Category Archives: international trade

Post-Graduate Fellowship in Business, Law, and Human Rights (open to graduating Duke seniors)

The Kenan Institute for Ethics, in which I spend much of my academic life, is pleased to announce a new “adversarial-ethics-related” fellowship open to a graduating senior from Duke. Full details are here. Its adversarial-ethics connection is obvious: international business, especially in less-developed markets, cannot be “civilized” as easily through strong state regulation. One of the many alternatives to hard regulations that is being developed now is a form of “soft law” and “self-regulation” based on internationally recognized standards of human rights that businesses, and not merely governments, should be expected to follow.

The eventual holder of this fellowship will work “closely with the United Nations Working Group on Business and Human Rights (UNWG). The mission of the Working Group is ‘to promote the effective and comprehensive dissemination and implementation of the Guiding Principles on Business and Human Rights.’ The Working Group consists of five independent experts, one from each of the U.N.’s five regional groups, who work virtually with limited support from the Office of the High Commissioner for Human Rights in Geneva.”

Deadline for applications: 2 April. (Full details here.)

Obama on the basic framework for adversarial ethics: why international trade is like a pick-up basketball game

In his press conference following the recent APEC meetings in Honolulu, President Obama laid out a pretty basic normative framework for the adversarial institution of international trade. The question he was addressing involved the perception among American politicians and some Asian leaders that China was not exactly playing cricket.

And I think leaders in the region understand that as China grows, as its economic influence expands, that the expectation is, is that they will be a responsible leader in the world economy — which is what the United States has tried to do. I mean, we try to set up rules that are universal, that everybody can follow, and then we play by those rules. And then we compete fiercely. But we don’t try to game the system. That’s part of what leadership is about.

China has the opportunity to be that same type of leader. And as the world’s second-largest economy, I think that’s going to be important not just for this region, but for the world. But that requires them to take responsibility, to understand that their role is different now than it might have been 20 years ago or 30 years ago, where if they were breaking some rules, it didn’t really matter, it did not have a significant impact. You weren’t seeing huge trade imbalances that had consequences for the world financial system.

Now they’ve grown up, and so they’re going to have to help manage this process in a responsible way.

What he is describing, essentially, are the rules for a pick-up game of soccer or basketball among a bunch of people from the same neighborhood. You agree to a set of reasonable rules (given there are no real referees), you expect everyone to follow the rules, each person still plays hard to win within those rules, and the whole game is threatened if one or more players are consistently trying to get away with blatant cheating or fouling. Obama says, “that’s part of what leadership is about,” and here he is really talking about sportsmanship.

Obama is chastising China for gaming the rules (e.g., by not devaluing its currency), though it is not clear they ever agreed to that particular rule. This press conference also unveiled some details about a new “Trans-Pacific Partnership” that might lead to a free-trade zone. But it appears that China is not welcome in this partnership until it agrees to abide by a fair set of rules.

It’s interesting that Obama also references an exception to full compliance that is often accepted by participants in a pick-up soccer or basketball game: that you may give a younger kid a little more latitude (say, to receive a pass off-side in soccer, or to travel or double-dribble in basketball). It can be fun to watch the kid trying to play “with men” above his talent level. But it nevertheless gets pretty annoying if the kid grows up to be one of the strongest players and still expects special rules or exceptions for himself alone.

Free trade = more regulation?

In the context of a domestic economy, a call for “free markets” or “free-market solutions” is often a plea not to regulate markets. But international agreements for free trade are by their very nature attempts to regulate international markets. As a deliberately adversarial institution, a free-trade agreement between two or more countries forbids various sharp competitive strategies that any given country can use to create a competitive advantage for itself (e.g. tactics that would allow its goods to be exported while it restricted imports from trading partners). The whole point is to solve a collective action problem between rival countries: when each country is allowed to pursue protectionist policies, say, they will all end up worse off. That is more or  less the point of Adam Smith’s Wealth of Nations. (It was not this point.)

But in today’s New York Times there’s an op-ed pointing out another interesting way to think of international free trade as involving more, not less, regulation. Layna Mosley, a political scientist at UNC-Chapel Hill, has study the way free-trade agreements between developed and less-developed countries seem to generate a regulatory “race-to-the-top” on labor standards.

There is…a more general way in which trade agreements — and the economic ties they generate — benefit workers in developing nations. As Colombia and Panama expand their trade relationships with the United States, workers stand to gain more than just the job creation and higher wages that often come with expanded trade. Research I conducted over the last several years with the political scientists Brian Greenhill and Aseem Prakash suggests that trade with developed nations helps developing countries expand labor rights themselves.

