signed the Government Procurement Agreement. However it seems that many local decision-makers think that they heard Congress say ‘Buy American. Period.’ As the speech sets out, we have no Buy British equivalent in government procurement rules in the UK and American companies get a substantial portion of government contracts.
There will be a major international conference on trade in London this week, featuring, among others, Paul Krugman, Jagdish Bhagwati, Lord Mandelson and EU Trade Commissioner Cathy Ashton. Friday afternoon we taped an address by Deputy USTR Demetrios Marantis to the conference.
It will then be interesting to see the US’s trade data for April which comes out on Tuesday. There were some signs of recovering transatlantic trade volumes in the March data - though the only press angle seemed to be the on-going obsession with the size of the trade deficit. Let’s hope for some more green shoots.
As March Madness reaches its crescendo, I have been trying to work out why college sports are so popular here. The only student sporting event that gets any major media attention is the annual Oxford and Cambridge Boat Race, which was held last Sunday. By contrast, US college basketball and football gets wall-to-wall TV coverage. The best explanation I've heard is that professional basketball and football only took off in post-war America, allowing the college games to build a following that they have kept. Had the Football League not been formed in 1888, British workplaces could now be filled with team brackets ahead of the university football cup.
It is interesting what sports can tell you about a country. I have been intrigued by the contrast between the Premiership (the top football league in England) and the NFL - and what it might say about attitudes to competition and foreign investment. These are not the things that you capture in the classic measures such as the World Bank's Doing Business report.
You might reasonably expect the NFL to epitomise testosterone-fuelled competition. But it feels like 1950s dirigism next to the Premiership's Gilded Age capitalism. For one thing, there is promotion and relegation between leagues in the UK: come in the bottom three and you go down a league. If you have a bad season in the NFL you live to fight another season.
Another difference is that different teams win the Super Bowl. Unfettered capitalism leads to monopoly, yes? Only three teams have won the Premiership since 1995. In the past three seasons (and probably this season) the same four teams in the Premiership finished in the first four positions. There is remarkably little criticism about this. In the NFL the worst teams get to pick the best college players. There's none of that redistribution in the Premiership.
And where does the money come from? Of the top four Premiership teams, Americans majority own Liverpool and Manchester United, a Russian owns Chelsea, with a US-Russian bidding war rumoured for Arsenal. This state of affairs is not universally popular. But it's hard to envisage foreign ownership of the biggest NFL franchises in the first place.
Life can mirror sport. The success of the City of London since the Big Bang has been characterised as the Wimbledon effect: great tournament, few great domestic players. You see the same approach in Sunday's Boat Race. Undergraduates and postgraduates competed freely for places in the crews. The closest US equivalents - the Harvard-Yale race or the Eastern Sprints - are restricted to undergraduates. The result is an Oxford crew with an average age of 25 and five Olympians on board racing a Cambridge crew with an average age of 24. But it makes for great, multinational crews, from which the relatively few British participants that make the grade consistently step up to the very successful British Olympic rowing programme. And, having the same two crews each year, it also makes for easier bracket predictions.
I have been looking at the recent Gallup poll on trade. The interesting story to write on US public attitudes to trade is that support is falling off a cliff and the US is about to pull up the gangplank to global trade. So the Gallup headline - 'Americans more negative than positive about foreign trade' - writes itself. But I have a couple of observations on the data which do not fit well within the narrative of a calamitous and unprecedented collapse in US support for trade: first, this year's figures (47% seeing trade as an opportunity, 44% as a threat) are almost exactly the same as in President Clinton's first year (46% and 44% respectively); second, support for trade improved significantly between 2007 and 2008, from negative 11 to negative 3. As an aside, it is also worth noting the exquisite mercantilist framing of the question: 'do you see foreign trade more ... as an opportunity for economic growth through increased American exports or a threat to the economy from foreign imports'. Under this formulation, bananas and coffee beans - both barely produced in the US - are somehow an economic threat. The logical conclusion of the question is that the best thing for the US is to export as much as possible and import nothing, which is a self-evident nonsense.
