economics

Best for Britain on Trumps trade war

I subscribe to Best for Britain’s news letter and they sent me the following. I can’t find it on their web site and so I have posted it here. Their front page has a comprehensive response to Trump’s trade war and is worth a look. Unlike me they are not focusing on the need for the single market to access the protection of the EU’s Digital Services Act and in fact are fundamentally in the “Fix Brexit” campaign, but what they say is interesting.

As you’ll no doubt have seen, the UK joins Brazil, Australia, and the uninhabited Heard Island – along with almost every other country in the world – in being slapped with a 10% tariff on all imports to the US. The EU has fared even worse, as they stare down the prospect of a 20% tariff. Unaddressed, this unprovoked and punitive move by Trump could wipe out all efforts to grow our economies, both here in the UK and in the EU.

We knew this was coming. Which is why we asked Frontier Economics to model how a better UK-EU trade deal could minimise the impact of Trump tariffs. The results should spur a simultaneous sigh of relief across Whitehall.

Not only would a common sense deal between the EU and UK cancel out the economic hit to the UK from Trump’s tariffs, it could also grow our economy by up to 1.5%. And those areas hit hardest by tariffs – manufacturing hubs like the Midlands and North East England – would see the greatest benefit. A deal that includes deep alignment between the UK and EU on goods and services would also shield the EU, reducing the impact of tariffs on the bloc by around a third.

Those sighs of relief should ripple around the Cabinet table too when you add in the results of our latest polling. Three times as many people think we should increase trade with the EU in response to Trump’s tariffs, compared to just 14% who say we should be sucking up to Trump in the hope of an exemption.

If there was any doubt, Trump is no friend of the UK. His unprovoked trade war will be felt by ordinary people across the country, in our pockets and in cuts to public spending. Anyone seeking to spin this slap in the face as a ‘Brexit win’ should remember the thousands now at risk of losing their jobs, and that Brexit itself has caused far more economic damage than Trump’s tariffs ever could.

But if we tear down barriers to UK-EU trade, we can gain significantly more from our largest trading partner than we stand to lose as a result of back-of-the-envelope calculations made in Washington.

In these choppy geopolitical waters, we’ll keep pushing the government to make the right decision and seek stability for us, and for our EU neighbours. Thank you for your support in helping us do it. …

Liberation Day

Today, or Yesterday depending on where you are the US announced a series of tariff increases around the world.

The FT explains how they calculated the tariffs; they engineered a number from the balance of trade deficit between the US and their trading partners. This has been a big surprise to most international trade economists. This is written in an amusing style asking questions on economics and supply chains, since the calculation method penalises, those countries supplying goods that the US cannot fulfil domestically, such as bananas and coffee.

In an article called, the stupidest chart you’ll see today, which I cannot understand, but they observe that a floor value of 10% has also been set, and comment,

One last thing not widely mentioned yet — there is also a baseline 10 per cent minimum tariff. Without this minimum, the UK would be treated with a negative tariff. So much for special treatment.

The original article points at the book Trade wars are class wars, where on its hosting page, they say,

Trade disputes are usually understood as conflicts between countries with competing national interests, but as Matthew C. Klein and Michael Pettis show, they are often the unexpected result of domestic political choices to serve the interests of the rich at the expense of workers and ordinary retirees. Klein and Pettis trace the origins of today’s trade wars to decisions made by politicians and business leaders in China, Europe, and the United States over the past thirty years. Across the world, the rich have prospered while workers can no longer afford to buy what they produce, have lost their jobs, or have been forced into higher levels of debt. In this thought‑provoking challenge to mainstream views, the authors provide a cohesive narrative that shows how the class wars of rising inequality are a threat to the global economy and international peace—and what we can do about it.

…

The Newsagents on Trump, Trade and Debt

In this podcast at the newsgents, the presenters talk about Trump’s tariffs and his liberation day and the impact on the UK’s public finances. This article is a reply.

The guardian reports US Department of State, channelling JD Vance, has raised the issue of “freedom of speech” in the current trade negotiations and are ‘concerned’ about the possible sanctions against an anti-abortion demonstrator who has been convicted of demonstrating too close to a clinic. The identification of ‘free speech’ as a trade issue is not just caprice. It was raised dramatically by JD Vance at the Munich security conference earlier this year. It is part of their pro-oligarch agenda; they are frightened of European regulators and the massive fines levied on the US high tech firms and now that Musk has bought twitter, the social media companies and their ‘freedom of speech’ is a tool by which they seek to maintain their power.

