Africa Tries Free Trade

Or, more accurately, a customs union.

With all the proposals for hundreds of billions of dollars in new government spending and new taxes in the United States in recent days, there hasn’t been much good economic news.

Alexander C. R. Hammond, of the Institute of Economic Affairs (IEA) and of African Liberty, writes about it in “Africa Tries Free Trade,” Reason, April 2021. He writes:

On January 1, the long-awaited African Continental Free Trade Area (AfCFTA) came into effect. Aside from the economic benefits that the arrangement will bring to the continent, Africa’s newfound support for free trade and liberalization marks a clear rejection of the socialist ideology that has tormented African politics for decades.

In recent decades Africa has been the sick puppy of the six heavily populated continents. A glance at the Economic Freedom of the World map of economic freedom shows why. Over half of the 50+ African countries are in the least-economically-free quartile of the world’s 190+ countries. Not a single African country is in the top quartile. Hammond calls Nigeria, South Africa, and Egypt “regional economic powerhouses,” but of the three, only Nigeria is in the second-from-the-top quartile, South African is in the second-from-the-bottom quartile, and Egypt is in the bottom quartile.

One of the five measures of economic freedom is freedom to trade internationally. With AfCFTA, this will increase for many African countries.

This agreement is like NAFTA and its successor, USMCA: it’s a customs union. The idea is to have low or zero tariffs between and among members of the group, but a common tariff rate on imports from outside. Nevertheless it’s a big, if slow, step toward freer trade.

Hammond writes:

Within 5–10 years, the AfCFTA will ensure that 90 percent of tariffs on goods traded between member states will be abolished. Within 13 years, 97 percent of all tariffs will be removed. By 2035, the World Bank has predicted, this enormous liberalization effort will boost Africa’s gross domestic product by $450 billion, increase wages for both skilled and unskilled workers by 10 percent, and lift more than 30 million people out of extreme poverty, defined as living on less than $1.90 per day. According to the same estimates, by 2035, the AfCFTA will see more than 68 million people rise out of moderate poverty, defined as living on $1.90–$5.50 per day. The “countries with the highest initial poverty rates,” the World Bank says, will see the “biggest improvements.”

Given Africa’s flirtation with socialism and protectionism from the 1960s through at least the 1980s, this is a welcome development.

For more on Customs Unions, see Douglas A. Irwin, “International Trade Agreements,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.


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Jagdish Bhagwati for Nobel Prize

Starting in 1996, I woke up early on an October morning and saw who won the Nobel Prize in economics. I had a deal with the Wall Street Journal that I would tell one of the editors within an hour so whether I knew enough about the winner(s) to write an op/ed that morning for the next day’s print edition.

Fortunately, I’ve been able to do so for every year since then, except 1998 (when I didn’t know enough), 1999 and 2000 (when I was teaching a course in Prague), 2002 (when I was traveling in the U.K.) , 2007 (when I didn’t know enough), and 2010 (when I didn’t know enough.) Here’s the list of past winners.

The web has made my job easier.

One economist in an email discussion yesterday joked that I must have some pre-written pieces because I have a sense of who will win. Unfortunately, no. I haven’t yet predicted correctly. I haven’t even been in the ball park. I gave up producing about a decade ago.

I did tell the people in the email discussion that I used to go the library the weekend before and check out books by 3 or 4 economists who I thought were contenders, but I quit after a few years because I never got it right.

Which brings me to Jagdish Bhagwati.

I used to check out 3 or 4 books by Bhagwati, starting in the early 2000s and going to late in that decade. I’ve always thought he was deserving. I still do. He did some of the most careful and important work on international trade and protectionism. In my graduate course on trade at UCLA, we studied his book 1969 book Trade, Tariffs, and Growth carefully. He was a master at showing why every argument for tariffs but one was a second-best argument: there was always a more direct, less distortionary way of achieving a goal other than tariffs.

What was the one first-best argument for tariffs? If I recall correctly, it was that a tariff can help a country exploit its monopsony power against exporters. I pointed out on this blog over a year ago, that, believe it or not, that seems to be what President Trump did with some of his tariffs.

Back to Bhagwati. Another strong admirer of Bhagwati was the late Paul Samuelson. Here’s an excerpt from Samuelson’s admiring note on Bhagwati:

However, in closing I turn away from any vanities of career accomplishments to substance. In the struggle to improve the lot of mankind, whether located in advanced economies or in societies climbing the ladder out of poverty, Jagdish Bhagwati has been a tireless partisan of that globalization which elevates global total-factor – productivities both of richest America and poorest regions of Asia and Africa.

Bhagwati, by the way, wrote “Protectionism,” in The Concise Encyclopedia of Economics.

This is NOT a prediction that Bhagwati will win. I think the Nobel Committee is too into fashion. However, it sometimes uses the prize to make a statement about policy. Given how much of a beating free trade and globalization have taken in the political realm in the last few years, this would be a good time to make such a statement.


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The Logic of Protectionist Nationalists

It seems that economics and logic were not the strong fields of protectionist nationalists in college—or at least this is the case with the three lieutenant governors who published an op-ed in The Hill at the beginning of the Summer. In the just-published Fall issue of Regulation (the electrons are still hot and the paper version has not yet hit the newsstands), I write:

The USMCA, the authors glowingly wrote, will “increase U.S. annual agricultural exports by $2.2 billion.” This crowing claim comes just a few lines after the statement that “agriculture is what puts food on the table, literally and metaphorically.” They better  take their “metaphorically” very literally because exported agricultural products actually take food away from American tables in order to feed foreigners.

No wonder that with this sort of coherence, protectionists think they can prove anything, including that the only benefit of free trade lies in exports.

