Trading partners

I’ve been thinking a lot about international trade recently.  For those of you who don’t know me well, this requires some explanation.  First off, I’m a nerd, and thinking about complex issues makes me happy, and reading and writing about them, modelling them, solving out equations which express them – yep, all of that makes me happy.  Giggly, actually.  Second, trade has been in the news a lot lately, what with tariffs and the like being strewn about willy-nilly, so to the extent my nerdish pondering at any moment is driven somewhat by what’s in the news, trade would naturally occupy some sort of a place (on that note, I’m also thinking a lot about pumpkin recipes).  Third, and perhaps most importantly, international trade – and its counterparts in international finance and immigration – impacts me really personally.  I worked outside the US for almost seven years and harbor deep hopes that I will do so again someday – but the general trends and operating mechanics which enable and restrict flows of capital, labor, and goods between countries will play a big role in deciding whether or not I’ll have an opportunity to do that.  So the recent eruption of a good old fashioned 19th century tariff war, combined with increasingly strident tones about people who “Aren’t From Here”, has me thinking a lot.

The basics of international economic theory is rooted in Adam Smith and David Ricardo, while international finance theory took on its modern form with John Maynard Keynes and the heated theoretical discussions that took place in Bretton Woods (if you haven’t been to Bretton Woods, by the way, I recommend it – especially in the fall, the leave colors are lovely and there’s a surprisingly challenging old-school format golf course).  But really, international economics needs to be understood in the context of four very different “flows” between countries, and those flows have not been readily understood in a kind of unified field theory of cross-border exchange – at least, I haven’t found a text which unites the four.  Those flows are of information, capital, goods, and people.  Sometimes the middle two are combined in theories of international trade and finance; sometimes people and ideas are thought of collectively.  But they are all distinct and yet form a continuum of engagement.

The distinction I want to focus on here is that of momentum or maybe acceleration.  At any moment, the flow of any of those four categories of human exchange will be subject to a greater or lesser tendency to either accelerate or decelerate.  Each also has a natural “potential momentum” – information, for example, probably has the fastest natural potential, being (in theory) transmittable instantaneously subject to technology.  Capital is often thought of as having a similar potential speed, but I’d argue that because capital is a “heavy” form of information – it being really a collection of value determinations – it can’t move quite as fast as lighter, more pure information – although I’ll come back to that in a bit.  Goods can move roughly as fast as shipping and logistics will allow; different goods – because of bulk or complexity or whatever – will have different “potential” speeds as a result of the actions of differing logistical chains.  And people are also subject to particular logistic challenges, but the potential of individuals is highly divergent, just like goods.  Some people will only leave their home, or town, or country of birth, via the threat of violence or disaster (and even then they may dig in – witness how many refuse to evacuate areas threatened by floods or fires until it is too late); on the other end of the spectrum, you have me.

Traditional approaches to international trade focus on the exchange of goods and services between countries, and the impact this has on the relative productivity and wealth of the countries involved over time.  There emerged early on in economic history the concept of “relative advantage,” in which goods will be traded between countries even if one country is absolutely more productive (ie., can produce more for less) in all areas of production, as countries exchange their relative advantages across goods and services.  Each country will then redirect new investment into those areas where they possess relative advantage, with the resulting specialization allowing both countries to experience an absolute combined advantage over time.  Trade in this classically defined way is to countries what diversification is to equity portfolios: a free benefit.

Classically this works because in the abstract, one can model goods as being essentially interchangeable collections of “factors”; of course, good A – say, a luxury car – is not interchangeable with a very different good B – a crate of iPhones with a spot price equal to that of the car.  Trade theory binds much of the friction of trade to a combination of logistical differences and differences in persistency value.  A car load of apples may be worth as much as a luxury car, but they will spoil quickly.  The car will depreciate in value relative to an equivalent value pile of raw iron ore.  The value of intellectual property in particular may not translate – and really, no pun intended here – from one country to another, but it might translate with even more traction than in the country from which it originated (“Baywatch” being my favorite example here; I will never understand the German people’s taste in broadcast television).

