The Campaign Against Prosperity

A useful axiom: bad policies result in bad economies, which in turn result in more bad policies. By contrast, good policies result in good economies, which in turn generate the space for more good policies.

We live in an age when growth in world trade has slowed to a crawl. Between 2000 and 2007, Northeast Asia’s exports rose an average 17.7% a year. After the violent shocks of the GFC are shaken out of the yoy data, between 2012 and 2018, those exports have grown only 2.6% yoy on average. And it is against this background of stalled world trade growth that future trade growth is compromised still further both by rising US-Sino trade frictions, and the threatened collapse of UK-EU trade relations.

What is little realized is that these potential overt trade dislocations do not come out of the blue. Rather, they are the logical extension of an aggressive campaign against international trade which has been waged by all major trading economies, and with increasing intensity, since the GFC. Bad policies have resulted in bad economies, which in turn are provoking even worse policies. This, then, is the story of trade wars foretold.

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One can reach for purely economic reasons to account for this dramatic curtailment of trade growth: changing patterns of domestic saving and cross-border investment clearly have a part to play. But using economics as a sole explanation overlooks a simpler and powerful explanation: the slowing of global trade growth to a crawl is (also) a result of deliberate policy aggressively pursued.

Trade has slowed in part because regulators in every major economy have raised obstacles to trade in goods, in the form of Non-Tariff Barriers (NTBs). NTBs are not usually noticed much, because they don’t immediately lend themselves to direct economic quantification. ‘Trade policy can take many different forms: tariffs, quotas, non-automatic licensing, antidumping duties, technical regulations, monopolistic measures, subsidies etc. How can one summarise in a single measure the trade restrictiveness of a 10% tariff, a 100-ton quota, a complex non-automatic licensing procedure and a $1 million subsidy?’ (Estimating Trade Restrictiveness Indices - Kee, Nicita, and Olarreaga, 2009)

Nevertheless, econometric calculation allows the authors to construct an Ad-Valorem Equivalent (AVE), which compares the impact of NTBs directly with direct trade tariffs. They conclude: ‘The importance of NTBs as a protectionist tool is substantial, especially considering that in 55% of tariff lines subject to core NTBs, the AVE of core NTB is higher than the tariff.’ ‘On average, they add an additional 87% to the restrictiveness imposed by tariffs. Moreover, in 34 out of the 78 countries in our sample, the restrictiveness of NTBs is larger than the restrictiveness of tariffs.’ The malign impact rises as a country grows richer, with the average AVE of NTBs rising with GDP per capita.

Those conclusions were reached using data from the early 2000s, when the US, EU, China and Japan had deployed comparative NTBs to impede trade. Since then the rate at which they have growth, and continue to grow, is extraordinary: back in early 2000, between them the US, EU, Japan and China had put up only 2,028 NTBs. As of end-November 2018, there are 12,612 NTBs either initiated or in force. More than two new NTBs are added by these economies every working day.

The means to track it are publicly available: the NTB tallies in this piece were all taken from the WTO’s Integrated Trade Intelligence Portal.

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This wild proliferation of specific trade barriers has continued unabated even as the trade which they are designed to hinder has almost stopped growing. This looks like a classic case of bad policies producing bad economies, which in turn produce even worse policies.

One way of illustrating the interaction between NTBs and trade volumes is to chart the number of NTBs to be overcome by every US$1bn of monthly imports made by these countries.

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The number of obstacles set in the way of every US$1bn of imports prior to the crisis fell gently from 13.6 at the beginning of 2004 to a low of 11.2 in 3Q08.

Since then, the rise has been dramatic, albeit disrupted by the business cycle. Still, it reached a peak of 21.8 per billion in 2016, and currently stands at 19.2. In other words, the number of barriers to trade has roughly doubled since the crisis. If the AVE of these NTBs is merely as expensive as a tariff on the goods, then it seems likely that post-GFC, we have seen the equivalent of a doubling in import tariffs.

This is our generation’s equivalent of Smoot-Hawley.

Yet this relentless campaign against trade - against prosperity - is for all intents and purposes invisible. It attracts no headline, courts no controversy. So I think I shall start to include monthly checks on the numbers of NTBs in my Shocks & Surprises work.

Which countries, then, are currently the worst prosecutors against world trade, and where are the instincts to damage world trade most virulent at the moment? Using the same metric (NTBs per US$ billion of imports per month), there is a quite clear order: Japan is by far the most protective, with 37.2 NTBs per US$1 billion of imports. The least active on this regulatory front - much to my surprise, I must admit - is the EU, with 11.1 NTBs per billion. The US is one of the most litigious economies in the world, so it is perhaps not surprising that it is heavily protective, with 27.8 NTBs per billion, whilst China, which only really started playing this game by WTO standards, has no reached 15.2 NTBs per billion.

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The other thing this chart shows is that the campaign against trade really intensified dramatically in 2015 and 2016, when these economies added 947 and 687 new NTBs respectively. And whilst everyone was at it - this was the point at which trade regulators were gaming the system, presumably driven by Prisoner’s Dilemma rationalizations - the two most fervent gamers were Japan and China. Japan started 2014 with 1,240 NTBs, but by end -2016 they had 1,556. China’s regulatory activity was similar: at end-2014 it had 2,031 NTBs in force; by end-2016 it had 2,527.

This is a dark picture, and darkening by the day. But even in the darkest picture there is some relief, and in this case, it is that the regulatory enthusiasm seen in 2015 and 2016 abated somewhat in 2017, which produced only 503 new NTBs. As markets twitch to the latest twist in US-Sino trade diplomacy, it is clear that without a de-escalation in the NTB trade wars, the prospects for global trade, and global prosperity, will remain deliberately and profoundly compromised. Bad policies make for bad economies, which make for worse policies.