Re: Trade policy

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

Henry

You wrote:

You cannot walk on the sidewalks of any city today without
> stumbling on the dead bodies left by globalization and free trade.


It is true but it is taboo subject in Economics.  We all "know" that the
floating exchange rate system is the better system.  But it does have a few
side effects that we choose to ignore.
Strangely, success has been the reason for the "dead bodies".   That is,
when countries succeed at raising our exports, they must increase imports
simultaneously, by the same amount.  This is achieved through the exchange
rate system.  The value of the currency rises to make imports cheaper, so
that domestic consumer buy more.

The higher value of the currency has two effects: it not only makes imports
cheaper; it reduces the incomes of exporters.

This damages the economy in two ways:

  a.. the lower income from exports reduces not only the income of
exporters, it squeezes down the amount they can afford to pay staff, so they
must try to reduce labour cost; that is lower worker incomes; and
  b.. the lower price of imports makes it difficitul for industries
supplying the domestic economy to compete with imports – the additional
imports must enter the economy and this reduces the market for local
suppliers.
Thus success in raising exports increases trade, both in exports and
imports.  But as it does so, it causes industries catering for the domeist
market to grow more slowly or decline.  This phenomena where international
trade grows more rapidly than the domestic economy is what we commonly call
globalisation.

The exchange rate system needs to be modified to eliminate this problem if
countries are going to be allowed to prosper from their success at
increasing exports.

Leigh Harkness