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by John Brian Shannon | January 17, 2017
Prime Minister Theresa May says that Britain must be a free trading nation to boost the UK economy and to better serve the aspirations of millions of Britons.
And Britain’s leader is correct, as history has proven that free trading nations outperform non-free-trading nations. From the seafaring Phoenicians of classical antiquity to the former British colony that became a superpower called the United States of America; Free trade and hard work have built our shared civilization, and any country that withdrew from free trade or liberalized trade agreements, consequently declined.
READ: Between Free Trade and Protectionism: Strategic Trade Policy and a Theory of Corporate Trade Demands by Helen V. Milner and David B. Yoffie | Published by MIT Press
That’s not to say that other economic practices don’t have merit, because they do. However, a group of non-free-trade nations will always be surpassed by a comparable group of free trade nations — due to the symbiotic nature of free trading relationships which produce small but measurable amounts of synergy that accumulate over time.
It’s the easier access to raw materials, the lower labour costs, and the ability to access larger export markets that make free trade work so well, but the ‘icing on the cake’ is the synergy produced by the symbiotic relationships which aggregate and thereby increase corporate profits and investor dividends that are often reinvested in the growing corporation. Over time, all this synergistic activity results in far greater outcomes than otherwise would’ve been the case.
A perceived problem occurs when vast disparities are present, such as when one nation is blessed with abundant raw resources allowing it to basically dig money out of the ground which eventually accumulates into billions or even trillions of dollars, while another country in the same trading bloc may have few natural resources.
As long as all partners within the trading bloc have equal access to those raw resources, such problems are likely to be nothing more than minor jealousies.
Countries like the United States, Canada, Norway, Saudi Arabia and the United Arab Emirates have vast petroleum reserves, and importantly, good economic stewardship — which allowed them both rapid growth for the economy and a high standard of living for their citizens. It’s telling to note they are free trading nations — while other countries blessed with large petroleum reserves but restrictive international trading arrangements, haven’t prospered. Venezuela (the country with the world’s largest proved oil reserves) along with Libya and Nigeria, have poorer development due to their historically somewhat less than free trade practices. For economists, those nations serve as a warning to politicians considering the adoption of less liberal trade policies or outright protectionism.
Such disparities between nations, unless handled carefully, can result in explosive economic and political consequences.
READ: What does Free Trade mean? | Investopedia
Globalization: Lower-priced goods, but fewer jobs
It’s easy for some to forget that free trade and globalization are two different things. Free trade relates to the removal of tariffs, or at least the standardization of low tariff rates between member nations of the same trading bloc, while globalization refers to a highly interconnected political and economic world of which trade of any kind, whether free or not, is merely part of a large picture.
Those who feel left behind by globalization (and there are millions) tend to blame free trade, when in fact it was free trade that created a booming global economy from 1982 through 2007 (and a somewhat less booming economy) from 2012 through 2016.
Led by global elites, the rush to create high growth and high GDP meant that quality of life fell steeply for millions of Westerners for the first time since WWII due to the offshoring of Western jobs to countries with lower labour costs and non-existent environmental regulations.
READ: You Can’t Feed a Family With G.D.P. | New York Times
It’s Not All Bad
Westerners have enjoyed unprecedented low-cost, quality goods manufactured in other countries.
Two examples of this are; 1) the Apple iPhone, which, if manufactured in the United States would have cost $2800. each, instead of the typical $650.-$950. price range. The iPhone wouldn’t have ever seen production if it hadn’t been manufactured in Asia. Over one billion have been sold since the first iPhone hit the market. And; 2) almost every computer chip in the world was manufactured in Taiwan, an industrious country with a very diligent workforce, but few natural resources. Computer chips have cost an average of $40. since Taiwan’s entry into the semi-conductor business, but if manufactured in the United States those chips would’ve cost hundreds of dollars each.
While low-cost goods are welcome in the West, people in the bottom quintiles now wish for a return to high paying employment and would gladly forego low-priced goods.
Which is exactly what the election of Donald Trump is all about. ‘Cheap goods are great, but we’d rather have jobs!’ — seems to be the main message there.
It’s difficult to blame those who harbour such resentments when 3/5ths of the population are doing less well, while only 2/5ths feel they have progressed in recent years.
Yet to blame the very free trade agreements that brought wealth to Western nations displays a lack of understanding of how globalization works vs. how free trade agreements work.