I was curious that they identified the fact that Trump respects those that strike back and yet spoke favourably of Starmer’s weak response, particularly when compared with both the EU’s and the US’s neighbours.

While they spoke of the short term economic results as a possible constraint on Trump’s behaviour, I suggest that the only constraint that concerns him is his popularity which since he can’t run again is of limited use to him. Curiously, I read an article by Lawrence Lessig today suggesting the founding fathers deliberately excluded term limits on the grounds that a desire for re-election would act as a moderator on behaviour. They were particularly concerned about kleptocracy, although Hamilton used the word plunder.

In the second part of the interview, they speak to Andy Haldane, once Chief Economist of the Bank of England. He argues that the trade war will blow Reeves’ plan off course as it lacks what he and others call fiscal head room. He argues that higher taxes will need to be raised but that the bond markets will live with a plan that works i.e. delivers growth, which he argues needs to be based on defence industries.

Itr was always unlikely that Haldane would argue that since the purpose of the golden rules and even the growth strategy is to reduce the national debt, what needs to change are the rules, the independence of the Bank of England and Office of Budget Responsibility (OBR). The progressive inventors of the fiscal golden rules argued that that their purpose was to protect investment. The purpose of Reeves’ iteration of the rules is to pay off the debt.

One justification against borrowing to fund investment, is the interest costs but Google reports that “As of 2023, Japan’s government debt to GDP ratio was 255.20%, while the UK’s was around 98.5%.” How can Japan fund their debt while the UK cannot?

I also question the efficacy of the government’s proposed industrial strategy; historically private sector capital has not invested in UK innovation which has been funded by retained profits.

It is frustrating that commentators like Haldane can’t or won’t mention easing trade barriers with Europe as a means of stimulating export led growth and that no digital liberty campaigners are arguing to rejoin the single market in order to implement the Digital Services Act which the US social media companies rightly fear.

Reeves’ rules are aimed at the wrong policy outcome, and her capitulation of judgement to the OBR is a democratic mistake which merely constrains her room for manoeuvre. In my view its time to review the independence of the Bank of England and the existance of the OBR. Economic policy should be the outcome of a democratic process, not a technocratic black box built by the dead.

I say more at this article on my blog, and on industrial policy at Chartist Magazine. …

Macro-, Welfare and Hero-voters

Why are Labour yet again looking at the DWP budgets? The reasons are based on the wrong macro-economic theory but also on political values and electoral strategy.

There are 2½ theories on how the economy works. The first is neo-Keynesianism which understands that a national economy is unlike a household, policy focuses on expanding demand, usually by focusing on exports or investment. The second theory is quantitative monetary theory (QMT) which focuses on money supply and interest rates. Labour’s leadership have chosen the latter but the Labour government’s desire to squeeze Social Security otherwise known as welfare budgets is based on a mean puritanism and should be condemned and opposed.

The fear of inflation by both the Parties and the markets are seen as a constraint on public finances, but inflation is either demand pull or cost push. If not caused by external factors, QMT believes in increasing the interest rates to take money out of the economy and reduce demand, Keynesianism’s response is to increase taxes. Recent inflation has been caused by external shocks and as such could be ameliorated by a more interventionist energy pricing cap.

The ”Golden Fiscal Rule” of Corbyn’s leadership was designed to protect investment, not the deficit.

Progressives should be arguing that the deficit is not a constraint on government activity, not that we will fund that deficit with wealth taxes. Wealth taxes are necessary as part of “from each according to their ability” and both Income/wealth equity and the business cycle stabilisers require a guaranteed decent benefit floor. More equal societies grow better, so it is right that we implement wealth taxes and maintain benefit levels, but this is because it’s the right thing to do, not to fund the expenditure.

Another failure in the growth strategy though is that Labour are not investing in Higher Education or research nor in social/commercial structures to encourage the adoption of technology and of course, the elephant in the room for inward foreign investment and import/export is Brexity and the European Union.

On electoral strategy, in his article in the Express of all places, Andy Twelves says, “There’s a deep-rooted misconception in British politics. The belief that winning elections depends on endlessly chasing voters who are fundamentally sceptical of you.”. This would seem this is true, but in the words of Capt. Blackadder, “there’s one problem with this theory”, and it also didn’t work in 2024. The Labour Party is continuing its so-called strategy of courting “hero voters” who are polled as not wanting to pay for those they see as feckless. Again, it is a task for progressives is to defend universal benefits, it’s the right thiong to do and a positive contribution to economic growth.

