Tuesday Aug 05, 2008

The end of the deep freeze

After the two great wars (WWI and WWII) and particularly after the first one, the world went into a deep freeze over international trade. Whole sections of the world were forcefully left out of its active commercial core. Political storms divided natural trade partners and put their commerce into a deep freeze. In the new millennium, those affected have fully woken up to the grander design of the world trade. So, now, we can read the following in Financial Times ("Sino-India trade wave captures banks' attention," August 4, 2008), as a normal course of events:

Sino-Indian trade last year climbed by 56 per cent to $38.7bn, according to Chinese data, and could reach $60bn as early as this year rather than in 2010, as was previously expected.

This is still pittance compared to the major bi-party trade figures in the rest of the world but looking at the growth rate will tell you where we are heading. Will the world commercial core next shift to where it was 800 years ago?

Thursday Feb 22, 2007

Commerce and Development

In his commentary, "Competitive Cooperation" written to honor the 50th anniversary of the Treaty of Rome, the 2004 Economics Nobelist Edward C. Prescott reminds the readers of the importance of commerce in mutual economic development and growth.  

Let's review some historical facts. With the signing of the Treaty of Rome in 1957, France, Italy, Belgium, West Germany, Luxembourg and the Netherlands formed what would eventually become the European Union. For six decades prior to the treaty, those countries were about 55% as productive as the U.S. But over the following 25 years, those countries essentially caught up to the U.S. in terms of productivity.

When that historic economic treaty was signed, three countries were roughly on par with those original six -- Denmark, Ireland and the United Kingdom. However, a funny thing happened in subsequent years -- those three countries started falling behind their former peers. So in 1973 they joined the original group and their economic fortunes improved. It took time, but the U.K. now is as productive as Germany.

...And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. Recent research by my Minneapolis Fed colleagues, Lee Ohanian and Jim Schmitz, and two co-authors, shows that from 1950 to 2001, per capita GDP for Europe increased 68% relative to the U.S.; Asia increased by 244%, while Latin America decreased by 21%. This is all the more striking when we realize that Latin America's per capita GDP actually exceeded Asia's by 75% in 1950.

Perhaps, it is time for a Latin American Union.

Some nations use trade policies to punish others. Whether politically motivated or otherwise, policies that raise barriers to potentially beneficial trade or create trade zones or alliances that exclude others are ultimately doomed to lead both groups worse off. Of course, the exclusionists, when powerful, come to believe they represent the house with infinite resources in the trade gamble.

Note: In his Getting it Right: Markets and Choices in a Free Society, Robert J. Barro advances points similar to Dr. Prescott's.

Friday Jan 05, 2007

Futility of Trade Sanctions

While I cannot say I agree with his every point, Roger Howard has written a sobering article about trade sanctions for Foreign Policy in Focus.
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