Before I get stuck thinking about Baywatch, however, I think trade theory captures some but not all of these differences.  My reading of late hasn’t really found adequate mention of this notion of momentum on several dimensions.  Trade theory “gets” (although usually glosses over) the first dimension of speed – the logistics of getting a tradeable quantity of Good A to Country Z, with logistics creating both temporal barriers and changes in value due to the combination of shipping costs and customs duties and tarriffs assessed on the transaction.  On another dimension, though, some goods create deeper connections due to their role in supply chains.  Pure commodities can be easily replaced, but value-added trade goods – especially goods that are intermediate in an assembly process, like car chassis or newsprint – often involve an exogenous process of adaptation, both on the part of the producer in Country A and the customer in County Z, which can mean trade will persist much longer, or be avoided much longer, than trade theory would suggest.  Still deeper is the fact that all exchange – even going to the corner store for milk – involves varying degrees of social interaction which are not purely economic.  When trading across country barriers, the social interaction costs are that much higher – and once trust has been built to overcome that cost of establishment, it is much more resilient to external challenge (although each party might still be on guard for internal violations of the trust).  That is, relations across borders can be fragile in and of themselves, but they can also be far more resilient to attack from without.

Information is usually outside of the realm of trade except in the emerging focus on intellectual property, but even there, some “thing” has been created which is presumed to have exchange value, whereas information exchange can take place without reference to traded value whatsoever.  This is where trade blends into politics, frankly, but it also blends into the realms that I find most interesting, the moral philosophical realms of art and beauty, of ideas of personal good and meaning (putting aside the more obviously polarized realms of the good of the state).  These ideas can move quickly but – unlike a pure use object, say, a bar of soap – they have what I think of as gestation or development periods.  Some ideas have spread rapidly, others much less readily but still with a gradual, eventual, inexorable momentum they acquire a deep purchase.  Other ideas fall flat, and still others are recycled to the point of unrecognizability.  The timing aspect of their momentum, though, is both important and mostly ignored.

Capital would, seemingly, be the simplest thing to model – we simply watch dollars go round the world, converted into yen and lira and euros and back again, chasing yields and opportunities and tax shelters.  But even there, there is a varied pace, multiple rhythms at work.  The dollars that convert to euros to buy a vacation will behave differently than the ones that buy a factory, which will definitely move differently than the dollars that buy shares in the same factory instead of the factory itself, which will move differently than the dollars which are deposited in the bank which makes a loan for the factory.  There is the absurd and disruptive power of dollars which buy bullets and tanks which are rapidly consumed and destroyed, the return on the expenditure measured in power over land, or people, or as measured against the land and people controlled by others.  On the other side of the “moral” coin there is the similarly absurd yet differently disruptive dollars which buy grain which is then rapidly consumed by victims of natural disasters.  Each one is signalled by a capital flow, but each capital flow has a different expectation of return (or no expectation at all), over a different horizon.

And then there are people.  We are still in the midst of the greatest and fastest exchange of humanity the world has ever seen, propelled by preferences and needs but ultimately involving hundreds of millions of us.  In some parts of the globe, we have already created what we think of as domestic, internal exchanges of people but which on the scale of history are nothing short of insane: the United States is a continent-wide free labor pool, Europe achieves something close to the same.  And even across harder borders, there are plenty of holes through which drip people in their thousands, legally – my work visas bringing me to Canada and the UK, my friends who I recently visited in Houston coming to the US from Ontario and southern Russia – and illegally.  But even there, there is a kind of speed associated with the migrations.  Some people don’t get to stay – they get deported, they decide to go back to their country of origin for a different or better job, or for family that misses them more than they can bear (or vice versa).  Some stay for good.  Some stay for awhile and then move on to a different country, for different reasons, with a new set of factors driving their momentum as they move.

Four waves of exchange, each complex on their own, each impacting the other – but what’s been fascinating to me of late is to think about how these waves have all been accelerated in the past few decades, but in very different and potentially incompatible ways.  What we are now experiencing – in a return to harder trade walls for goods, to sharper rhetoric and more militarized borders for people, to a rejection of dialogue and information exchange between communities – is, I think, simply an expression of a trade machine which has gotten out of tune – or to return to the notion of momentum, which has run ahead of itself.