Why? International trade gives producers incentives to meet the standards of their export markets. When developing nations export more to countries with better labor standards, their labor rights laws and practices tend to improve.

With a shout-out to David Vogel’s “California effect” explanation of the way in which the state of California raises environmental standards for other states in the US, she continues:

This California effect works in two ways, both based on global producers’ own calculations of self-interest.

First, multinational companies often carry their management and production technologies with them when they produce goods abroad because, like automakers selling to California’s consumers, they find it efficient to standardize their practices in plants, regardless of location. Those practices — including rules for the appropriate treatment of workers — then set an example for other employers throughout the host economy.

Second, the multinational company knows that many consumers, activists and shareholders in its home country will judge its imported products on whether they were produced in ways that reflect the firm’s public commitment to corporate social responsibility. This spurs multinational firms and importers to press locally owned companies in their supply chains for working conditions that meet internationally recognized labor standards.

So not all unforeseen consequences of regulating contests (in this case, the contest between national economies in international trade) turn out to be perverse consequences. Not all races involving more- and less-regulated economies are races to the bottom.

[Note: click on the “race to the bottom” category link, in the right-hand column, for more posts on this general topic, mostly by star students in my Adversarial Ethics class at Duke in the spring of 2011.]

 

Race-to-the-Bottom Watch: Fishing for Trouble

What’s the most deadly occupation in America? According to the U.S. Bureau of Labor Statistics, it’s fishing. Commercial fishing, to be precise. Why is fishing so dangerous? Fisherman can be trapped in a perfect storm of collective-action problems and, well, actual storms.

The harsh competition in this already dangerous industry is leading workers to labor in ever-worse sea conditions in order for businesses to stay afloat (so to speak). The best fishing grounds are often found in the most treacherous seas, and the clock ticks down quickly in some fisheries (say, the crab fishery off the coast of Alaska) where the seasons last only a few weeks. When one vessel decides to go out in stormy weather in order to get a competitive edge, crews of other vessels are faced with the dilemma of either falling behind the competition or following suit in braving the potentially life-threatening conditions.

This dilemma is only exacerbated by the depleted state of many of the world’s most important fisheries.  In an effort to stem the “tragedy of the commons” of overfishing, authorities have commonly resorted to setting an overall limit of fish that can be caught in a given fishery for a given season.  The approach of giving an aggregated limit breeds intense competition because each fish caught by one fisherman entails one fewer available to all the others.  This creates what has become known as a “race to fish” wherein fishermen are willing to do almost anything in order to nab a greater share of the overall quota before it runs out, including foregoing safety precautions.

So this race to fish is really a race to the bottom. One crew deciding to risk the elements in order to gain a competitive advantage starts the race. But once the other vessels join the competition by going out in perilous weather conditions, the competitive edge that motivated the first mover vanishes, while the risk of death for all of the fishers increases.  Thus, in the race to fish we can see how individuals attempting to act in their own interest, while responding to the actions of others attempting to do the same, can all end up worse off.

Is there any way out of this race to the bottom? Some authorities have replaced the overall quota with individual allocations to prevent such fierce competition.  Critics protest, however, that this solution does not live up to the free-market principles of American capitalism.  However, it is evident that the case of a totally free market for fishing (in which fishers and their customers do not pay the cost of replenishing the fish stock) is likely to lead to overfishing and ultimately the end of any kind of market for fishing. What if the rights of individual allocations were auctioned off in advance?

 

 

The Hesitant Hand: what Adam Smith did and didn’t say about government regulation, corporate lobbying, and CSR

Ethics for Adversaries has been on spring break, but should be roaring back to life in the coming days.

Here’s a newish book I’ve just ordered on the history of Adam Smith’s Great Idea — the one that still frames so much of our thinking about the ethics of deliberately adversarial institutions. (Steven G. Medema, The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas.)

I just hope the book is better than the first line of Princeton University Press’s blurb, which seems at best skewed and revisionist, and at worst just false:

“Adam Smith turned economic theory on its head in 1776 when he declared that the pursuit of self-interest mediated by the market itself–not by government–led, via an invisible hand, to the greatest possible welfare for society as a whole.”

It is well-known that the famous phrase “an invisible hand” (not even “the invisible hand,” which is what we tend to say now) was used only once in the massive two-volume Wealth of Nations. It comes in a chapter railing against Restraints on the Importation of Goods. Much of the chapter concerns what we would now call the law of comparative advantage — that is, about why it is to each country’s advantage to produce what it can produce most efficiently, and to trade abroad for what can be produced more efficiently in other countries. Throughout the chapter and the book Smith points out the myriad ways restrictions on international trade create inefficiencies. And also how these restrictions inevitably come from business people lobbying gullible or corrupt politicians in order to secure domestic monopolies.