Image: from free malaysia today Licence: Attribution 4.0 International CC BY 4.0 …

Win/Lose vs Win/Win & Trump

I was pointed at this,and was advised, that, “Everybody I know should read this accurate and enlightening piece…”.

The best, most cogent and elegantly simple explanation into the inexplicably destructive negotiating processes of the President, by Prof. David Honig of Indiana University.

“I’m going to get a little wonky and write about Donald Trump and negotiations. For those who don’t know, I’m an adjunct professor at Indiana University – Robert H. McKinney School of Law and I teach negotiations. Okay, here goes.

Trump, as most of us know, is the credited author of “The Art of the Deal,” a book that was actually ghost written by a man named Tony Schwartz, who was given access to Trump and wrote based upon his observations. If you’ve read The Art of the Deal, or if you’ve followed Trump lately, you’ll know, even if you didn’t know the label, that he sees all dealmaking as what we call “distributive bargaining.”

Distributive bargaining always has a winner and a loser. It happens when there is a fixed quantity of something and two sides are fighting over how it gets distributed. Think of it as a pie and you’re fighting over who gets how many pieces. In Trump’s world, the bargaining was for a building, or for construction work, or subcontractors. He perceives a successful bargain as one in which there is a winner and a loser, so if he pays less than the seller wants, he wins. The more he saves the more he wins.

The other type of bargaining is called integrative bargaining. In integrative bargaining the two sides don’t have a complete conflict of interest, and it is possible to reach mutually beneficial agreements. Think of it, not a single pie to be divided by two hungry people, but as a baker and a caterer negotiating over how many pies will be baked at what prices, and the nature of their ongoing relationship after this one gig is over.

The problem with Trump is that he sees only distributive bargaining in an international world that requires integrative bargaining. He can raise tariffs, but so can other countries. He can’t demand they not respond. There is no defined end to the negotiation and there is no simple winner and loser. There are always more pies to be baked. Further, negotiations aren’t binary. China’s choices aren’t (a) buy soybeans from US farmers, or (b) don’t buy soybeans. They can also (c) buy soybeans from Russia, or Argentina, or Brazil, or Canada, etc. That completely strips the distributive bargainer of his power to win or lose, to control the negotiation.

One of the risks of distributive bargaining is bad will. In a one-time distributive bargain, e.g. negotiating with the cabinet maker in your casino about whether you’re going to pay his whole bill or demand a discount, you don’t have to worry about your ongoing credibility or the next deal. If you do that to the cabinet maker, you can bet he won’t agree to do the cabinets in your next casino, and you’re going to have to find another cabinet maker.

There isn’t another Canada.

So when you approach international negotiation, in a world as complex as ours, with integrated economies and multiple buyers and sellers, you simply must approach them through integrative bargaining. If you attempt distributive bargaining, success is impossible. And we see that already.

Trump has raised tariffs on China. China responded, in addition to raising tariffs on US goods, by dropping all its soybean orders from the US and buying them from Russia. The effect is not only to cause tremendous harm to US farmers, but also to increase Russian revenue, making Russia less susceptible to sanctions and boycotts, increasing its economic and political power in the world, and reducing ours. Trump saw steel and aluminum and thought it would be an easy win, BECAUSE HE SAW ONLY STEEL AND ALUMINUM – HE SEES EVERY NEGOTIATION AS DISTRIBUTIVE. China saw it as integrative, and integrated Russia and its soybean purchase orders into a far more complex negotiation ecosystem.

Trump has the same weakness politically. For every winner there must be a loser. And that’s just not how politics works, not over the long run.

For people who study negotiations, this is incredibly basic stuff, negotiations 101, definitions you learn before you even start talking about styles and tactics. And here’s another huge problem for us.

Trump is utterly convinced that his experience in a closely held real estate company has prepared him to run a nation, and therefore he rejects the advice of people who spent entire careers studying the nuances of international negotiations and diplomacy. But the leaders on the other side of the table have not eschewed expertise, they have embraced it. And that means they look at Trump and, given his very limited tool chest and his blindly distributive understanding of negotiation, they know exactly what he is going to do and exactly how to respond to it.