For a view of the free-market view of trade, have a look at my article. One question it answers is, Why do American exporters work for foreigners? I also review recent data on the impact of the 2018 tariff on the domestic price of washing machines.



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Brexiters FOR State Aid?

Once upon a time, Newt Gingrich could say that Boris Johnson was “Margaret Thatcher with wild hair”. Now that would be difficult to argue.

Matthew Lesh, Head of Research at the Adam Smith Institute, reports on CapX that “the UK could sacrifice a deal with the EU — which would in the short run seriously disrupt trade in goods and services, undermine security service data sharing, and raise serious legal issues around the Northern Ireland Protocol — for the worst possible reason: an interventionist economic agenda.” Lesh adds: “For a supposedly conservative Government that just vanquished Corbynite socialism, that would be quite something.”

Lesh’s article is well worth reading.

As an outsider, I can see that a “No Deal” path would energize Brexiters and thus strengthen the government’s position in the country. It is an expensive way of making your supporters happy: nasty divorces often are. But it may well be that Johnson and his cabinet think the price is worth paying. Yet in politics, you can hardly do stuff claiming that you are doing it only for the sake of pleasing your voters: that would defy their very purpose, as voters themselves want high motives and nice sounding reasons, for you to do stuff which actually pleases them.

The high motive and nice sounding reason the British government worked out is that it should be able to support- with taxpayer money- all the companies it cares for. The Guardian (which is not Reason magazine) perfidiously reminds us that “Margaret Thatcher thought Europe allowed too much of it [state aid], Jeremy Corbyn believed there was not enough”.

On the one hand, then, the fact that the British government thinks the state aid issue is palatable to its voters as an excuse for a “No Deal” Brexit tells us something. Namely, that perhaps our vignette of the Tory voter as by and large more free-market oriented than others does no longer resemble reality. Sure, these voters detest the EU more than anything else, but their leaders’ vocabulary used to imply that the EU ought to be detested because it is bureaucratic and protectionist (do you remember “Global Britain”?), a petty organization that regulates anything which moves. Now should it be detested because it puts a brake on government subsidies…?

On the other hand, it may well be that conservative politicians, on top of believing a “No Deal” Brexit will be good for their popularity, actually believe that England needs more latitude in spending taxpayers money to the benefit of businesses of government’s choosing.

On that, I have little to add to the point Lesh makes:

Forsyth claims the Government is concerned that without subsidies the UK risks becoming “a technological vassal — reliant on either the United States or China, both of whom are unafraid to use the state to shape these markets”.
This is crazy technological isolationism. No single country can or should develop every single technology and keep it for themselves. We are much richer because of technologies developed and produced in other countries. Imagine how awful everything would be if we only used British-made goods no iPhones, no Zoom, no Samsung TVs, no Amazon, no Microsoft Windows. The list is endless. Remember too that the great tech success stories in the US, and even in communist China, are led by the private sector, not the state.
According to [ITV’s journalist Robert] Peston, Dominic Cummings [the main adviser to Boris Johnson] believes that the key to British success in the first industrial revolution was being the first mover in many key industries. Again, though this had little to do with state intervention. In fact, quite the opposite.
The reason Britain was successful during the industrial revolution was a combination of freedom to disrupt existing modes of production and a strong emphasis on entrepreneurship, underpinned by property rights. We should take the same approach today by getting rid of cumbersome red tape and taxes that hold businesses back.

Among contemporary ruling classes, the “technological isolationism” Lesh underlines is going strong. Everybody wants “his” science and “his” technology to be on top of everyone else’s. This is quite bizarre because one would think that if there is one area in which the benefits of international cooperation are clearly apparent is science and research. When a safe and effective vaccine about Covid-19 is happily produced, will you be refusing it, if it does not come out of your national labs?


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Bannon’s Nationalist Adventure: Natural Justice?

Economists assume that each individual has his own preferences that guide his actions. The moral problem starts when an individual wants to force his preferences on other individuals’ choices. If, for this kind of moral sin, God had wanted to strike Steve Bannon off his horse on the road to Damascus and perhaps punish him with a nervous breakdown, He would have done exactly what He did on August 20: get Bannon arrested by federal agents on a Coast Guard boat.

Bannon is the former Executive Chairman of Breitbart News and Trump adviser. A believer in providential or natural justice (which is of course something different from economics) might think that Bannon’s arrest was a wake-up call or punishment for his protectionist crimes, that is, conspiring to impose his own preferences by force on individuals who want to trade.

I suspect that when Bannon saw the Coast Guard boat approaching the yacht on which he was sailing along the Connecticut coast, his nationalist heart bounced in his manly chest. He must have thought something like: “Here is our great Coast Guard tasked with keeping foreigners and their goods off our coasts (including Mexican rapists if they ever try to get around The Wall). The mighty Coast Guard is here to protect me, an American citizen.”


Caravaggio, Conversion on the Way
to Damascus (Wikipedia Commons)

In fact, the Coast Guard was there to arrest him—another instance of a military unit assuming internal police functions, the sort of thing that the Founders feared from a permanent army.

I don’t know if Bannon is guilty of the crimes he is accused of, which have not been proven in court. And I will not discuss here the economics and ethics of the plethora and reach of laws that, in America like in other Western countries, give an air of quasi-inevitability and quasi-normalcy to the words of Lavrentiy Beria, chief of Soviet state security under Joseph Stalin: “Show me the man and I’ll show you the crime.”

It was not the least irony of Bannon’s nationalist adventure of August 20 that the Coast Guard originated from Revenue-Marine, a service created by Congress in 1790 at the request of Alexander Hamilton with the purpose of collecting customs duties—even if, at that time, tariffs were used more to finance a small government than to protect Americans from foreign goods. As usual for a government bureaucracy, mission creep has proceeded.


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