Timely 'news' on trade

The Times led with a piece on its front page today about a coup for the Brexit secretary David Davis. "The Times has learnt", the piece said, "that Britain will be free to sign trade deals during the Brexit transition period without permission from the European Union after a climbdown by Brussels."

So far, so exciting. 

Except... we knew this already. Everybody knew this. No one was arguing that we couldn’t sign new deals. It was one of the key points of having a transition period after Brexit. What was argued (and what is still the case) is that they can’t come into force until we leave. 

As the Prime Minister has stated before, we leave the European Union on March 29th 2019. That’s the date that we leave the Common Commercial Policy, the Customs Union and the Single Market. The transition period that is being arranged is to allow a period of alignment on the latter two. On the former, that will cease in March next year. 

If we’re to have a transition the terms must meet current rules until its end. 

In practical terms you can negotiate with who you like, however you like, whenever you like. What matters is the enforceability of anything signed. I can sign any piece of paper promising to remove the UK’s tariff or non-tariff barriers with another country’s government. But they’re not mine to replace. At present, as part of the Common Commercial Policy, they’re not the UK’s to negotiate either. Until we’ve left the EU, and we’ve finished the transition period, nothing arranged with countries like the USA, Australia, China or India could be binding or come into force. The whole point of this process is the return of control after a set date. 

It’s welcome to know that the EU isn’t going to try and lock our negotiators out of rooms with third countries but they never were going to, or if they were going to try they’d have failed. But this isn’t news. It’s stating the bleeding obvious.

The only thing that’s new is that the EU has confirmed it won’t try and sanction any deals signed, that they’ll ignore them until the end of the transition period and let them come into force without any recourse. That’s all perfectly sensible, and perfectly neighbourly. They understand that Brexit is happening, it would be good if some of our political class could catch up.

We’re in the final phases of the transition deal being ironed out, David Davis will be in Brussels on Sunday and after that we’ll hopefully know when we can bring new deals into place. As the new text released today suggests in paragraphs 3 and 4, the EU won’t negotiate on behalf of the UK during the transition period and the UK will need authorisation to become bound by deals it negotiates before the end of the transition period. Otherwise these will have to wait until that period ends. This is reasonable and it's time limited. It provides certainty to both parties, businesses and citizens and means a good lead-in to any deals the Department for International Trade can negotiate in time. 

To understand what powers they can have we’ll need to know the limits of the Free Trade Agreement being sought between the UK and the EU, and we’ll need to know which powers will be Westminster’s to negotiate on behalf of the whole of the UK, and which powers will be ceded to devolved administrations. 

Once all that is in place we can start to really talk with other countries, and we can start to see what global Britain looks like in practice. 
 

Why kill off the profitable part of money making?

Being able to slap together 10 pence worth of ink and 10 pence of paper to sell the resultant note for £50 is a pretty profitable activity. We do make rather a lot of money if we've the right to make money that is.

The plan rather falls apart when people come back with old and tattered notes and demand new ones. It's thus the increase in money supply which really turns that seigniorage profit - or the money that never does come back. Which is what makes this such a strange decision:

Mr Hammond launched the consultation into cash alongside his Spring Statement. Six in 10 copper coins are used in just one transaction and never again, either because they are saved or thrown away, according to the Treasury.

The UK’s largest note – the £50 – could also be in jeopardy after bureaucrats said it was “rarely used for routine purchases”.

It is instead usually stored for its value, with the most “significant” demand from overseas.

We could, if we were so minded, view making £50 notes as our contribution to foreigners. They're able to have a store of value free of the activities of their own governments. Do note that there are parts of the world where the greatest threat to income, wealth and economic freedom is the government of that place.

But also note what is being said there. The most significant demand for the notes is from foreigners, much of which will never circulate back to the UK. This is a proper and pure seigniorage profit - the US equivalent is said to make the Feds some $20 billion a year.

The insistence is therefore that we should close down the one part of government which is purely and wholly profitable? Who are these people working for? For it definitely doesn't appear to be us, does it?

Trading blows on tariffs

Dr Pirie takes tariffs head-on in this week's Madsen Moment – bad for everyone and something where it's good we're taking back control. 

