Saturday, June 27, 2015

Saturday Morning Musings - political and economic ramblings

This morning began, as Saturday mornings so often do, with a media tour looking for anything special that I might write about. I must say I find the electronic media including the BBC unsatisfying. They are useful for quick scan purposes, for perhaps indicating patterns, but they do not give me enough information to properly understand.

President Obama has had rather a good week. There was the Supreme Court decision on Obamacare, the legislation on the Trans-Pacific Partnership (TPP) and now the Supreme Court ruling on gay marriage.

I looked briefly at Obamacare in the context of the 2013 US debt ceiling impasse. I found it quite complex with major roll-out problems at the time, but couldn't quite understand the venom of the debate. While Republicans are still opposed, my feeling is that with the Supreme Court Decision, sufficient time has passed that the core will survive, if with modifications to improve performance.

The TPP is more problematic. There is a lot of debate in Australia especially on the left of politics about the value of the PTT, a view apparently shared by the Australian Productivity Commission, if on different grounds. I do understand the economics of "free trade" agreements including trade diversion versus trade creation.  However, when I first wrote on this some time back in the context of the strategic objectives of Australian trade policy,  I concluded that they were overall a good thing.

I'm not so sure now. The thing that has made me pause is the sheer complexity of the recent agreements for industry and others. FTAs are meant to simplify, not make trade and investment more complex.

One of the difficulties is discussed in the Productivity Commission report, the importance of global value chains. Both trade statistics and trade analysis have been based on a simple model. I sell something to you, you buy something from me. But what happens when the things I sell to you or you buy from me have inputs from other places? More complex still, what happens when the the things that you buy from me actually have less Australian content than the things that you buy from others?

 We re still coming to grips with these issues in both statistical and policy terms. However, it is already clear that trade statistics based on value chain analysis give very different results as compared to conventional models.

The Committee for Economic Development of Australia has released a report on the Future of Australia's Work Force. One conclusion is that 40% of Australia's work force could be replaced by automation over the next ten to twenty years. While I did receive advance notice of the release of the report, I simply haven't had time to read it. However, it bears upon a conversation that has been going on over at Winton Bate's place: Will robots replace human labour and reduce real wage levels?

I don't have a clear view on this. I don't know that there is one. Robots are installed because the price of labour is higher than that of capital involved. The freed labour bids labour costs (wages) down. This increased demand for labour. The lower costs associated with the robots allows for price reductions, increasing demand. Higher demand means more production, requiring capital and labour. So where does it end?

I am out of time now. Talk to you later.


Relevant to the discussion on this post, ABC business editor Ian Verrender on Australia's Free Trade Agreements. The central point, I think, is that the FTAs are complicating, not simplifying, trade and investment.

Postscript 2

The Australian Department of Foreign Affairs and Trade has released a defence of the PTT.  



2 tanners said...

I view most TPPs to which we are party as a bad thing. This will probably be another but no-one can be sure. Its contents will remain secret until after it is approved.

We do not have the bargaining power to get a good deal, particularly in the case of multilateral negotiations. Probably the best example of this is the wine agreement with the EU, in which we were the winners, because the French were so desperate to cut a deal. There's an academic paper out, using this as the exception which actually proves the rule, about small nations negotiating with large nations or economic blocs.

Also, what is it about the TPP which is so secret that the people who are going to be affected by it are not allowed to see it?

Finally, I have relatively little confidence that trade officials who by and large have never run a trading enterprise in their lives can be relied upon to give the best advice to Government. And yet only their voice will be heard.The trade officials in question have a 100% negative batting average (again in my view) as the EU wine agreement was negotiated with the Agriculture department and I view as as losers on all the others with the exception of the NZ agreement in which we were the gorilla.

Jim Belshaw said...

The wine case is fascinating, 2t. Now I'm not sure how all the bits fit together, but the action by the French in protecting their geographical nomenclature was one of the best things that could have happened because it forced the Australian industry to a dual response: a focus on grape varieties plus our own geographical nomenclature. That created a new playing field that actually damaged the French position by diminishing their brand advantage.

On the other agreements, my understanding is that thy do involve industry consultation.

2 tanners said...

Pox, I wrote a response to this but it has gotten lost, as has the clipboard copy.

In short, I was the director for wine and brandy in Australia and saw the finale of the wine negotiations very close up. The advantages for Australia were amazing, meaning that a TPP which does not favour us will damage us. It is pretty much a zero sum game. One that we will lose without either an odd advantage or being the gorilla in the room.

Consultation is fine, but what about agreement to the final (secret) text?

Winton Bates said...

Hi Jim
I had hoped that the preferential trading arrangements would help advance a more general round of trade liberalisation. That looks like a forlorn hope. There is political and bureaucratic diversion to contend with as well as trade diversion. Trade bureaucrats can only think of one thing at a time.
We should also spare a thought for the countries that seem to get left out of these preferential deals e.g. PNG.

Jim Belshaw said...

I'm sorry that you lost your comment, 2T! What were the advantages as you saw them in wine and brandy? I agree with you on the question of relative balance, although this is usually expressed in terms of the smaller partner getting the greater benefit!

Winton, I agree with your first two sentences. PNG is interesting. Is PNG pursuing any free trade agreements?

Winton Bates said...

I don't know the answer. While working there on agricultural policy I gained the impression that PNG has not given a high priority to bilateral and regional trade negotiations. I think that priority is right. PNG has more important problems to contend with. And I think there are already enough ways for deserving PNG bureaucrats to be paid to see the world without engaging in trade diversion activities.
However, it will be unfortunate if we end up with bilateral and regional agreements that disadvantage non-signatories.

2 tanners said...

The wine agreement was driven by a French and Italian domination of the EU wine industry and a perception from them that their geographical denominations (like burgundy, or champagne) were the be-all and end-all to wine marketing. They were quite willing to offer access to Australian wine which had long been refused. Some of the claims were pretty cheeky such as claret and port, but hasn't resulted in lasting damage to Australia. The point was, the EU was under internal pressure that we could never have imposed. We had tried and failed.

The side game was also to try and put pressure on the US to do the same. Didn't work.

I'm biased, but I would argue that at that stage, Australian wines were superior to French wines *at any price point*. Maybe a $200 bottle of Grange wasn't as good as a $1000 bottle of Chateau Romany Conti, but a $34 bottle of Bin 386 would knock the pants off any $50 Burgundy.

Most consumers agreed with my point of view. Australia's exports went up by a factor of 10 in about 5 years. if I recall correctly.

Jim Belshaw said...

Thanks, Winton. I broadly agree with you last point, although trade diversion always damages somebody.

Very interesting, 2T. That confirms my understanding of what happened. The agreement did indeed prove a something of a bonanza for Australia.