On the NYT’s “Building Trade Walls”

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The Trump administration has certainly increased public discussion of trade policy. Yesterday, the New York Times ran a series of graphics accompanied by a thousand words on “Building Trade Walls” in its online business section. I found the piece frustrating. At a number of points, the article presents valid information in a way that muddles meanings or implies misleading conclusions.

Are sales taxes akin to import tariffs?

Consider these two consecutive paragraphs:

But many countries have additional taxes. For example, China and other countries, but not the United States, also charge a steep value-added tax, which is a kind of national sales tax on imports and home-produced goods alike. Exports are exempt from value-added taxes.

Once value-added taxes and sales taxes are included in an international comparison, America’s taxes on imports are much lower than those of almost every other country.

Why would you make an international comparison that counted VATs or sales taxes as taxes on imports? Since VATs and sales taxes apply to both “imports and home-produced goods alike”, they aren’t protectionist. An import tariff applies to imports and not to domestic-produced goods. The discriminatory nature of the import tariff is why it protects domestic firms from foreign competitors.

Back in September, Paul Krugman lambasted Donald Trump for accusing Mexico’s VAT of being a trade barrier. Now, his NYT colleagues have produced a good-looking map that relies on this premise. A quick mashup of the two makes the contrast clear:

In short, the NYT‘s first paragraph noting the non-discriminatory nature of VATs and sales taxes means that the international comparison offered in the second paragraph is nonsensical.

Is China a developing country?

In another troublesome part of the article, a series of facts about China’s GDP and GDP per capita are somehow combined to say that China might be a developed economy:

Today, China’s designation as a developing country is more debatable. China is the world’s second-largest economy and the biggest producer of steel and cars.

Still, China trails most developed nations by some measures, and Chinese officials argue that it is still developing and does not yet qualify as industrialized.

China’s economy is still roughly two-thirds the size of the American economy, even though China has four times as many people. Average incomes in China are still one-fifth to one-quarter of levels in the United States, and much of China’s interior is still underdeveloped.

Based on the first paragraph, I have to ask: is Iceland a developing economy? It’s quite small, with a GDP of maybe $15 billion. But of course it’s developed, as it has a GDP per capita in the neighborhood of $50,000. Development is about income levels (and accompanying socioeconomic changes), not population size. I have never before seen GDP (as opposed to GDP per capita) used to inform the “developing country” designation.

The NYT article raises the (novel) question of whether China is developed or developing in the context of its trade-policy obligations:

The World Trade Organization, the global trade adjudicator, has allowed developing countries to impose far higher tariffs than industrialized countries, while they build up industries at home. China has been counted as a developing country.

This is unhelpful in a few important respects. First, the WTO does not designate countries as developing or developed. In the narrow areas where developing countries are given special and differential treatment, member nations identify themselves as developing. Second, the “global trade adjudicator” language is potentially confusing. Countries’ MFN tariff schedules are negotiated among member nations at the WTO. There’s no separate WTO entity announcing tariff rates for developing (or developed) countries. Past rounds of negotiations among members have resulted in the tariff schedules of China and other economies. Third, China has lower tariff bindings than a typical developing country, partly because it acceded to the WTO later than most developing countries. Branstetter and Lardy say that “China agreed to a set of conditions that were far more stringent than the terms under which other developing countries had acceded”. Compare China’s 10% average bound tariff to Brazil’s 31% or India’s 49%.  Fourth, there is not much evidence that “far higher tariffs” have allowed countries to “build up industries at home”. China’s export growth, in particular, has involved integration into global value chains and assembly processing, not import-substitution industrialization behind a tariff wall.

A few other concerns

  • It would be more helpful to plot the trade deficit as a percent of GDP than in nominal dollars.
  • A focus on the bilateral deficit with China is unhelpful.
  • A discussion of border adjustments that does not mention exchange rates omits a first-order feature, according to the policy’s proponents.
  • The NYT reporters say: “When China joined the W.T.O. in 2001, the expectation was that its tariffs would later be adjusted lower during global trade talks, known as the Doha Round. But those talks fell apart for a variety of reasons.” China’s bilateral negotiations with the US wrapped up in 1999. The protests in Seattle that year accompanied a failed round of WTO negotiations. I don’t think expectations of the Doha Round – which started two years later in a post-9/11 context – were clear when China’s accession protocol was being determined.
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