But it is notable how international trade, which is seen as being at the centre of 'Anglo-Saxon capitalism', has so little support in the US compared to other countries. The US public is consistently among the most suspicious of the effects of trade. See, for example, page 19 of the Pew Global Attitudes survey from last June, where US support for trade stood at 55%, compared to 79% in France (a country which is often rolled out as being instinctively anti-trade). Quite why US support for international trade is so low is a puzzle. Has America, which maintained high tariffs throughout the nineteenth century, retained a Hamiltonian appreciation for the benefits of protection - in which case, why have other countries which followed a similar developmental pattern not? Has trade had more baleful impacts on the US economy than on others - in which case, why has this effect been felt most keenly in the US, with a ratio of trade volume to GDP much lower than most other developed countries? Is free trade tainted by being a relatively partisan issue in Washington - in which case, why is there so little distance between the views of those polled who identify themselves as Democrat or Republican? Do supporters of international trade talk the wrong language - in which case, how has the dialogue been so different in other countries? Is it because employers provide many benefits provided by the state in other countries, making the loss of a job more traumatic - in which case, why is it international trade, which is estimated to cause under 5% of American job losses (and create many more), that bears so much of the criticism? I think this is a fascinating topic.
Professor Doug Irwin notes that before the second world war most self-respecting US Congressmen prefaced comments on international trade with the proviso 'I'm not a free trader but ...' and that this switched during the 1950s to 'I'm not a protectionist but ...'. I think and hope that we are some way from the first proviso coming back into fashion (though the last few months have shaken the firmness of my conviction on that). In that regard the Gallup poll is relatively reassuring.
Gordon Brown's speech on the global economy yesterday contained a very interesting section on the dangers of deglobilisation (it starts at 11.30 on the video clip, if you don't want to watch the whole thing).
The traditional worry is that during tough economic times trade and investment barriers are put up - this was what the G20 leaders sought to address through a standstill clause in the G20 Washington Summit communiqué in November. The WTO has been collecting data in the interim looking at recent instances of countries raising barriers: the 'periodic reports on global trade trends' referred to by Pascal Lamy during a speech at the Department of International Development last week. The hope is that scrutiny and some powerful arguments about the negative economic and public policy impacts of traditional protectionist measures will stop them in their tracks.
A different, and more subtle, threat is of government and corporate behaviours that, taken together, have the potential to balkanize the global economy. The most stark example is in capital markets, where financial markets (often nudged this way by politicians) have retrenched to the familiarity of their home markets. In the most globilised of sectors, countries' borders matter again. Similarly, as governments put in place fiscal stimulus packages and intervene to support individual sectors, the focus will inevitably be on the domestic market. Unfortunately you can easily imagine the net effect being the partial fragmentation of the global economy without governments touching tariffs on foreign investment rules. Food for thought in the snowfields of Davos and during the run-up to the London G20 Summit in April.
Happy New Year. I hope that anyone lucky enough to be in Italy over the holiday period was not badly affected by the Pineapple Strike. In case you missed it, the Italian Agriculture Minister Luca Zaia announced the Strike at a news conference on 16 December. In place of pineapples he encouraged Italians to purchase fruits produced in Italy, together with the traditional Italian Christmas products of zampone (pig's trotter stuffed with pork meat) and cotechino (pork sausage). I have an Italian friend who loves Hawaiian pizza. I couldn't help thinking of the mental anguish that the Strike would cause this Italian patriot and pineapple lover.
Having done my first blog post on the subject of consumer patriotism, it feels nostalgic to return to the same topic to kick off 2009. Minister Zaia's laid out three reasons for seasonal Italian consumer patriotism. First, pineapples are a 'symbol of everything that is not Italian'. Second, foreign producers of pineapples may use carcinogenic insecticides. Third, he was concerned about the environmental impact of shipping pineapples over long distances.