Let’s look at trade in goods and services first.  The WTO was set up as an expansion of the old General Agreement on Trade and Tariffs (GATT), which was a limited framework for allowing for some free trade while setting up a mechanism to resolve trade disputes.  That limited trade suited a world where logistics were harder, information exchange far more difficult, and interestingly, where people could largely move around the free world.    There was a manageable disconnect in speeds, in other words: people could move relatively easily (not as easily as today, but still – the jumbo jet is over 50 years old), but because goods were less mobile, and information was much less mobile, and capital was still largely trapped in localized zones, people movement was inherently less disruptive.  (I’m speaking right now of movements within the developed, free market world – obviously the Cold War had its share of horrific refugee movements, and the totalitarian dictatorships have always understood that people, even innocents, bring with them ideas which dissolve the illusion of control.)  In that world, the fear of movement, of marginally more trade, was much less – the momentum of goods and capital and idea flows served as a system limiter on the potential for disruptive people movement.

In the past 20 years since the explosion of the internet, however, information exchange has become not just fast, but uncontrolled.  Capital flows have been freed, although that process has been more gradual and actually hasn’t seen the same quantum shift in speed that hit information flows.  Perhaps below the radar for many of us, though, is the shift in speed and complexity of goods and services – and services are key here.  With the acceleration of information flows came the ability for services to be exchanged at a far greater pace than before.  The notion of sharing piecework for information businesses like software development or even art and fashion and design was simply unimaginable in 1970 except in the highest of high value add industries, which could support the literal movement of people on jets to enable collaboration.  By bringing services into the world of international trade in a material way, the information revolution gave an even greater boost to the potential momentum of economic trade.  Also, because information exchange could allow for improvements in the communication necessary to run large supply chains, it also accelerated trade in goods.  Ships don’t travel markedly faster today than they did in 1990, nor do trucks move faster (although trains generally do run faster: signalling technology is quite a bit better than before).  But goods move faster and farther because the ability to track them reliably has evolved at the speed of light.

The spped at which human beings move, though, hasn’t really increased – although the volume of movement has increased, the speed at which those people can move has not.  There might be more movement, therefore, but a large part of that is due to political violence and wars (those were always around, although information speed means we know about them more today), economic conditions (which seem starker when you’re aware from watching YouTube that things really are much, much better in France than they are in Syria), and demographics (rich countries have fewer children, and increasingly import labor from poor countries who produce more children).  The pace at which people can move hasn’t changed nearly as radically as the speed at which information and goods and services can travel.

That differential – the fact that information and goods has accelerated, but people, relatively speaking, continue to move at the same pace, or have even slowed down – has formed a kind of mirrored breakdown in our response to all forms of exchange.  On the one hand, there are those who look at the speed of modern information and economic exchange and wonder why people flows haven’t kept pace, why it’s still as difficult to (legally) get a job as a Mexican farmworking in California today as it was in 1991, maybe more so.  Or why it’s getting harder to get a job in finance in London, or in fashion in Paris, or as a pipefitter in Texas, unless you’re born in England, France, or the US respectively, instead of easier.  Some people wonder why they can’t move and others wonder why they can’t import – unemployment in skilled fields in the US is approaching 3% nationally, but government continues to squeeze access to skilled foreign labor.  It’s not just programmers and farmworkers, either: back home in Maine, seasonal businesses from clam shacks to summer camps struggled to find enough workers.

And capital flows are also slowing.  Capital was never monolithic, even though it is often rhetorically narrowed into visions of greedy bankers cornering currencies and then wiring their ill-gotten gains quickly to back to the sheltered security of a Caymans Island account.  Far more typical is just the bank letter of credit guaranteeing trade relationships between two companies for a year, or that quiet decision to locate a new factory line in Lyon instead of Windsor.  A combination of uncertainty and regulation, though, is slowing that down.  It’s harder to wire money between countries today than it used to be, convenient mobile phone apps notwithstanding; it’s not an issue of technology or cost, it’s an issue of compliance with “know your customer” and anti-money laundering rules which date in full force only back to 2001.  Uncertainty is not only about the risks associated with local business conditions; it’s also now uncertainty that capitalists won’t be able to get their money out, or that the supply chain assumptions that made a project work will disappear as a country pulls out of the WTO or out of the EU or out of NAFTA.