From a professional negotiation point of view, Trump isn’t even bringing checkers to a chess match. He’s bringing a quarter that he insists of flipping for heads or tails, while everybody else is studying the chess board to decide whether its better to open with Najdorf or Grünfeld.”

— David Honig

From https://www.facebook.com/geoffrey.m.arnold/posts/10160302885212273, also at threads https://www.threads.net/@beingliberal/post/DFhUZedxEIT?hl=en

Not having studied negotiation, I can see that this ignorance is being applied to the original Brexit negotiations and to Starmer’s attempts to “reset” the election. …

The Draghi report on European competitiveness.

I have been trying to get on top of whether the Draghi Report on European economic competitiveness is really a game changer. Without study it seems to be a call for more EU (as opposed to member state debt. I am of the view that within the UK, there needs to be transfer union i.e. that borrowing and wealth from London needs to be shared with other parts of the country.

I found this article from the FT, which is headlined, “Europe can learn fiscal lessons from the UK on how to achieve its goals”, and subtitled, “ A co-ordinated reform agenda is crucial if the EU is serious about becoming a climate leader and geopolitical player”, written by Draghi. On diigo, I highlighted the following lines,

The UK government has chosen to significantly raise public investment over the next five years and has adopted precise rules to ensure that borrowing is used only to fund this investment. … Moreover, in order to ensure the quality of spending, transactions will be validated by independent authorities.

To which I reply, “Of course Draghi would argue for independence. The near cultish following with which his recent comments have been greeted is based on the desire by politicians and capitalists to ensure the macroeconomic policy and regulation is outsourced to non-democratic agencies. Central bankers underestimate the ability of democracies to present a wisdom of crowds, even on investment decisions. An example of this is the EU’s horizon investment valuation process, which ranks proposals and select winners from a competition. The technocrats and democrats, particularly representative politicians also underestimate the value that citizens assemblies may bring to these decisions.

Draghi continues,

“A more efficient use of Europe’s high private savings rates requires integrating its capital markets. To redirect private investment from mature industries to more advanced sectors will hinge on completing the single market. … innovative firms in fast-growing sectors such as digital services will not be able to scale up and attract capital. And, as a result, investment will remain locked in old technologies.”

Is this true? Perez, whose theories I summarise on my blog, argues that the declining profit of now legacy industries will ensure that investment goes to new innovative industries. Also, like most Draghi is betting on digital services as the driver; Perez’s theories suggest that IT is now reaching its stagnation stage and will be replaced although we maybe in a stage where the political power of legacy capitalism is too powerful to be overcome. This is why corporate lobbying power is so destructive to human progress. …

A budget that “needs improvement” &“exceeds expectations”

The budget headline is a £127bn deficit and current account stabilisation where the Tories had planned further reductions in expenditure. I am on the side of those who say, it’s not too bad and could have been worse. It, in the words of most performance management systems, “Exceeds expectations”, although most of those were set by themselves. There remain some unsolved problems and some risk but I think this response from Jeremy Corbyn and the Green Party misses the mark, it is not austerity light. There's much more, overleaf ...

Are there any public sector efficiencies to find?

In order to prop up the markets, Kier Starmer wrote an article in the FT, once again extolling the need for public sector reform. His article covers more than that, it seeks to address innovation & growth, and public sector reform, yet misses the implications on industrial policy, university investment and local authority services. I explore these themes in more detail overleaf ...

Growth, institutions and Brexit

Several commentators on the UK budget, including the OBR, have suggested but there’s insufficient growth stimulus planed. The OBR predict that the economy will grow slightly less than under previous plans; I don’t know how this can be when the proposed deficit is £89bn. They also however predict that the effect of Brexit his -4% of GDP and yet no one in parliament, except for Ed Davey has mentioned this as a growth opportunity.

The OBR and the Bank of England are both institutions designed to protect economic policy from democratic control. Time to abolish one and reform the other. …

More on growth & debt

The problem with the Truss mini-budget was not that they had an ‘unfunded’ deficit but that there was no mechanism between the deficit and investment. Rich people tend to save and for the deficit to do any social good, the banks would have to lend to investors i.e. entities looking to buy or make capital goods; which they have never done. Private sector domestic investment has usually been funded by retained earnings!

The lesson here is that the markets were not frightened of the deficit, just its purpose.

See also Growth vs public debt management on this blog. …

« Previous