Antitrust doesn't need reforming

Yet again, members of the Open Markets Institute have been promoting themselves as “saviours of the people” in their attempts to reform fundamentally US antitrust law, despite competition law functioning extremely well over the past 20-30 years, requiring perhaps only some minor tinkering. Indeed, in an attempt to defend themselves against the many valid criticisms levied against them, one of their members has written an article in the Journal of European Competition Law & Practice claiming that Open Markets is merely following an approach set out by Louis Brandeis, a former US Supreme Court Justice. Specifically, this “Brandeisian approach” was aimed at breaking up large firms and cartels that had been operating in the US in the early 1900s but had not yet been tackled by the Sherman Act (the US legislation that provided for antitrust enforcement). Regardless of the fact that the issues with which Brandeis was concerned have long since been resolved, the journal article makes some bold claims that are not supported by evidence.

Most strikingly, Open Markets claims that they do not view firms being large as an inherently bad thing – i.e. that big is not always bad.  However, this stands in stark contrast to their continued insistence that Google, Amazon, and Facebook are “dominant” solely because they are large firms, and despite having conducted an assessment of the relevant market, which goes against all standard approaches within antitrust.

Specifically, in order for a firm to be found “dominant”, it is necessary first to define the “relevant market” over which said firm might hold a dominant position – this involves examining the product(s)/service(s) offered by a firm and then determining the extent to which other firms/products/services operate in the same realm as that firm.

For example, suppose that there is concern that a car manufacturer such as BMW might have a dominant position. To determine what products constitute the relevant market for the purpose of assessing whether or not BMW holds a dominant position, one would first consider whether consumers looking at buying a car from BMW would switch to other car manufacturers should BMW impose a 10% increase in price. If consumers would not switch in sufficient numbers, then BMW cars themselves constitute a relevant market as it would be profitable for BMW to conduct the price increase.

In the more likely event that consumers would switch to, say Mercedes, Audi, and Jaguar cars in sufficient numbers that the price increase would not be profitable, one would then group all those cars together under a “hypothetical monopolist” and see whether consumers would switch away from this group of cars were the hypothetical monopolist increase the price of each of the cars in that group by 10%. As before, if the price increase for this group of cars would be profitable, then the relevant market constitutes that group of cars. Otherwise, if the price increase would not be profitable, the group of cars included is widened further. Only once enough cars/manufacturers have been included in this group that a hypothetical monopolist could increase prices profitably has a relevant market been found, and a firm’s market shares be calculated, competitive constraints be examined, and dominance (or lack thereof) be assessed. In this example, stopping too early could give the misleading impression that BMW has a large share of sales, whereas in reality their share of the actual relevant market (probably something along the lines of “all luxury cars”) would be much smaller.

To my knowledge, Open Markets has not conducted such an exercise for the areas in which Facebook, Google, and Amazon operate, and nor do they ever cite such an exercise carried out by someone else (such as a competition authority). Indeed, Open Markets could have cited the the Google Shopping case, in which such an exercise was conducted by the European Commission’s Competition Directorate. However, in conducting this exercise the Commission disregarded evidence that Google Shopping and Amazon compete with each other - in other words, Amazon cannot be dominant as it is constrained by Google Shopping (and vice versa). Hence, the only logical inference as to why Open Markets consider Facebook, Google, Amazon etc to be in a dominant position is that Open Markets considers that “big is bad”.

Moreover, even though the article itself states that “certain industries tend naturally towards monopoly” with the example of “networks” being cited in particular, Open Markets has been rather hypocritical in that regard. For example, even though Open Markets appears to acknowledge that firms / markets with network effects should not be broken up, but instead provided with the appropriate incentives so as not to abuse their dominant position, one member of the Open Markets institute has previously stated that Amazon should be split up.

This recommendation for splitting up Amazon is despite the fact that there are clear network effects associated with Amazon - the more buyers that Amazon attracts to its Marketplace services, the larger the market available to sellers using Marketplace, and so the more attractive Marketplace becomes to sellers. Similarly, the more sellers available on Marketplace means that potential buyers have a wider range of goods from which to choose, making Marketplace an even more attractive shopping option for buyers. This virtuous circle is the very definition of a network effect.