Free trade creates additional economic activity (with many virtuous cycles, which are always a good thing) while unrestricted globalization (under existing personal tax laws) rewards the top-two quintiles at the expense of the bottom-three quintiles. And it’s this fundamental misunderstanding which have people in an anti-free-trade mood — when instead, they should be protesting against global elites, unfettered globalization, and crass-and-uncaring politicians.
Had the global elites applied as much effort to ensuring that globalization worked for every economic quintile instead of the top-two quintiles exclusively, movements such as Occupy Wall Street along with the general disenchantment voiced by the public against politicians and economists wouldn’t have materialized. Ever.
When it works for everyone, there’s no complaining.
READ: In Defense of Globalization | Project Syndicate
Free Trade with a Standardized and Reciprocal Tariff Regime – Instead of Unfettered Globalization
PM Theresa May and Chancellor Philip Hammond should work to obtain a mutually-beneficial free trade agreement between all Commonwealth countries as part of a Tier 1 trade accord.
Such an agreement should ensure there are no tariffs, levies, nor other trade impediments — save for a highly standardized and reciprocal 5% tariff on all goods — except books (in any form) or those medicines that actually save lives, because principles do matter. A more educated and healthier Commonwealth are desirable outcomes. No VAT taxes or tariffs should be levied on books or life-saving medicines, ever. Anywhere on the planet, IMHO.
Why the 5% Tariff?
What the 5% tariff would do for all signatory countries is to pay for upgraded port facilities and enhanced security at ports, railways, and for cargo ships at sea.
Why the 10% Tariff?
A Tier 2 trade accord should be negotiated with nations that aren’t Commonwealth members with a standardized and reciprocal tariff of 10% — except for books and life-saving medicines which should be tariff-free and VAT-free in every case. As long as the trade partners agree to standardized and reciprocal tariffs, such tariffs won’t break WTO tariff rules. And such revenue could enhance port security, of course, but could also be used to pay for additional infrastructure programmes to put millions of workers back on the job.
Why the 25% Tariff?
Finally, a Tier 3 trading scheme could be created for those nations that won’t agree to a standardized list of tariffable items at a standardized and reciprocal rate, and won’t agree to not tariff books and life-saving medicines, and that tariff could be 25% on all imported items until the day arrives that country begins to abide by the Tier 2 trading rules.
In all three scenarios it puts the UK government firmly in the drivers’ seat in regards to imported goods and guides UK trading partners towards Tier 2, or even Tier 1 status.
The goal is to arrive at a situation whereby every nation willingly decides to join The Commonwealth in order to gain free trading status with the Commonwealth and agrees to a nominal, standardized, and reciprocal 5% tariff regime on every good except books and life-saving medicines.
It is still free trade, but with a nominal, built-in tariff designed to enhance port facilities and streamline security in all partner nations.
What to do with the revenue generated by such tariffs?
The main point is to upgrade existing port facilities, to increase security at Britain’s ports, and at reciprocal trade partner ports to ensure the security of ships at sea and the thousands of kilometres of rail lines that carry freight.
Any remaining tariff revenue could be used to soften the economic blows to those in the bottom-two quintiles who have suffered quite enough over the past 16 years.
Whether used to boost social welfare rates (good) or to boost national infrastructure spending (better) or both (best) it will be money well spent, and it would be revenue that arrived in the government hand via imported goods.
Which seems fitting, doesn’t it?
by John Brian Shannon | January 1, 2017
Like all developed nations, Britain has a government-backed unemployment insurance scheme where workers pay fractional amounts of every pound sterling they earn to a national unemployment insurance fund during their working years.
Consequently, whenever a British worker becomes unemployed due to lay-off, that worker begins to collect unemployment insurance which pays them a portion of the wage they earned while they were employed, as a weekly benefit.
It’s a system that prevents millions of workers from experiencing the worst financial duress during periods of unemployment, or from spending their life savings during extended periods of unemployment.
In the interests of helping British workers, were the British government to pass legislation requiring the national unemployment insurance scheme to pay British workers a full 90% of a worker’s normal wage during his/her unemployment, there would be howls of protest from various quarters and the present unemployment insurance premiums paid by British workers would rise dramatically.
Though such legislation would benefit hundreds of thousands or even millions of British workers (at any given time there are likely to be 1.1 to 2.0 million unemployed people in the UK) many more millions of citizens would rail against such a plan — even though (unbeknownst to them) their own employer might be writing out their pink slip at this very moment. Which is to say, you never know what the future holds.
Almost everyone becomes unemployed at some point in their life. For seasonal workers it can be a few weeks to a few months every year. And it can occur suddenly, to anyone.
