Saturday, October 5, 2013

Free Trade Propaganda?

The  Bertelsmann Stiftung(Foundation) published a study today claiming that a Transatlantic Free Trade Area would increase employment by 160.000 in Germany. Together with the Munich based IFO Institute they proved that in economics there is only extremely limited knowledge of how companies operate; and how different standards in the EU and the US affect engineering. Additionally, I don't think I value life the same way they do.

The study is empirical. Typically, the only known trade barriers are tariffs. The influence of other obstacles has to be guesstimated. But the IFO Institute chose a different approach. They used other free trade areas like NAFTA and the EU to base their model for the Transatlantic Trade and Investment Partnership (TTIP). But there is a tiny difference between these two and one between the EU and the US. Let's call it Atlantic Ocean, which in my book might be relevant here, even though it's nothing more than a bunch of water (they actually claim that TTIP will have similar benefits to NAFTA and the EU). Also I would really have loved to have gotten a time frame. 160.000 jobs in a single year are something a bit different than over 10, 30 or 50 years.

The following is not an empirical study which bases its conclusions on other free trade areas that are completely different to the one proposed. The following will be an argument that a) the existing obstacles to enter the markets are for the most part good and b) they aren't big barriers for the industries which supposedly would gain the most jobs in Germany, anyways.

In engineering standards are essential. They cover almost everything from how to conduct tests over safety to alloy composition. In the beginning of the last century each country had their own standards; but this clearly affected trade. To reduce this part of the so called non-tariff trade barriers the International Organisation for Standardization (ISO) (for electrical engineering there is a similar institution: IEC)  was founded in 1947 in Geneva, Switzerland. Today, many standards are used worldwide, but some especially concerning safety are still local. For example, in Europe there are more pedestrians on the road, so we might see a stronger focus on their safety in automotive standards. In the US seat belt legislation does not affect everybody in all seats in all states. So, in the US there are safety standards that are designed to make sure that in an accident the chances for survival for those who do not use a seat belt are increased. This includes additional padding of the roof.

In a video (English version) to support the Bertelsmann study they seem to argue against these standards to increase exports a bit. Specifically, they mention the extra padding, which is supposed to safe lives. They also argue against car manufacturers having to pass crash tests in different areas. US NCAP and EU NCAP might sound very simila,r but they use different overlaps and velocities in frontal crash tests, for example. A car might get four stars in an US test but only one in a European one. This happened with the Chevrolet Aveo (German), so for the consumers there is a significant advantage in cars having a wide range of tests to pass. Their chances of survival in case of an accident increase because catastrophic flaws are more likely to be found and fixed. To argue against this, in my opinion, shows that the creators of the study do not regard human life as all that valuable are blissfully unaware of real life consequences of their absolutely terrible ideas. More tests to increase the survivability are better, the minimally increased costs of conducting more tests are an absolute non-issue when it comes to safety. The primary cost factor is that the cars need to be designed better to pass all tests. We all want better cars. Especially the manufacturers want better cars; so it seems very, very unlikely that any good firm would "reduce" costs by risking the lives of their customers. These German companies are lead by engineers not economists, they know that producing bad and unsafe cars will in the end reduce and not increase their exports.

It is also argued in the video that minor differences like the different color of indicators somehow hamper exports. I would strongly advise the economists to visit the factories of car manufacturers. This claim is just bogus. The times at which all cars were black and identical have been gone for a while now. It makes almost no difference whatsoever if the color of the plastic covering the indicator light is red or yellow. In fact, one can easily configure a car in a way that it will be absolutely unique. It will still get produced in the same factory and in the same time as all other cars. I completely disagree that decreasing safety and a few minor mostly cosmetic changes will increase the number of exports or jobs. In fact, building worse cars means less engineers have to work on them so less jobs and it will damage the brand, therefore in the medium term it will lead to less exports.

Let's look at another industry that is mentioned. It is claimed that metal production in Germany would profit. ThyssenKrupp is the biggest German steel producer. The conglomerate produces worldwide, but is currently suffering from low demand, especially in their US business. Their production in Alabama is not profitable; and the company is trying to sell this facility. So why should they produce more steel in Germany to export to the US if they have a completely new factory there? The focus on other free trade zones that are not separated by oceans, of course, shows a different picture. It is easier for a company that wants to increase their export to France from Germany to increase the capacity at home, but when it comes to the US it has significant advantages to produce there instead. In fact many German companies already do so.

Standards for alloys are often different in the US and Germany. But, economists are completely wrong in assuming that a harmonization would lead to less export obstacles. Alloy standards are similar to baking recipes. Take iron, add in a bit of carbon, and some chromium, and molybdenum, let it bake for a while, roll it and in the end you should get mechanical test results in the area from A to B. Of course, it is more complex, but it a metal producer just like a chef wants to be able to excel at as many "recipes" as possible. So they are already good at German and US meals alloys.  A metal producer that is unable to produce the alloy inquired will not get the order, no matter if it is based on an international, US, European, or company standard.

In electrical engineering one significant obstacle just cannot be overcome. A different voltage and frequency is used in the EU and the US. So, electrical devices are often designed to function in a range from 100 V to 240 V and 50 Hz to 60 Hz, which increases costs somewhat.

The Munich based ordo-liberal IFO Institute - lead by Hans-Werner Sinn - favors liberalisation over the order and just assumes that companies would do so, too. But in standardisation there is only ordo order. Every new standard is designed to improve the state of the art and most of them are used worldwide. Even those that aren't have a positive impact. The study is based on a dogma which luckily plays an insignificant role in actual business operations, but is unluckily favored by many politicians, who just like the economists have never been involved with the production of anything.

The regulation that companies themselves push on other firms is immense. The so called "Product Requirement Document" is the most extreme one. An example? Alone the requirements for seat heaters for cars can have dozens of pages. Even detailing how the heater is supposed to fail. A sensor is in the seat and the backrest each that regulates the temperature(e.g. PTC), if it fails then the whole heater has to fail. Now an economist might think that it could be better and even cheaper if the heater would still function. You could regulate the temperature by turning it off yourself, couldn't you? Well, not in case you don't feel it. There have been terrible burns in the past because people with paraplegia did not realize that the heater was getting too hot. There just aren't unnecessary regulations in engineering. A Transatlantic Free Trade Area will therefore not lead to more exports or jobs in manufacturing through a reduction of standards.

But, what is the Bertelsmann Foundation, anyways? Some consider it primarily a vehicle to avoid the death tax for the owners of the Bertelsmann SE & Co. KGaA. It holds 77.4 percent of content provider company (e.g. BMG, RTL television). It has to be non-profit organisation to profit from tax exemptions; and focuses on research which more often than not shows that the state should be weaker. Content providers are not the primary focus of the study, even though they might profit the most. Nowhere did I see a mention of a possible conflict of interest, which should have been addressed, in my opinion.

No downsides of the free trade agreement are mentioned anywhere on the Bertelsmann homepage about TTIP. For example many Germans do not want to eat food made from genetically modified crops, which might be part of the negotiations. The IP protection clauses might in the end be harmful to anybody but the content providers; and national laws might be circumvented. It seems very unlikely that politicians understand anything about regulations and standards.

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