But not only is it inefficient to restrict imports of goods produced more efficiently abroad, it is usually unnecessary. Business people prefer to keep an eye on their investments and to be able to trust the people they deal with, so they will naturally, even other things not equal, invest domestically. As Smith says in the famous “invisible hand” paragraph,

“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own gain, and he is in this, and in many other cases, led by an invisible hand to promote an end which was not part of his intention.”

He is talking about a particular case, and criticizing a particular type of government regulation, namely, what we would now call protectionism. He notes that this basic logic of the market replicates itself “in many other cases.” He does not say “in all other cases.” We know, for example, that the invisible hand will get all messed up in situations that involve collective action problems like the Prisoner’s Dilemma. Adam Smith would have had no reason to object to that (and I suspect that a real Smith scholar could point you to his discussions of PD-like situations). And he wouldn’t think that the general welfare would necessarily be increased by trade involving deceit, the exploitation of what we now call information asymmetries, or negative externalities.

It is also noteworthy, given the wording of the Princeton University Press blurb, that he does not say that self-interest via the invisible hand leads to “the greatest possible welfare of society as a whole.” In the “invisible hand” paragraph he is talking about “the annual revenue of every society [which] is always precisely equal to the exchangeable value of the whole annual produce of its industry.” That is, something like GDP. It is obviously an open question whether GDP tracks the “welfare of society.” Even the British Conservative Party doubts that assumption these days!

Once again, I’m no Adam Smith expert, but I have actually read great swaths of the Wealth of Nations, which is more than most latter-day “disciples” of Smith can claim. It is somewhat odd that the enduring lesson from that monumental work is the panglossian one that markets, left to their own devices, always lead to the best of all possible worlds (since that is not what Smith ever says), rather than Smith’s repeated warnings that we should always be suspicious of corporate lobbying and corporate conspiracies.

The conspiracy part we do remember from the famous quote about how we should worry whenever members of the same trade meet, “even for merriment and diversion” since they will inevitably try to fix prices. That is why even conservatives support anti-trust regulation; even if they also tend to think it is unfair in almost any particular case. But just as relevant today would be Smith’s utter contempt for business people lobbying and corrupting hapless politicians in order to enact particular regulations that serve their interest more than the public’s. Smith was concerned with trade restrictions that create unnatural monopolies, but he would be just as worried today about lobbying to allow for the exploitation of other market failures in a modern economy. And he would have been horrified when the right-wing — supposedly pro-market — justices on the Supreme Court used the Citizens United case to make it easier for corporations to pursue their interests by manipulating election processes.

And while this new book is drawing our attention to the famous “invisible hand” paragraph, it is worth noting that Smith was no fan of Corporate Social Responsibility, or CSR, either. He continues the paragraph quoted above by noting:

“By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

Do we really care if political leaders lie to us?

This afternoon I attended a terrific seminar at the Kenan Institute for Ethics led by Amber Diaz, a PhD student in political science at Duke. Amber was presenting some preliminary results from a large survey she has conducted on Americans’ reactions to learning that their political leaders sometimes mislead them. According to the Kenan Institute’s web site, her dissertation is tentatively entitled: “Bumbling, Bluffing, and Bald-Faced Lies: Mis-Leading and Domestic Audience Costs in International Relations.”

It shouldn’t surprise readers of this blog that during the discussion of many different kinds and contexts of deception in politics, it seems to make a difference whether we interpret the deceptive politician as being engaged in an essentially competitive or a non-competitive activity.

In competitive “games” — especially those involving strategic rationality, where one party is taking into account how the other is trying to outwit her — we routinely leave room for “ethical deception,” or at least ethically excusable deception. Poker players can bluff, quarterbacks can pump-fake, pitchers can throw change-ups, negotiators can deliver a phony ultimatum, detectives interrogating suspects can trick them into believing they already have DNA evidence proving their guilt; and so on.

What about political leaders? Do we demand that they always tell us the truth, the whole truth, and nothing but the truth? We might be inclined to answer, “Yes, of course!” And when we say this it is because we are thinking about them as our public servants, with a fiduciary duty to look after our interests rather than their own. One of these interests is in knowing the truth, and not being manipulated or disrespected. We hate the idea that a political leader would lie to us because he knows full well we would not go along with his scheme. We hate it even more if he lies to us in pursuit of some personal or partisan interest.

Amber Diaz’s research aims to see just how righteously indignant we really are when we realize we’ve been duped. Is this something that we make politicians pay a price for? (Amber is more than welcome to post on this blog if she wants to tell us more about the answers her research and number-crunching are turning up!)