Hence, what possible reason could Open Markets have for this difference in treatment for Amazon (as well as Google and Facebook) as compared to other industries with network effects? Perhaps Open Markets’ own publications and statements belie their claims that they do not view all big firms as inherently evil.

Furthermore, Open Markets seems to want to open up the assessment of antitrust to those that are not specialists (nor indeed, have any experience whatsoever) in competition economics. For example, they suggest that competition assessments should be conducted by authorities as wide-ranging as “the General Services Administration”, “the Office of the United States Trade Representative”, and “the Department of Agriculture”. This can only be a recipe for disaster – competition analysis often requires very detailed and counter-intuitive examinations that a non-specialist is likely to get wrong (or miss entirely). As such, mandating authorities that have no experience or expertise in competition economics to regulate competition can only be detrimental compared to the current situation.

Finally, Open Markets suggests moving away from the “consumer welfare” standard that has served antitrust exceedingly well over the past 50-odd years, but does not suggest what the new focus should be (or how to incorporate any new focus in antitrust assessments). The “consumer welfare” standard means focusing on how consumers are affected by a firm’s behaviour - for example, are consumers being charged too high a price, or receiving too small a range of options. However, Open Markets criticises this approach because they claim it does not take into account the impact that a firm’s behaviour might have on those that provide inputs to that firm (such as workers or suppliers of raw materials), and that a dominant firm can also harm said suppliers.

Nonetheless, this potential impact on suppliers to an allegedly dominant firm can still be incorporated with just a minor adjustment to the current framework.  Specifically, if “producer welfare” is also included in the assessment (i.e. if one also cares about what happens to the provider of a product rather than just those that consume a product), the impact of a dominant firm on its suppliers can be taken into account by considering the firm as a consumer and its suppliers as producers and looking at what happens to combined producer and consumer welfare. It is important to note that this would require including producer welfare in all assessments of antitrust behaviour rather than just those where many suppliers face a single large buyer so as not to apply different standards of proof / evidence to different cases.

However, as noted by Hovenkamp in 2011, including producer welfare in an antitrust assessment can lead to some perverse results - for example, if a monopoly firm were to substantially increase its profits by raising prices to the extent that its increase in profits was far larger than the harm to consumers, incorporating producer welfare in the assessment would mean this excessive pricing behaviour would be viewed as perfectly acceptable. This seems perverse, and presumably Open Markets would be against this alternative (given their apparent dislike of firms making any profits whatsoever). However, Open Markets does not put forward any suggestions for a potential alternative approach.

Overall, therefore, Open Markets’ ideas for how to reform antitrust are both completely misguided and so utterly vague as to render them useless in their entirety.

Populism in the UK

It’s been said so many times that it’s beginning to sound like a cliche: the status quo and everything it represents is on a decline while populism in all its forms are on the rise. Manifesting in multiple parties, the populist movement continue to surge in parliaments around the world and it doesn’t seem like it is going to stop anytime soon. While it’s often easy to ridicule decisions or problems on the other side of the pond that seem alien to us, this isn’t exclusive to one nation - it’s a pressing issue around the world, but it’s become increasingly so in the last couple of years in Europe. The latest testimony to this is the election in Italy where the 5 Star Movement and the Northern League received more than half of votes.

Despite the fact that populism comes in different shapes and sizes, they all have common traits. What ties all the groups together is mainly the perception that governments have been reluctant to address problems close to the hearts of those that feel left behind. This perception stems from this group lacking behind and seeing the so-called elite reap all the benefits of the globalisation that they themselves advocate for, while disdaining working and lower-middle class’ views as “incorrect”. The power felt by the working and middle class is shrinking, all the while governments grow ever the more powerful. Regardless of how legitimate this perception may be, they do not take into consideration how viable these populist policies are or what their consequences could be.

With the rise of populism in Europe, the Libertarian Club - Libek (an organisation promoting individual liberty and economic freedom in Serbia and the Western Balkans) have released a publication bringing together 12 authors to analyze the rise of populism and what the appropriate response from the international freedom movement should be. Some of the authors include Anna Applebaum, Dr. Tom G. Palmer and our very own Director Dr. Eamonn Butler.