From a consumer's point of view, trade is at heart about introducing variety. In essence it is all about buying symbols of other countries. I like to buy seasonal fruits and I am a sucker for farmers' markers - but a holiday period consuming only British fruit would be a drab affair. From my point of view, being able to buy a ripe pineapple at any time of the year is one of the luxuries that quick transport and international trade offers. And it is often developing countries that are in the best position to provide these out-of-season luxuries. Italian pineapple imports were worth Î73 million in 2007. Two of the biggest exporters of pineapples are Cote D'Ivoire and The Philippines. So long as the producers there are producing safe products, I don't think that we should be discouraging consumption of their pineapples.
Plus these luxuries needn't be viewed as guilty pleasures, even taking into account the fact that they are often transported over large distances. Calculating the carbon footprint of a product is far more complicated than simply looking at the 'food miles' that a product has travelled. A study by Lincoln University looked at the carbon footprint of producing and transporting New Zealand lamb versus Welsh lamb. I don't agree with all the findings of the study - but it illustrates that how far a product has been transported often has much less impact on its overall carbon footprint than how it was produced. In fact, whether you drove or walked to the store to buy your pineapple may turn out to be a bigger factor in its overall carbon footprint than how far it travelled to the store.
After nearly five years working on the latest round of WTO negotiations – the Doha Development Agenda - I thought I had seen every possible typo connected with the Qatari capital. Not so. A recent email produced the most amusing so far: the ‘Dodo Round’. Some would argue that is an apt description. They'd argue that Doha is a negotiation that has failed to get off the ground or evolve since its launch in 2001 to address today’s problems and is heading for extinction. Some see Doha destined to become a historical curio like the famous flightless bird of Mauritius – the only multilateral trade round since the launch of the GATT in 1948 to fail to conclude.
But the Dodo is making a comeback. Pressure is building for a meeting of Ministers in Geneva within the next two weeks, designed to agree a deal on agriculture and industrial goods. The reaction on the Hill and in the DC trade community? “Yeah right”. But Washington has consistently been down on the Doha Round. In July before the last Doha Ministerial meeting, few in Washington gave the meeting any chance of success, at the same time as the European Commission’s chief agriculture negotiator was buying a box of cigars to share around in Geneva in anticipation of an agreement. The result? A tantalizing near-miss in Geneva - and shock in Washington that a deal had so nearly been done.
July now seems a lifetime away. We have been through a financial and economic maelstrom. The Dow at the end of July stood at 11,500. It is now at 8,500. Since then Leaders at both the G20 and APEC summits have put their weight behind a Doha deal this year. The political wind is now behind the negotiation. This has elicited warnings to the US Administration both from business groups and Congress to hold firm and press other countries harder. So it is worth recalling five reasons why we all need this deal and need it now.
First. A deal will give a boost to the global economy during difficult times measured in hundreds of billions of dollars. Pascal Lamy, the WTO Director-General, argues that the deal on the table is worth considerably more than the Uruguay Round. Yes, its impact could have been bigger and we need to keep pressing for ambition. Yes, its effects won’t be instantaneous. But it is well worth having. And systemic arguments for a deal are even stronger than any dollar-and-cent valuation of new market access.
Second, it will bind tariffs at low levels. At the moment there is often a significant gap between bound and applied tariffs. Getting rid of that differential has real value. The provisional result of a study by the International Food Policy Research Institute is that the difference in trade volume between completing a Doha deal and countries putting tariffs back up to bound levels would be $2,110 bn. To put that figure in context, the total US trade volume (imports and exports) last year was $3,100 bn. Binding tariffs is the insurance policy against tariffs sliding back up – which is a real risk in today’s economic climate.