But the fact is, we are not always upset about politicians being deceptive, and not just in cases where we might want to say “I know he’s a sonuvabitch, but he’s our sonuvabitch!” Sometimes we recognize that politicians are engaged in deliberately adversarial contests; and we respect them for being wily in some of these situations.

This is most obviously the case in the conduct of foreign affairs (a realm Amber is looking at, in fact). Here we see our leaders as engaged, at least partly, in an adversarial contest against our national rivals or enemies. We expect them to deceive these rivals sometimes (e.g., to send spies and special ops into other countries), and this may well require that they deceive us too. Similarly, we might expect political leaders involved in sensitive international negotiations (e.g. for trade, or arms-reduction, treaties) to bluff and make hollow threats.

But we may even excuse deception within domestic politics precisely because we take seriously the constitutionally adversarial nature of democracy. Political leaders are not merely public servants with paternalistic duties to look after our interests. We have deliberately locked them into adversarial contests with rival politicians, and with rival sources of power in our society. We might want to tie one hand behind their backs in these contests. But if we understand the nature of our adversarial system, we cannot tie both hands. For this reason, as my colleague Kieran Healy pointed out in today’s seminar, we often gain a grudging respect for “successful” politicians who know how to win at the game we place them in — even when they are not “our sonuvabitch.”

In any case, if we are a bit confused or inconsistent in our evaluations or, or reactions to, political leaders lying — and this is what Amber’s preliminary data seem to be showing — it is at least in part because we are confused and inconsistent about how partisan or non-partisan we expect the game of politics to be.

Should we be Worried When Competitive Arenas Compete with Each Other?

[Ed. Note: This is the debut post by founding member, Dominic Martin.]

The Deutsche Boerse announced this week that it was in advanced talks to buy NYSE Euronext in a deal that would create the world’s largest stock market.

And by complete coincidence, on the very same day, the London Stock Exchange Group (LSE) had also announced that it would merge with the TMX Group Inc. (who owns the Toronto Stock Exchange). Both of these mergers (Frankfurt-New York and London-Toronto) are presented as a necessary measure to compete with other stock markets at the international level.

So here is a big question. If competition is justified within properly regulated and self-contained competitive arenas, should it also be justified, at a “meta-level,” between these arenas themselves?

My intuitive answer is … yes.

Because competition already goes on at many different levels: corporations compete against each other (obviously), but also, in other ways, with their suppliers and their customers; consumers compete with each other over products that are scarce (houses, for instance, or art), and even national markets compete with each other to attract investors, increases their exports, and so on. What is a tax haven, if not a competitive national economy that plays “dirty” at that game? (Or so say highly taxed and less internationally competitive economies, like Canada or France.) Competition among stock markets also contributes to the dynamic that makes rivalry desirable in the first place.

However, a few things have to be kept in mind regarding the London-Toronto stock exchange merger:

  • What Canadians will gain, in terms of stocks volume, they will lose in terms of control over their own national stock market.

Even if LSE CEO Xavier Rolet is seeking to reassure Torontonian financiers, and even if the Canadian authorities will require some guarantees that TMX won’t lose all its sovereignty in the merger, the fact remains that the bigger player is the LSE. It will hold 55% of the share of the new corporation. It will occupy eight seats at the Board of directors, compared to seven seats for TMX. What will happen when UK’s financial interests conflict with Canada’s? To ask the question is to answer it.

In 2008 TMX acquired the Montreal Stock Exchange. Let’s just say that Montreallers’ interests would now be even further down the food chain.

  • If you are out in the market of stock markets, ready to merge with another player, why not go after the biggest one?

The TMX-LSE merger will create the biggest stock market in the world in terms of subscribers, but only the second in terms of market capitalization. The first one being the New York Stock Exchange (now I let you do the math if NYSE Euronext is acquired by the Deutsche Boerse). So why didn’t the TMX try to merge with that group? Shouldn’t Canadian’s benefit ever more from that transaction?

The fact that the stock markets owned by TMX and LSE specialized in similar product might be an acceptable rationale, however. Once taken together, the London and Toronto stock exchanges will become the biggest market for merchandise, natural resources, energy, and small- and medium-sized businesses in the world.

  • Did they really have a choice? And if not, what does the TMX Group should be accountable for?

Technological development (that allows decentralization of transactions) and the integration of world-wide economies (that increase the size of markets and corporations) have pushed many stock exchange to merge since 2000. Some like to say that these mergers are unavoidable (see Professor Louis Gagnon’s comments in the Globe and Mail for instance). If it is the case, does it wave all obligations for the corporations that own these stock markets? Ought they to promote their respective national interests?