Author Archives: jdingel

This paper takes free trade seriously

A 2003 paper (pdf) from Dean Baker:

“Free trade” has generally been used to refer to the removal of trade barriers that protect less-skilled workers… The term has rarely been used in the context of efforts to extend protectionist barriers that benefit powerful industries… A consistent proponent of “free trade” would be opposed to all these barriers to the free exchange of goods and services…

While both Democratic and Republican administrations have actively sought to lower some types of trade barriers, most notably on manufactured goods, U.S. trade negotiators have done little or nothing to lower other barriers… highly paid professionals continue to work in a well-protected labor market. This protection is one reason that wage growth for these professionals has consistently outpaced the rate of wage growth of most other workers in the United States over the last two decades…

Skilled labor is in fact a produced input… In the same way that developing countries can often produce steel or apparel at a lower cost than in the United States,developing countries will often be able to educate doctors, dentists, lawyers, or accountants — to U.S. standards – at a far lower cost than in the United States…

U.S. trade policy toward highly paid professional services has largely gone in the opposite direction in recent years, increasing barriers to foreign professionals… a new test – which only applied to foreign trained doctors — was put in place as part of the licensing requirements for foreign physicians. As a result of these restrictions, the inflow of foreign residents was cut almost in half…

[S]ince 1976, the Federal government has had a policy of refusing to hire foreign citizens, unless no qualified citizen can be found for a position. The analogous policy for goods would be a federal buying policy that required the government to purchase only U.S. made products, unless there were no domestic producers of a specific item. Such a policy would be a blatant violation of NAFTA, the WTO, and numerous other trade pacts….

The potential economic impact of freer trade in professional services is at least an order of magnitude higher than most of the items that currently dominate the trade agenda… [R]emoving barriers for four categories of highly paid professionals –doctors, dentists, lawyers, and accountants… [would produce] annual gains to consumers [that] could be between $160 billion and $270 billion, or between $2,200 and $3,700 a year for an average family of four.

In defense of anti-dumping

Ever the contrarian, Dani Rodrik mounts a defense of anti-dumping rules (pdf):

There are also some provisions of the GATT/WTO regime that are highly open to protectionist abuse, but these have had only limited impact on trade. The anti-dumping (AD) provisions of trade law are particularly notable in this respect, as they provide easy access to protection in circumstances where the economic case for protection is weak or non-existent. While countries do make use of AD, it is hard to argue that the world economy has greatly suffered as a result. In retrospect, what is striking is not that AD is used, but that it is used so infrequently in light of the flexibility of the rules, and that it has caused so little damage. Indeed, we could argue that AD has made the trade regime more resilient by providing a safety valve for protectionist pressures. These pressures might have had more damaging consequences otherwise, if they had to make their way outside international rules rather than within them.

Border effects & prices

Yuriy Gorodnichenko and Linda Tesar (2006), “Border Effect or Country Effect?“:

This paper reexamines the evidence on the border effect, the finding that the border drives a wedge between domestic and foreign prices. We argue that if there is cross-country heterogeneity in the distribution of within-country price differentials, there is no clear benchmark from which to gauge the effect of a border. In the absence of a structural model it is impossible to separate the “border” effect from the effect of trading with a country with a different distribution of prices. We show that the border effect identified by Engel and Rogers (1996) is entirely driven by the difference in the distribution of prices within the US and Canada.

Via DeLong.

Self-enforcing agreements

Dani Rodrik, surrounded by anarcho-sympathizing libertarians at Cato Unbound, thoughtfully discusses the limits of self-enforcing agreements. In response to Peter Leeson’s claim that we don’t see “shriveling international commerce in the absence of supranational commercial law,” Rodrik writes:

It may be objected that the operation of the global economy is proof in itself that a high level of economic activity can be maintained without political institutions… But Leeson is overlooking several things. First, there is in fact a significant global institutional architecture that supports the international economy: globalization would not have reached this far in the absence of the WTO, IMF, World Bank and a host of regional supranational institutions. The global public sector is not non-existent.

Now the World Bank and IMF cannot claim credit for inducing developed countries to liberalize their trade policies, nor do they get much credit for Indian or Chinese policy shifts, so it seems that the bulk of responsibility for the relatively open global trading system would fall upon the WTO. But even those (Subramanian & Wei) claiming that the WTO promotes trade concede that it doesn’t force countries to liberalize, which is why developing countries remain relatively closed and sensitive sectors “did not witness liberalization.” The WTO is not an effective supranational institution if that term means enforcing policies contrary to participants’ wishes.