Third. A deal will cement the status of the WTO. The current financial crisis has underlined the need for effective global governance. The WTO isn’t perfect but in many ways it is an exemplar for other international institutions. India and Brazil sit shoulder to shoulder with the EU and US in the inner negotiating groups. Each WTO Member has a real stake. The WTO allows countries to either negotiate or litigate away problems. If the negotiation channel fails, how viable is the WTO?
Fourth. If not now, when? Why are the chances of a deal any better in, say, two years’ time? The word from Geneva is that we have got about as far as we can get at a technical level. What are left are the big political calls. International deals get done because of political attention and leadership. We have it now.
Fifth. What happens if we don’t do a deal? A proliferation of free trade agreements. The worst distortions in the global trading system, such as agricultural subsidies, won’t be touched. And the poorest counties – for whom this round was started – pay the price.
One of the great things about autumn in the US as a parent of young children is the steady flow of diversions. October is all about the lead up to Halloween. November is all about Thanksgiving. December is all about the holidays. So, as we approach the end of November, the kids' questions about Santa Claus are just round the corner.
As everyone knows, Santa Claus has helpful elves that make all the presents for all the children around the world, for Santa to distribute on one frantic chimney-to-chimney delivery. This raises several problems, including why a number of the presents my children will receive will have 'Made in USA' or 'Made in China' printed on them. I think I have the answer to this particular problem: it's comparative advantage.
I have no doubt that Santa's elves could make anything and I assume that they could make it all better and cheaper than anyone else. They have absolute advantage in producing all goods. But does it follow that it makes sense for them to produce all the presents that Santa will give out? In a word, no.
The elves will be much better at making some things than anybody else (let's say wooden trains), but they will be only a little better than other people at producing other things (let's say board games and chocolate). The elves have a comparative advantage in producing wooden trains. If they specialise in producing wooden trains, they can trade the excess production - which everyone else will value highly because they can't do it as well - for lots of board games and chocolate that they can make better, but only a little better, than other producers. Specialisation in goods where they have comparative advantage will be far more efficient. It will take the elves less time to put together the full order list for Santa, allowing them more time to enjoy the Northern Lights. And it will provide an explanation for why the chocolate in the stocking will have 'Made in the USA' printed on it.
It may sound inconsequential but it is a powerful - and comforting - real-world conclusion. Is China going to end up manufacturing everything? No. Is Brazil going to dominate global markets for all agricultural produce? No.
Comparative advantage was first set out by Robert Torrens in an essay on the Corn Laws in 1815. It concluded that Britain - at the time the emerging 'workshop of the world' - should buy wheat from Poland, even if a bushel could be produced cheaper in Britain than Poland. David Ricardo then took the plaudits for comparative advantage in his Principles of Political Economy in 1817. For a good contemporary exploration of comparative advantage, see Tim Harford's fun Undercover Economist.
As we all wrestle with policy responses to the financial crisis, one of the dangers is that failings in financial regulation are somehow seen as repudiating the economic and philosophical bases of Anglo-Saxon capitalism. But we need to be careful. How to regulate structured financial products - which, at least in their recent scope, are a new phenomenon - is a very different question from whether to keep borders open to international trade. The latter is an old debate and one that free traders feel that they have won twice before - first in the UK in the 1840s and second after the second world war. Comparisons between the current times and the Great Depression are already starting to feel hackneyed. But it is worth remembering how border restrictions ushered in by the Smoot-Hawley Tariff Act of 1930 stemmed trade flows and deepened the recession. US exports plummeted from $5bn in 1929 to $1.6bn in 1933.
I spoke with someone from the WTO Secretariat recently about my concerns of brand contamination between the financial crisis and trade liberalisation. His view was that, since its inception, the GATT / WTO has been about setting parameters for international trade, with many painful negotiations over the appropriate rules of the multilateral trade road, rather than letting unregulated markets rip.