But none of the foregoing precludes the British government from passing legislation allowing private insurance companies to sell optional, additional, private unemployment insurance coverage to workers — over and above the national unemployment insurance scheme which pays only a small portion of a worker’s wage as benefits during times of unemployment.
In the interests of writing ‘a simple blog’ instead of ‘a large book’ I have dramatically simplified the Swedish example below, as it could be a complicated explanation, as different plans are offered by different companies over and above the legal minimums required by Swedish labour law (2007)
In Sweden, beyond what is mandated by Swedish law to be paid to workers during periods of unemployment (80% of the worker’s previous employment income) workers can buy any amount of optional, additional, private unemployment insurance for any amount of coverage (up to 99% of their normal wage) and as the insurance premiums are automatically deducted from their monthly wage, there’s no need for them to worry about forgetting to pay their private unemployment insurance premium payments.
- To provide a hypothetical example, Swedes can opt to pay the equivalent of one cent per dollar while employed to the private unemployment insurance provider, allowing them to receive up to 90% of their normal pay during unemployment
- Again, (a hypothetical example) to move up to 99% coverage, Swedes can choose to pay the equivalent of two cents per dollar.
It should be noted that actuaries for each private insurance company choose their particular factors, meaning that these things are never calculated by the equivalent of exactly one or two cents, etc. but rather by fractions of cents.
NOTE: In Sweden, the private insurers pay on a weekly schedule due to decades-long tradition there. Also, the Swedish government don’t care where private insurers are investing unemployment insurance premium revenues, as long as every unemployed worker gets his/her payments on time.
In Canada, a simple to understand and administer unemployment insurance system (called EI) provides government unemployment insurance that pays workers some 66% of their previous wage after getting laid-off (but not fired) from their job.
In Canada, both employers and employees contribute to the EU scheme and the per dollar contributions are set at a high enough rate to allow the entire scheme to earn a small profit for the government. In fact, Canada has again revised the rate downward as the scheme was too profitable! (It’s the second time in recent years that the rate has been revised downward as the entire EI scheme was embarrassingly profitable for the Canadian government)
It would be so easy for private companies in North America to offer optional, additional unemployment insurance coverage for only pennies on the dollar.
In fact, there has been some baby-steps toward that goal in the U.S. However, in the United States, optional, additional, private unemployment insurance coverage is a new thing, consequently, insurance companies are extremely cautious, are charging high rates, and have few applicants. At least until they get some experience with the new-ish business model.
For Canadian and U.S. insurance companies, it would be simple to add optional, additional, private unemployment insurance coverage (on top of the government unemployment insurance scheme that usually calculates benefits based on 66% of the worker’s previous wage) thereby allowing workers to top-up their unemployment insurance coverage at their discretion — to 80%, 90%, or even 99% of their previous wage. As each worker’s financial situation is different it must be the workers’ decision how much additional insurance coverage they purchase.
It might cost 1 or 2 cents on the dollar for each worker to obtain such additional coverage for themselves during periods of unemployment. But in an era when it seems everyone is spending every dollar they earn just to stay afloat, it makes sense to boost unemployment insurance benefits up to 99% of a worker’s previous wage when combined with the government benefit, and to do so via private insurers so that governments don’t need to spend more on unemployed workers. And all of that for only pennies on the dollar.
At first blush, workers might ask; ‘Why would a company want to sell additional unemployment insurance to workers over and above the national unemployment insurance plan?’
And the answer is; It’s profitable for them for two reasons.
One, the worker premiums (payments) allow the insurance company to make a small, but respectable profit.
Two, all the money paid to the private insurer by workers is invested in the stock market where the private insurance companies can make very significant profits.
It’s a business that allows private insurers to ‘have their cake and eat it too’ — the cake is the revenue generated via the normal payroll deductions of workers enrolled in the private insurance plan — and the icing is the revenue that private insurers earn by investing that huge pool of money in the markets. Which adds up to a great business model.
To Build a Better Britain, it behooves the UK government to allow private insurers to sell optional, additional private unemployment insurance over and above the government unemployment insurance plan, as it would allow workers (who have no control over the unemployment rate, nor of the overall economy) to continue to pay their bills on time, to live their lives normally, and to continue with their particular life plan — with much less personal upset and financial distress during periods of unemployment.
Building a Better Britain means strengthening worker supports during times of unemployment without it costing the government a single pence.
It signifies responsible government that places the needs of workers and their families at a higher level, while concomitantly creating a new, useful, and valuable product for British insurers to sell, thereby adding billions of pounds sterling every month to the London financial sector.
