friedrich naumann foundation for freedom, european ... · barriers to trade call for reasons, free...

KOOTHS | How to steer trade policy so that it mutually benefits economies and societies globally?

How to steer trade policy so that it mutually benefits economies and societies globally?

Friedrich Naumann Foundation for Freedom, European Dialogue Programme | Online hackathon, 19 June 2020Enable Economy Europe21 ! Re-imagine Social Market Economy

Stefan KoothsForecasting Center


Kiel Institute for the World Economy (est. 1914)

2


Voluntary exchange is a positive sum game.

Barriers to trade call for reasons, free trade doesn’t.

The burden of proof

3


Barriers to trade: (Much) More than just tariffs

Quelle: WTO, World Trade Statistical Review 2016.

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Capital controls.

Protectionism: Not just a matter of trade

5


Block building: U.S. / China / EUthinking from the 20th century

Europe’s true source of power: Diversitythinking for the 21st century

Power politics vs. smart politics

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Neomercantilism:

Protectionism + strategic industrial policy

Double pack of interventionism

7


Protectionism

“Economic sovereignty”

Beware of new narratives

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Social coordination systems

Radical simplification Accepting complexity

Organization (Taxis)» Atavistic instincts

▪ Solidarity, altruism, commons

▪ Hierarchy, aggression against outsiders

Social warmth(stabilizing small groups)

» Constructivist rationalism

» Methodological collectivism

Socialist community(Historical determinism, design)

Spontaneous Order (Cosmos)» Abstract rules

▪ Private property, contracts, reputation

▪ Competition, exchange with foreigners

Social division of knowledge(coordinating anonymous societies)

» Critical rationalism

» Methodological individualism

Open society(Evolution, self-organization)


Mercantilist atavism: “Buy German”

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Trade surplusGDP = C + I + Ex – Im

GDP + Im = C + I + Ex

Growth via net exports: A Keynesian myth

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Wrong: A country is just like a company, only bigger.

Right: A country is a system of interwoven markets.

The fundamental mercantilist flaw

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Ricardo still applies.

Countries cannot become uncompetitive.

The fallacy of national competitiveness

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Make (= domestic production)

or

buy (= exchange with the RoW)

Peaceful sourcing of goods

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Waiting for the most sluggish camel in the caravan(WTO Doha round: launched in 2001)

Multilateralism

15


Most-favored nation treatment ≠ free trade

WTO

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Stubborn reciprocity/retorsion

Market access as a concession

Trade negotiations

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Blind spot:Relevant knowledge and rent-seeking

Optimal tariff theory

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European champions, technological sovereignty, …

High risk of system deformation

Strategic industrial policy

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System deformation by interventionism

(Democratic) State

Constitution

Economy

Competition

Inte

rve

nti

on

s

Infl

uen

ce

Interventionism

(Democratic) State

Constitution

Capitalist economy

Competition

Free market system


Unilateral free trade

Radical alternative

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▪ Level playing field for domestic and foreign firms

▪ Abolishing tariffs (independently from rest of the world)

▪ Widely accepting foreign standards

▪ Exploiting foreign subsidies

▪ Market-driven innovations/technologies

▪ Global collective goods: Border adjustment tax

Maximum competition for domestic companies

Protection of the inner competitive order

Open markets via unilateral free trade

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If goods don’t cross borders, soldiers will.

Otto M. MalleryEconomic Union and durable peace (1943)

Self-sufficiency (autarchy)


@kielinstitute

www.ifw-kiel.de

Prof. Dr. Stefan KoothsHead of Forecasting

T +49 431 8814-579F +49 431 8814-525M [email protected]

@StefanKooths


Not trivial.

Identifying the losers of globalization

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Absolute poverty almost wiped outSource: Our World in Data


Consumer perspective:Gains from global free trade

▪ Low income households: Higher expenditure share for tradable goods

▪ Global competition and division of labor make tradable goods more affordable

▪ World trade is mainly trade in mass production

Source: Fajgelbaum, P. D., & Khandelwal, A. K. (2014). Measuring the unequal gains from trade. NBER WP 20331


Working conditions are improving

0

5

10

15

20

25

30

1970 1980 1990 2000 2010

World DE

Fatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational Injuries

Annual Data (last observation: 2015). Cases per 100'000 workers .

Source: ILO; IfW calculations.

Fatal Occupational Injuries

0

1000

2000

3000

4000

5000

6000

1970 1980 1990 2000 2010

World DE

Fatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational InjuriesFatal Occupational Injuries

Annual Data (last observation: 2015). Cases per 100'000 workers .

Source: ILO; IfW calculations.

Non-fatal Occupational Injuries


Living for longer

40

45

50

55

60

65

70

75

80

85

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

World High income Middle income Low income

Annual data. Life expectancy at brith, years, total population.

Source: World Bank, World Economic Indicators; IfW calculations.

Years

Life expectancy

+19.5

+15.9

+10.1

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