Wednesday, April 24, 2013

The Domino Effect of Free Trade

We often think about the winners and losers of our trade agreements in terms of which groups within our country (and within the country of the other party) end up doing better or doing worse. Who we often do not think about is the third parties who are affected. Those third parties end up wanting to sign on in order not to be left behind.

The recently signed US-South Korea Free Trade Agreement is supposed to be a boon to both economies. The US gets to import cheap electronics from them in exchange for more beef import from us (this is way oversimplified).  They can not provide supply beef in their country to meet demand, so imports are necessary to bring the price down. We can not create electronics hardware as cheaply as they can, so imports are necessary to bring prices down.

The story of Sony is the story of Japan. Once filled with hubris and now struggling to get by. After failing to make the jump from producing consumer electronics to creating software, Sony has faced a long and painful decline since their peak. Sony was king with the Walkman in the 1990s. Yet now Apple (American) and Samsung (South Korea) lead the digital phone and music revolution. Sony still creates a quality product, but they are constantly losing market share to their more creative competitors on one side and lower-cost production on the other. With the signing of the free trade deal between South Korea and the US, Japan no longer has any competitive advantage on electronics. Japan's new Prime Minister has taken it upon himself to end Japan's two decades of stagnation.

Japan does not want to see a future where they are no longer the main trading partner of the US. The Japanese need not only US products, but also US military protection against an ever-threatening China.

It was a surprise last week (but perhaps should not have been) that Japan wanted to join the Trans-Pacific Free Trade talks. After several years of negotiations between countries as diverse as Canada, Brunei, Argentina, Australia, Chile, the United States, and a few others, Japan decided to jump onto the bandwagon at the very end. The resulting agreement will cover 40 percent of global economic output and over a third of global trade. It will be the largest free trade agreement in history if it passes.

The Associated Press reports:

"Japan's national interests are protected under this  agreement," Japanese Prime Minister Shinzo Abe told reporters on Friday after a meeting with Cabinet ministers. He is pursuing this agreement.. as part of a "third arrow" in his "Abenomics" policy triad, after fiscal spending and drastic monetary policy easing.
The domino effect isn't just true for  Communism anymore, but free trade as well.

No comments:

Post a Comment