Originally published on the CGS blog on December 4, 2008.
By Daniel Turner
The earlier post by Lenka Andrysova draws attention to the Nov 15 Summit about the financial crisis. While the communique issued by the summiteers sketches out useful ideas about regulating global financial institutions and reforming existing institutions such as the IMF and the World Bank, the position they took on world trade, regrettably, represents an ostrich-like “hear no evil; see no evil” stance.
Fortunately there are saner voices, and the nascent Obama administration – with its rumblings about rewarding those who create jobs and penalizing those who outsource them – has been listening. Regrettably, however, tax policies and domestic incentives are not going to correct our 7% of GDP current account deficit any time soon. The hollowing out of the US economy has been going on for too long, and is largely irreversible because our foreign trading partners now have the latest technology, supply networks that we have irretrievably lost, and labor costs that we can’t compete with. Stronger medicine is needed.
Fortunately for us, the rest of the world is equally interested in curing this crisis, and other countries may not so dogmatically opposed to the obvious medicine. The massive damage done to traditional farmers in developing economies, hurt by the world market for industrialized agricultural commodities is perhaps the most obvious example of why they are not. Now that the crisis has hit, widespread criticism of “free trade” seems likely to turn to protective action by the countries that are getting hurt (a list that certainly includes the US, despite brave words from diehard free-traders).
In addition to the WTO and NAFTA, which are household words, there are many hundreds of “free-trade” agreements worldwide; bilateral, multilateral, regional, in every shape and size. Despite hype to the contrary, all these agreements primarily serve the interests of those who push them. Free trade has worked well for our big corporations; and politicians who heed their lobbying could blithely ignore the effects of outsourcing on the American middle class because up until the recent crash there was a plentiful supply of credit to offset wage stagnation.
The US has become a credit junkie nation and continues to be dependent on foreigners to buy derivatives of our credit bubble. To stabilize the tottering bubble the new administration will have to figure out a way to strengthen the fundamentals of the US economy so those housing and credit card derivatives have real wage income to support them. But how is that going to work when our free trading partners can undercut us in low tech and high tech jobs alike, whether in goods or services?
The whole world needs a take a new look at this problem. It’s a global problem that needs a global solution. What we need is a multinational treaty for rational trade tariffs to replace NAFTA, the WTO and all other trade treaties we are involved with. It’s too complex a problem to solve either by negotiation or by linear algebra. The solution that occurs to me would be a global “flexible trade” treaty, which would require participating nations to engage in an annual ritual of simultaneous tariff adjustments, illustratively consisting of this process:
- Submission of a proposed set of import tariffs to be imposed at its borders by each participating nation
- An optimization/simulation of world GDP which would take all submitted tariff-sets and run them through a series of iterations. Each iteration would introduce trial adjustments to individual tariffs to move the optimization along. (Perhaps run by an international team of economists: recognized experts on the board of advisors, and staff economists, data managers, and technicians supplied by the participating countries).
- The results of the simulation distributed to each participant would include a suggested set of modifications to the originally submitted set, and explanations of why the suggestions might be considered.
- Repeat steps 1 through 3 another time (possibly 2 more times) to give participating nations a chance to rethink their priorities in light of the simulation.
- Have a general meeting of all participants to approve the tariffs for the coming year, grant exceptions, admit new members…etc.
The procedure outlined above would allow for flexibility in line with national priorities, but would also impose the discipline of global optimization. It would also allow for change over time, as nations adjust their protection-priorities in line with actual economic progress. This annual ritual would deliver help where help is needed, and do it quickly, so long as a critical mass of nations can be persuaded to participate.
The world needs a quick fix, because if the credit crunch continues to spiral down the US will surely enter a ’30s style depression, and the developing economies of the world will see their export markets collapse. The prospective damage would take decades to repair. The US is the nation that needs the “fix” the most. And luckily – or ironically – many other nations still look to us for leadership, and to our tottering dollar for refuge in this time of panic. There is no time to be lost.
Daniel Turner, the author of this blog piece, is a former economic consultant and an occasional attender at meetings of the Philadelphia chapter of CGS.