Trade is not going to be at the forefront of this week's G20 Summit in Washington. But it will be on the agenda. And rightly so, given the importance of maintaining open markets in propelling us out of the economic downturn. Leaders can send a strong signal - to a sceptical world and to their own sceptical bureaucracies - about the importance of locking in a deal on the Doha Development Agenda this year. Some doubt how much good another exhortation on Doha can do. However, we were tantalisingly close to a deal in July and one thing that the intervening period has impressed on me is the value of tariffs being bound in Geneva. Reducing the level of bound tariffs has real value that we overlooked when the economic going was good. It is our insurance policy against protectionism. Senator Reed Smoot and Representative Willis Hawley didn't have the restraint of the WTO.
I am just back from a study tour looking at the enforcement of intellectual property rights (IPR) in LA. This was a mix of the old (a bust on a stall in Santee Alley selling fake Chanel bags) and the new (talking to the studios about how they plan to compete with peer-to-peer file sharing).
I'm not sure if it was because the tour was organised by the French Embassy but fake Chanel bags ended up being a theme of the trip. We witnessed boxes of Chanel fakes (including some baseball caps whose bad taste would cause heart attacks at Chanel Design Central) being opened by Customs and Border Protection agents at the LA-Long Beach port complex. The scale of the challenge they face is immense - the port handles 5 million containers annually, which represent 45% of the US total and are worth $350 billion in two-way trade flows. To put that figure in context, it is roughly the same as total EU imports of goods into the US last year. Roughly $70 million of counterfeit merchandise was intercepted at the port last year. The most seized item? Shoes from China.
Two other themes were the diversification of counterfeited goods and the increasing participation of organised crime. The attractions of counterfeiting are that margins can be big and the punishment tends to be probation rather than jail time (I suppose reflecting a misguided societal view that IPR infringement is a victimless crime). It's an issue that we're taking very seriously in the UK. To take one example, our Fake Free London initiative aims for London to be free of counterfeits by the 2012 Olympics. But of all the items on display in LA, the one that caught my eye was not a straight counterfeit at all: a (working) branded hi-liter pen concealing a crack pipe.
The IPR challenge to the entertainment industry is well documented. The Motion Picture Association reckon that piracy led to a $18 billion of lost revenue for the industry in 2005. This is about much more than dodgy DVDs (though, incidently, the MPA reckon that it takes pirates about 13 hours from infringement to having mass-produced counterfeit DVDs on sale). Fast, cheap broadband access is one of the great benefits of our age - but also a real headache for the studios. They are looking to work with ISPs to address endemic peer-to-peer file sharing. The agreement between rights-holders and ISPs brokered by the UK government earlier this year is one promising approach - we are currently consulting on legislative options to address illicit P2P file sharing as well. The studios are also looking to compete with pirates in the content market, through products such as high quality video on demand. As a technology late-adopter, video on demand will be relevant for me in about 2015.
My flippant comment on the financial crisis is that it has reinforced for me the different uses of the word 'quite' in American English and British English. Let me explain.
My dictionary provides two meanings of 'quite' that are essentially mutually incompatible. A first meaning is 'completely, fully, entirely'. This is the almost universal American usage and it is in this sense that people have been describing the financial crisis as 'quite worrying'. 'Quite worrying' is interchangeable with 'very worrying'.
But in British usage, 'quite', when used as an adverb or adjective, adopts a second, different meaning: 'somewhat, moderately, fairly'. 'Quite worrying' is less worrying than 'worrying', which is less worrying than 'very worrying'. So natural British responses to the statement that the financial crisis is 'quite worrying' are that the spokesman (a) is badly underestimating how bad the situation is or (b) has a dry sense of humour or (c) is deliberately using the power of understatement.
This paper asks why the markets reacted so strongly to Greenspan's comments about 'irrational exuberance' in 1996 but didn't move when Bernanke said in testimony to Congress in 2006 that he was 'quite concerned about the intermediate to long-term federal budget outlook'. The answer may be global misunderstanding of what 'quite' meant. My experience is that when you work in an environment with both British and American employees, it's best to steer clear of the phrase 'quite good' altogether.