The Pin Factory Blog

They are neither our enemy nor our friend. These were the stern words of Barack Obama when asked about his attitude towards China. His view reflects wider opinion in the West; namely that the economic rise of China can only spell decline for America, Western Europe and the like. However, China's new economic status, symbolised recently by the splendour of the opening ceremony of the Olympics, isn't something to be dreaded.

In fact, the West has already benefited- the last decade of notable economic growth has been a consequence of cheaper consumer goods produced in China. Seeing the words Made in China‚ on what we buy is not the sign of unhealthy dependence, but evidence of the gains that can be realised from world trade. China is simply producing what it has the comparative advantage in.

With this new wealth expect China to become a nation of consumers: consumers who will buy goods from all over the world. The West will have a whole new market to exploit. A Chinese middle-class will drive German cars, drink French wine, watch Japanese TVs, holiday in Britain and rely on American commodities.

Furthermore, China will invest. Financial institutions that desperately need to raise money will have China as a source- the China Development Bank recently bought a stake in Barclays. Stocks, bonds, shares and other financial instruments will find capital in China.

This is a success story for China and the rest of the world. The benefits of capitalism and globalisation have helped us and will continue to do so. If only the West could be more optimistic.

A month ago, a BBC News investigation team uncovered a criminal network in West London, involved in smuggling poor, male farmers from Punjab in India into the UK. These illegal immigrants, known as faujis were given fake documents, poorly paid manual work and stationed in squalid housing. Yes, it was totally wrong to provide them with fake passports, driving licenses and Home Office registration cards. But there are other aspects of this activity where the illegality is not so obvious, and they should be further contemplated before being branded so quickly as inhumane.

Take their accommodation - the faujis are packed into houses living in poor conditions all over Southall. And their pay - they are often employed for 12-hour days, six days a week at £150, which is just over £2 an hour. In the exposé, the undercover reporter Mohammed‚ managed to work in a chip shop and on a building site flouting all safety regulations. But aren't all these circumstances better than the alternative? As rural workers in India pay, rights and living and working conditions are even worse. This is evident from the lengths they are willing to go to in order to enter Britain illegally. All the while, poverty in India is improved by the remittances of faujis to their families back home.

The UK also profits. In keeping within the laws of supply and demand, abundant labour brings down the costs of goods and services for the consumer. And with the need for manual labour taken care of, the UK can focus on becoming a knowledge-based economy.

Evidently, we need a pro-immigration policy, bringing non-zero sum consequences where both immigrants and the British benefit. The entry of 600,000 eastern Europeans since 2004 is testament to this; their role as workers and consumers has been vital to this country's growth over the last 4 years. Indeed, the Labour government's decision to open its borders when the remainder of Europe (save Ireland and Sweden) refused to, is something to be commended. Let‚s just hope it doesn‚t stop there.
 
 

As early as 1992, the Adam Smith Institute propagated the use of marketable permits for tackling high CO2 emissions (see Rethinking the Environment). This cap and trade system means that while the government has limited the overall value of emissions, firms (polluters) can trade their pollution permits. The incentive to reduce emissions is created by the cost of buying extra permits and selling your surplus if you are more efficient.

So only 13 years later, the EU entered Phase I (2005-2007) of its Emissions Trading System that sought to do just that. Over the same time period CO2 emissions in the EU rose 1.9 %. Why does the market approach appear to have failed?

Firstly, Phase I only covered a two year period; it takes time for firms to invest in more efficient methods of production and consequently reap the benefits of lower CO2 output.

Secondly, the scheme only applied to installations in the energy and industry sectors which accounted for less than half of the EU‚s emissions of CO2. In other words, the emissions trading system was not able to have its full effect.

Thirdly, the ETS was subject to lobbying and mismanagement by the EU and its member states. They allowed far too many permits to be issued, and of those only 5% were auctioned, the rest being freely allocated. This is evident in the price of allowances- from April 2006 to September 2007, it fell from •30 per tonne of CO2 to •0.10. The result: the incentive to reduce emissions vanishes.

Now in 2008 as Phase II begins, the EU has decided that it, and not the member states will allocate the emissions caps- the caps themselves will be lowered and more permits auctioned. Also, coverage of the scheme will increase to contain aluminium and ammonium producers, and, by 2010, the aviation industry. But don't hold your breath. The EU will be just as vulnerable to lobbyists as its members making overallocation just as likely. And increasing the proportion of permits auctioned from 5% to 7% is less of a step in the right direction, and more of a snail's pace.

Instead, lowering the caps to a more effective level and auctioning them all will better reflect the ideas that were suggested 16 years ago, and in the long run will help to vindicate a market based approach to the environment.

The failed Doha Round has set an uninspiring precedent for world trade policy as we encounter a global recession. The next important chapter on this matter will be the U.S. Presidential election. The McCain-Obama debate is one that divides the ASI office, but when it comes to trade, it's clear that McCain has the better policies.

Though Barack Obama asserts foreign trade is paramount to stimulating the American economy, he talks of only doing so to support American jobs. While this is an obvious attribute to desire, his populist rhetoric over the last 8 months (i.e. condemning NAFTA) leads me to believe his short-termism may shine through, and he will be too ready to adopt a protectionist and insular policy. He made this patent in the unpassed Patriot Employers Act which he co-wrote in 2007. In it, Obama attempts to use tax credits to coax American firms into increasing the ratio of workers in the US to workers outside of the US. By distorting the market, he would prevent American firms from hiring labour in countries that have the comparative advantage.

At the same time, Obama supports the subsidising of corn-based ethanol, which has been a significant factor in the escalation of food prices. John McCain, by contrast, has long been sceptical, and opposed the $300 billion farm bill approved by Congress this year. It was government intervention such as this which deterred India and China from making concessions at the Doha round after all.

McCain has even earned the praise of Karl Rove, being called ‘gutsy’ for championing the fundamentals of free trade in manufacturing states. For this principled position – at times when bashing trade would be politically expedient – McCain deserves our applause.

With political analysts already suggesting that David Cameron is a PM-in-waiting, most Brits are eager for change. A change from the stealth taxes, over-centralization and onslaught on civil liberties that have summed up Labour, and more noticeably, Gordon Brown.

Another crucial issue will be the EU. And to this, Cameron will bring change too.  Much of his policy towards this institution is to be commended. In July 2006 he helped to found the Movement for European Reform together with the Czech Civic Democrats. This will work towards the removal of protectionism (particularly dismantling the CAP) and usher in a free-trade platform that the EU no doubt needs to embrace. If they were to succeed, such reforms would not only alleviate the poverty of excluded agriculturalists but would also allow food prices to fall as supply increases (not to mention helping to reduce taxes).

So all is good? Well, up to a point. Trouble could actually stem from the deep-seated euroscepticism of many of his MPs. Their aversion to the EU will likely breed lethargy and leave the British government simply moaning about Europe without ever engaging or accomplishing significant reform. And as our report Eutopia argued, if we're going to be in the EU then we might as well fight our corner properly.

It will be interesting to see on which side of this line David Cameron decides to walk.

Hello - I’m Yohan Sanmugam and I am starting my two-week internship here at the Adam Smith Institute.

At 18 years old, I have just finished at Westminster School where I studied Maths, Further Maths, Economics, History and Spanish. Fingers crossed for results day, the 14th. In October, I will be starting my degree in Economics at Christ’s College, Cambridge. And after that I don’t know - many have warned me not to sell my soul to the City. But I am torn between that, politics and some sort of civil service job (diplomat, economist).

Outside of my core education, I would say my greatest interest is Politics, which explains why I wanted to work here and understand more about public policy. And after that, The Sopranos.