In Dr. Butler’s article he writes about the state of populism in the UK touching on Brexit and why the Brits rejected the the dire warnings sent out by the government, why the interests of Britain differ from those of the continent, why what we’ve seen in the UK is not as much populism as it is the public poking fun at their leaders, and why this might not be bad as we think after all.

You can find Dr. Butler’s article, "Populism in the UK", on page 55 of the publication alongside with a bunch of other great articles.

Cheap energy, plentiful water

In my 2015 book, “Britain and the World in 2050,” I made several startling predictions, startling because they went against many assumptions popular among the chatterati. While the dinosaurs and dodos gained massive coverage because the media couldn’t resist them – some even did drawings – there were two significant predictions that offer more far-reaching consequences.

The first is that we will not run out of energy. Despite alarmist cries of “peak oil,” I take the view that we’ll be leaving most of it in the ground by 2050, or maybe using it for its complex chemistry. We won’t be burning much of it. My reasoning is that fracked gas is plentiful and cheap, and mostly not controlled by politically unstable countries. It is less polluting, and will have replaced coal and most of oil for power stations. We have hundreds of years of reserves.

The steady fall in the price of photovoltaic solar energy is another contributing factor. Solar and gas will be big, and vehicles that use petrol or diesel will have been banned from most cities. Electric vehicles charged from power stations using gas and photovoltaic solar will be the norm. And energy will be plentiful and very cheap.

That leads to my other prediction, that water will be plentiful. Talk of “water wars” is as alarmist and as wrong as “peak oil.” There is plenty of water; it covers most of the planet. The task is to get it drinkable and to get it where it is needed. That takes energy. Osmotic desalination is expensive because it is energy intensive. If energy is cheap, it becomes viable on a massive scale. With cheap gas and solar, many desalination plants can be built along coastlines to purify seawater. Furthermore, the energy to move it around will also be cheap, and it will be possible to pipe it long distances much as oil is piped today. Indeed, some of the same pipes might be used when they are no longer pumping oil.

Optimism doesn’t sell; alarmism does. We’ll no doubt continue to read about the world running out of energy and water. But it isn’t going to happen.

Doesn't Brexit keep producing those little bundles of joy?

We're well aware that opinion is divided upon the merits of Brexit. It is at our gaff too. But we would still insist that the process is producing certain little bundles of joy:

Ministerial panic at the prospect of defeat over Brexit and key domestic policies has created the most inactive parliament for at least two decades.

Analysis by The Times shows that the number of votes held in the nine months since the general election, when Theresa May lost her majority, is lower than after every election won by David Cameron and Tony Blair.

Despite the task of rewriting British law for life outside the EU, since June MPs have voted 127 times on 40 separate days, equivalent to a third of the days on which the Commons has sat.

Legislation on post-Brexit customs rules as well as the multibillion-pound restoration of parliament has been repeatedly delayed as whips try to head off defeats on dozens of amendments. Pressing issues such as housing and social care are also being neglected.

There are indeed problems which need solving in this modern world. There are also problems which must be solved and which can only be solved by government. It is our insistence that the overlap between the problems needing solving and those which can or will be solved by more government is small. Small to the point of non-existence in fact. Our diagnosis of most of what ails this modern world - with respect to governance that is - is that we've too much government. The task is to get them to stop doing things, not to give them room to attempt more.

Brexit is preventing them from passing new laws. Good. Yes, of course we'd prefer that we were all in a better place, with better governance. Brexit is causing that log jam - how excellent, given that a decent enough prevention for modern government is that constipation.

The maternity discrimination problem

We agree that there is discrimination going on in the British workplace concerning women, children, maternity and pregnancy. The important question though is not whether but who? Who is doing the discriminating?

A study by the Equality and Human Rights Commission (EHRC) earlier this year, reported a bias against working parents. Its survey of 1,106 employers in the UK, revealed that a third believe new and expectant mothers are “generally less interested in career progression” than their childless counterparts. Of those polled, 40 per cent claimed they had seen at least one woman in their company “take advantage” of their pregnancy. 

Nearly 60 per cent of employers surveyed said women should have to disclose a pregnancy during the recruitment process. Meanwhile, 36 per cent said it is reasonable to ask about their plans to start a family.