I’d observe that that combination of change – two primary flows, of information and of economic goods, accelerating almost beyond description, and two other flows, of people and of capital, moderating or at best holding at the same speed of decades prior – is not sustainable at all.  I wouldn’t go so far as to recommend a more “balanced” relative pace for each flow, but in any event that’s an exercise in tuning; we’re far past the point of tuning now.  Steam locomotives had a governing rule; you could run them as fast as you wanted, but most locomotives could only run reliably as fast in miles per hour as their main drive wheel was high in inches.  Go above that and it might work for a little while, but eventually, the engine would shake and rattle itself to death, first with rivets coming loose and then eventually a piston rod would fly free and, well, it would end badly.  It took awhile for engineers to learn how to balance speed and mechanical stability, to tune the engines to optimal performance.  But it was obvious when things had gone out of control.

I think we’re at a similar point right now.  Economists and political theorists, and the practitioners who join them in business and in the halls of political power, have missed the opportunity to engage in a tuning exercise, and the result is plain for us now to see: the global trade, finance, and exchange apparatus that was gradually set up in the years following the Bretton Woods agreement’s collapse in 1973 is now irredeemably broken, and we’re in that period of instability and awkwardness that occurs when a machine flies apart.  Back to Bretton Woods for a moment: that conference set up a system of fixed capital flows and exchange mechanisms designed to help a world – which had effectively stopped working because of World War II – rebuild.  People movement at that moment was uncontrolled and fast and unpredictable; trade had collapsed as countries which had not been destroyed in the war struggled to reestablish reliable markets for what they produced; information flows were walled up between the East and the West, and even in the West, “free information exchange” was still a debatable concept, let alone a functioning reality.  Capital was fixed as a means of establishing a common “speed”, or at least a sustainably aligned speed, between it and the other flows among people in an economic system.

It succeeded too well, with European countries recovering rapidly, so rapidly that they needed more and more capital to move, to purchase raw goods for factories, to purchase capital goods with which to build the factories, and to purchase consumer goods for people free to buy.  The rigid frameworks of Bretton Woods eventually flew apart, resulting in a few years of absolute monetary and capital chaos as currencies recalibrated, some appreciating monstrously (like the yen) and others depreciating just as fast, with commodity prices expanding and collapsing in a market system gone haywire, until finally central banks retooled themselves with the policies and tools to accelerate capital flows to meet the growing needs of industry, people, and informational exchange.  Those tools – with important adjustments – continue to serve us well, but the apparatus of economic and informational exchange have now accelerated beyond the tools of the system that gave birth to them.  They are now tearing that old system apart, first with a financial crisis, now with a trade war.  Hopefully, like the collapse of Bretton Woods, we won’t see further pressures on the world system.  But we might.

I’m not sure what I’m observing is radically interesting, but I’m struck by rhetoric on all sides – the “business press” of the Wall Street Journal and Bloomberg, the international political press, the general observations of reasonably intelligent people – that seems to focus on just “the information revolution” without the context in which it sits, or talks about trade flows in terms that would make sense to someone in 1988 but which, even on the surface, seems to be ignorant of the way the world has turned over itself in the three decades since then.  I think some recognition that there is, in fact, a grand unifying process that binds us across nations – when we trade across the legal, linguistic, social, and conceptual boundaries that we are bound to out of a strange glue of tradition, habit, and preference.  That grand process is beyond my academic ability to describe in econometric detail, but it doesn’t make me ignorant to its presence, or to the obvious signs that we’ve moved beyond any rule of thumb for safe operation and that they system is spinning apart.

As Viktoria has said recently, I’m not normal – I’m a global nomad, someone who is more comfortable with the odd sensation of not belonging somewhere than I am knowing I’m where I belong.  That means I’ll probably often be on the boundary of speed in pushing myself around the world, and I’m also comfortable with systems which are a bit on the fast side in general.  But I know I’m just one among seven odd billion humans, and the sustainability of the system we create and live within is not indicated by those who are on the bleeding edge.  The comfort I have with movement and exchange may be a view of the future, or it may be an indicator of a false path.  I don’t know and functionally, I don’t really care.  But the mechanisms we’ve come to rely upon for sustainable alignment of the flow of information and people and capital and goods and services are exhausted and no longer fit for purpose.  It’s a mechanical observation, not a moral or a political or even really an economic one.