See, it really is ‘Win-Win’ when government places the needs of workers and their families first.
by John Brian Shannon | November 29, 2016
Some things are expected, and some things sure aren’t. And one of the things that wasn’t expected even by the most vociferous Brexiteers prior to the June 23 referendum, was the strength of the UK economy.
In the run-up to the referendum, Bremainers used the fear of an economic crash in the UK to good effect, lowering support for Brexit from a high of almost 70% down to 52% in the final two weeks of the campaign.
Even so, Britons ‘knowing’ in their hearts there would be high economic costs to exit the EU (because famous Op/Ed journalists told them so) they still voted for more democracy, more sovereignty, and more control over immigration
The latest OECD report, informs us that GDP growth in the UK next year will be a healthy 2% — beating major Western and developing nation economies, and the following year is estimated to be in the 1.5% range. Not bad, considering the doom that was supposed to be upon us and considering that the OECD itself had earlier predicted UK growth to be at 1.5% and 1.2% (at best) over the same two-year period.
Sure, some things need to be carefully navigated. Raising the minimum wage for UK workers over age 25 (called The National Living Wage) could be an additional cost for some employers and could thereby increase the unemployment rate among workers. But it’s an overstatement to say that could happen in a growing economy however, if the economy begins to contract it becomes incrementally more serious.
Something else that bears watching is the fall in the value of the pound — which is seen as a desirable thing by economists as it increases exports in almost every country where currency devaluation has ever occurred — but if it doesn’t happen, a speedy remedy must be found. A falling currency with no appreciable increase in exports has no value at all, and only serves to make foreign goods and foreign travel for Britons, more expensive. Government intervention must therefore be instant and right on target in order to rectify the problem.
The UK economy is largely service based (due to the historical high valuation of the British pound) and with a falling pound manufacturing exports should rise in tandem with the falling currency (with plenty of lag time, as it isn’t an instant process) yet if it carries on for too many months, government must intervene to help exporters.
Help is not ‘help’ unless it is actually help.
Providing the right kind of assistance to British manufacturers is key here. There’s no use having the international trade office providing help to access foreign markets if transportation bottlenecks are the problem! Likewise, if limited access to rare-earth metals is the thing restricting manufacturers, lowering the corporate tax rate won’t help.
It’s about listening carefully to the needs of exporters
It’s about meeting every manufacturing CEO and giving them a full and fair hearing in regards to their corporate needs. And then, solving the problems surrounding their inability to export in huge volumes.
It’s doubtful that a one-size-fits-all solution is going to work in Britain’s case. It’s likely that a range of issues need to be addressed. Certainly, companies have a different challenges. For example, some have never exported railway steel (due to the historically high pound) while others that export designer clothing (the high pound just isn’t a factor in this particular market) but face competition from nations which allow ‘knock-offs’ of Britain’s famous clothing brands.
In previous decades, governments threw money at corporations or give them massive tax breaks to allow them to take care of the problems, themselves. But those days are past.
In our time, governments simply don’t have multi-billions to hand to industry as the massive economic growth that was a consequence of massive population increases (courtesy of the baby-boom generation) are long past — and massive corporate tax breaks just aren’t possible as the present corporate tax rates can only be termed ‘marginal’ compared to the ‘heavy’ corporate tax rates of the 1950’s – 1990’s.
All of this means that the British government must begin to see UK companies as ‘part of the solution’ to Britain’s economic future as opposed to ‘part of the problem’ — which is how the corporate world was viewed by government in the pre-2000 era.
High growth is a wonderful thing for senior executives, it’s a great thing for a sitting government, but it means the people in the bottom-three quintiles face ever-lower wages, more unemployment, resulting in a lowered standard of living for those citizens. And let’s not forget, lower standards of living directly and always equate to higher healthcare costs so there’s no savings anyway. At least, not for governments or families.
While the days of fixing everything with one silver bullet are over, there is still plenty the UK government can do to boost GDP; By assisting manufacturers to re-learn how to export and find new markets, helping industry to boost productivity by redirecting education towards the always changing needs of industry, by providing additional R&D tax breaks for companies — and to provide decent jobs for those left behind via massive and ongoing infrastructure spending programmes, rather than have them rely on eternal government support.
It’s clear that Building a Better Britain begins and ends with Building a Better Economy
Therefore, as important as every other matter before government is (including Brexit!) it’s all for naught if the economy begins to fail, because when the economy fails, so does industry, society, and governments, which tend to fall… hard. Just ask any former politician.