Previous research has shown that 40 per cent of employers avoid hiring a woman of childbearing age.

We could read all of that as saying that employers do discriminate against pregnant women and new and would be mothers. That they'd like to be able to discriminate more.

But we do have something of a problem here. What if the basic claim, that mothers put children - all of such things are on average across the population of course, not relevant to the decisions of any one woman - before career are true? What then?

The thing being that as far as we know this is true. Women do indeed tend (again, tend) to become primary child carer, it is more likely that female career ambitions are put on hold than male. That then leads us to, well, who is making that decision? 

We might claim that it's the patriarchy, capitalism, The Man, insisting that women throw away their dreams. Or it could be that this accords with the desires of the women doing the deciding. What we might do about it all, even whether we do anything at all, rather depends upon that very question - who is it doing the discriminating?

Given that we see exactly the same pattern in every human society we can observe, yea even unto the Scandinavian social democracies, we do rather conclude that it's the individual choices of the women concerned which lead to the larger pattern we can see.

At which point what do we do about it? And why would we do anything about the freely expressed choices of consenting adults?  

Another way to put this is that the recognition of an unequal outcome is not sufficient as a justification for action. If the inequality is the result of the exercise of freedom and liberty well, that's just that, isn't it? We insisting that the freedom and liberty being exercised are more important than the inequality.

Exactly why we shouldn't believe Wilbur Ross on trade and tariffs

Don Boudreaux has a correspondent insisting that because Wilbur Ross is a successful businessman, the Good Professor is only a pointy head in an ivory tower, therefore we should believe Ross against Boudreaux on the subject of trade tariffs. This is the wrong way around.

Precisely because of the successful businessman and pointy head bit we should believe the view from the ivory tower.

 Of all the countless fallacious arguments for protectionism, none is more illogical than the one that you offer in your e-mail today – namely, that because “Secretary Wilbur Ross is a successful businessman his understanding of trade [is] rich and reliable” while my and other “ivory tower professors’” understanding of trade “is shallow, not very trustworthy.”

A useful real world test - even if edging up to the lip of a logical fallacy - is to ask cui bono? As one of us put it elsewhere recently:

A protectionist is someone who argues that you should be poorer so they can be richer.

The people who become richer through protectionism are the people who own the businesses being protected. We're going to take the opinion of a man made rich in the steel industry about the desirability of steel import tariffs? 

Professor Boudreaux is of course far too polite to get to the lip of that ad hominem logical fallacy but we're not.

KFC's DHL Debacle shows why markets work

We've all had a good chortle about Kentucky Fried Chicken's problems over their new distribution contract with DHL. Stores closing because of a lack of fresh chicken, musings over who knew they used that ingredient, those sorts of things.

What is going to get missed here is how this shows the superiority of a market economy:

KFC has gone back to its original recipe for chicken deliveries by rehiring Bidvest Logistics in the wake of last month’s supply fiasco.

The American fast food chain was forced to temporarily close hundreds of storesafter it ran out of chicken following the botched handover of its logistics contract to DHL and QSL. “To put it simply,” KFC tweeted at the time, “we’ve got the chicken, we’ve got the restaurants, but we’ve just had issues getting them together.”

We can just hear the Teenage Trots giggling in their bedrooms, can't we? The State, planning, that would have done something as simple as getting chicken to the restaurants, wouldn't it? This will be used as an example of the inefficiencies of private economic action, undirected by said state.

In response we might point out that several of us have lived and worked in places with state distribution of food and believe us, it isn't better than this at all.

However, the real point here is not that a mistake was made. We're humans, any economic system is going to contain humans and therefore we're going to have errors. Given, you know, that erring and humanity bit. What matters is how we clean up errors.

That contract changed on Feb 14, here we are on 10 March, the contract was reassigned on 8 March. That is, 3 weeks after the error started it has been solved.

Now think of any government error which has even been admitted in such a time period let alone solved.

Sure, any system of economic organisation will contain errors. The difference between government planning and market chaos is who cleans up the mistakes, solves the problems, faster? That would be the markets, precisely why they are so desirable - over and on top of all that freedom and liberty stuff.