Historically, the unbinding of the momentum of any one of these media has led to a crisis, usually “solved” only with violence, the reductio ad absurdum of human action.  It’s not that I predict that, but at the same time it wouldn’t surprise me – just as the current sense of crisis in all quarters strikes nearly all commentators as unsurprising.  What’s interesting is that, despite the observation that we are a learning species, gifted with the genetic capacity for self-reflection, for recursive learning, that seems to exceed that of all other species thus evolved on this planet, we still haven’t learned how to resolve this quandry.  We know how to exchange idea-value, how to exchange value-capital, how to exchange the goods we create, and how to move ourselves, but we seem unable to learn how to balance the movement of these – and we still seem oblivious to the relationship of our self-referential exchanges with the world in which we live.

I had a bad bout of the flu this past few days; the fever only broke yesterday, and fortunately I know my body well enough that I had arranged a play date for my son while I sat in bed and hoped for the break, hoped for that weird shift you feel in your self between a physical self – body, mind, spirit – that was in battle with an invisible invader.  If it hadn’t broken, my being would have dragged myself out of bed and continued to care for my son and brought him to holiday supper at my ex-wife’s house, would have done my best to pretend to be real even while I knew that the invader (influenza virus H1N16 or whatever the heck strain it is this year) had the upper hand.  But my body did well; I picked my son up at noon, and while he assembled Lego train layouts while I lay on my bed wondering where I was, the white blood cells won, and in the space of about ninety minutes I went from freezing cold in my limbs to comfortably warm, and then to uncomfortably warm as I realized the thermostat I had set at 25C was far too warm and I could remove the duvet, the fleece blanket, the sweater, and the double wool socks I had had on to battle the chills.  It’s not that I was myself again, it was that myself had won the temporary battle against the invader, and I could be myself in peace, not myself in war.

Over the past couple of days I’ve read two books, Cake and Ales by W. Somerset Maugham and The Trumpet of the Swan by EB White (the latter, admittedly, for about the fortieth time).  Both were on point, in vastly different ways.  White’s book – ostensibly for children, but relevant for anyone who can see that we are part of this earth, not owners of it, but maybe part of his grand irony is that adults who think they own are in fact children and that children who know they are merely part of this earth are more wise than anyone else – had me thinking about the flux and timing and disease of what society is now going through as a kind of influenza in the body of the earth.  Maugham’s book was quite different; it made me think that those who live in the moment, those who embrace their humanity in full force as his Rosie Duffield does, are no more sentient than the inhabitants of either London or Kentish society that rejects her for separate and irresponsible reasons.

In both books, the timing, the pace, the momentum of the characters struck me.  White’s humans – with the exception of the human protagonist, Sam – ignore the rhythms of the earth, and are poor and ignorant as a result.  Maugham’s humans are similarly ignorant except for his anti-hero, Rosie, who is at least in tune with her own rhythm against the potential of being alive as a human.  I’ve been lucky to be raised in Maine, walking in small fields and along ponds and small forests, to feel closer to Sam than I feel to anyone in my day to day life, with few exceptions – thankfully, including my son – and this being Thanksgiving week in the United States, I’ve been thinking about how lucky I’ve been to have known Gordy, even if I was a god-awful steward of his life in his final days.  I didn’t have to know only human existence, which really is part of Maugham’s lament in writing of Kent and London and its rejection of what was real and natural in that setting.  But his sympathy for the one person who at least lived her own existence truly divorced from this earth was both unsettling and lovely, as a work of art.

We live in a time of understandable crisis, repeating prior patterns of disconnecting momentum in the exchange of goods, of value, of ideas, of ourselves.  But what we fail to realize in each such crisis is that we are always, crucially, guilty of ignoring the rhythm of the world in which we live.  What my dog gave me was a crucial connection, that I had lost since I was a child in a rural part of a suburban-ish town in Maine, to the natural world around me.  There is a fifth exchange which Ricardo and Smith and Marx and really, if we’re honest, nearly every economist and Western philosopher misses – that of ourselves and the non-human world.  We engage with exchange with them at all times.  The pace of that exchange, the momentum of that exchange, is an underlying turbulence.  We can resolve our crises amongst ourselves with violence, but we’ll probably find it difficult to learn any sustainable lessons without acknowledging the exchange we have with the “natural” world  which does not express itself in words or in our own terms of value.

I don’t believe in the Bill McKibben fantasy land of “if we only change our society to meet certain sustainability goals, we’ll be able to exist” (although I also know that that’s a pathetic simplification of what he’s trying to say).  But I do object to him addressing the problem as a kind of failure of public policy.  This is a failure of theory.  We describe sustainability as a combination of policy objectives amongst tradeable goods in the human sphere, without paying adequate attention to the exchange relationship we have with nature and the universe we find ourselves in.  Environmental economic theory at its heart reduces the environment to a commons economic problem, instead of making the commons a kind of partner in the overall trade landscape.  The environment is a trading partner just as much as China trades with the United States, and it trades with each (and with us as individual actors) on equal or unequal terms just as China and the United States deal with one another on differing terms for capital, goods, people, and ideas.  Environmental economics states that there also exist environmental “goods” which are traded which are both common goods (global air quality, climate) and property goods (a given watershed, a given mining lode).  What I’m claiming is that the environment is a separate economic actor, and trades with us across the range of economic goods which are already defined because they are the only things we fundamentally care about – value-capital, “stuff” (goods), our own placement of ourselves, and ideas.  We trade these with an actor – the earth, the environment – whose value as stated via indifference functions etc. have, to date, been ignored, to say nothing of the time-scale over which its indifference functions against these tradeable goods change.

Maugham’s book – set against White’s book – threw this in my face in a rather personal way.  We engage with people on our own terms; when we encounter someone who engages with us on entirely different terms, we either learn to engage in a new way or we are disappointed and surprised.  If we learn to engage in a new way, we can find a way forward, but if we can’t, we’re doomed.  Even if we can engage in a new way, though, we might be disappointed – simply because not all engagements end happily.  But only one path leads to the potential for happiness, for success – success in the sense of mutual understanding, not in the sense of “I get everything I want” (if we start with that as our grounding for success, well, we’re doomed to either fail, or to pursue something which is unsustainable in any larger scale, and I’m presuming that anyone who reads this wants everyone to succeed in that larger scale).  I think I’ve learned to engage in new ways, and have nevertheless been disappointed.  But I’m still amazed that both at small scales and large, we as a learning species are blinded by our own self-reference.  Learning now requires seeing that we’re already engaging in a relationship with an alien, with an other, with someone who is totally different than ourselves.  And we are not right to think that our language of engagement is the only correct one.  We need to find a language to engage with a new partner – the world in which we find ourselves.

White’s books all lead to a notion that there is a language of engagement that we have lost – not so much through Western theorizing, although that has its share of blame, but through self-reference.  I think he’s on to something.  Who – and what – are we engaging with in a trade, really?  It’s not just another counterparty on a screen, not just an importer looking to buy what I’m exporting, not just you reading my thoughts on the other side of a blog connection, not just your society as I move to your country.  Who – and what – are we trading with beyond that?  What do I do when I crunch my foot against the earth, when I pet the head of your dog and ignore the bird on the tree above him, when I look upwards to the stars and when I find my dead body in the earth below?  Who am I trading with?

2 Replies to “Trading partners”

  1. A short distance north of St. Louis is the confluence of the Missouri and Mississippi rivers ( like two on-ramps to the same interstate, the Lower Mississippi. At times of the year, their separate identities are clearly marked by color, when the Missouri is carrying a lot of suspended mud. Eventually, hydrodynamics cause mixing as the river flows around bends, causing parts to move relatively more slowly than others and the resulting eddies do the mixing.

    I hadn’t thought about world economic connectedness in the 4-part way you describe and the differences in velocity with which they operate. I think it’s a useful framework and one that is especially insightful in our current tumult.

    Imagine a confluence of four “equal” streams into a frictionless channel. They will move in parallel, in theory, indefinitely (thank you, Sir Issac). But even for this idealized case, the transformation from smooth, laminal flow to turbulent flow can happen quite suddenly for reasons that, at the margin, has frustrated physicists.: “Turbulence is the most important unsolved problem of classical physics”‘ — Richard Feynman.

    I think it provides some insights into good old fashioned financial panics, but seems directly on point for the out-of-sync conditions you describe. The world economy can survive some frictions, diverters and barriers but not when they work at cross purposes. What happens is as you describe.

    Thanks for the read, Peter.

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