In fact, a leading theoretical explanation for the WTO is that it is a successful self-enforcing agreement! Bagwell & Staiger:

[T]he optimal unilateral tariff for a national-income maximizing government of a large country is positive. If both governments behave this way and set positive import tariffs, a Prisoners’ Dilemma situation is created. In the Nash equilibrium, tariffs are too high and trade volumes are too low; hence, a trade agreement that facilitates a reciprocal reduction in tariffs could be mutually beneficial…

The terms-of-trade theory is easily generalized to include political considerations, and it may be directly interpreted in the context of the market-access language that trade-policy negotiators use. This theoretical perspective offers a means by which to interpret the rules of GATT/WTO. For instance, it suggests that a government may hesitate to liberalize unilaterally, since it does not want to face the terms-of-trade loss that such behavior would imply…

Likewise, a government would hesitate to liberalize as part of a reciprocal negotiation, if it were concerned that its negotiating partner might later “cheat” and raise its tariff. We argue that the GATT/WTO enforcement provisions can be interpreted in this light…

As there are no GATT/WTO police, agreements between governments achieved through GATT/WTO negotiations must be self-enforcing. Indeed, the rules of GATT/WTO may be interpreted as a codification of supergame strategies.

Rodrik may be right about the limits of self-enforcing agreements in most circumstances, but the liberalization of international trade seems to be a counterexample to his generalization.

[Of course, Rodrik is also writing about the protection of property rights and enforcement of contracts across national borders, which may indeed depend upon states making legal arrangements, but that’s not the role of the IMF, WB, nor WTO.]

Transferrable retaliatory rights at the WTO

A neat idea I first read about in Fair Trade For All apparently has both a longer history and a richer theoretical exposition than I realized.

In 2002, Mexico proposed that the WTO make retaliatory tariff rights tradable, so that countries that would only hurt themsleves by imposing sanctions might still pose a punitive threat to the subject of complaints at the trade body’s dispute settlement mechanism. This sounds like a great idea to me.

Bagwell, Mavroidis & Staiger have an academic paper on the subject: The Case for Auctioning Countermeasures in the WTO. Their result is a bit surprising:

We then consider an extended auction, in which the home country is also allowed to bid to retire the right of retaliation. The extended auction is again characterized by positive externalities between foreign countries. But the extended auction also features negative externalities, since the home country experiences a negative externality whenever a foreign country wins. In the extended auction, we find that auction failure does not occur; in fact, the home country always wins and the retaliation right is therefore always retired.

It’s an odd outcome, but instituting the auction does result in the violator paying compensation, so it sounds better than the status quo. But Bagwell is cautious (pdf) in making a policy recommendation:

[Bagwell, Mavroidis & Staiger] do not claim to answer this question, though, since a system with tradable retaliation rights would generate additional costs and benefits that are not included in their formal analysis. One un-modeled benefit is that the prospect of auction revenue might enable a small and developing country to attract private legal support for WTO legal actions that it would not otherwise be able to afford. Under the heading of un-modeled costs, it is important to
list the possibility that the revenue generated by auctions could result in nuisance cases and excessive use of the WTO dispute settlement system. Another potential cost is that a system of tradable retaliation rights might cause bilateral trade tensions to grow into multilateral tensions. Acrimony across governments could grow, and future negotiations could be undermined…

The costs of a system with tradable retaliation rights could well exceed the benefits. At this stage, I therefore caution against any explicit change in the DSU to accommodate tradable retaliation rights.

True, there are many costs and benefits not examined by a formal auction model, but how does one research the likelihood of nuisance cases or acrimony? I don’t we’re likely to see significant academic progress on whether auctioning countermeasures would be net beneficial, so policymakers ought to start discussing it seriously.

[The general merits of making tort claims transferrable will be familiar to those who have read David Friedman’s Law’s Order.]

Chinese cloning

Here’s a great Popular Science article on China’s industrial development via copying developed country manufacturers. I’m not terribly concerned about the patent violations slowing innovation, but the trademark issues are troubling from a consumer perspective in terms of knowing who actually made the good you’re purchasing.

[Hat tip: Patri.]

What made the House’s 2007 farm bill?

The people of the First District of Minnesota, I think, can probably lay claim to one of the richest agricultural pieces of land in the entire world . . . I had 14 hearings throughout my district with universal acceptance of making sure the safety net is maintained . . . When I need advice on the farm bill, I go to a couple of good farmers in my district, Kevin Papp, president of the Minnesota Farm Bureau, and Doug Peterson, president of Minnesota’s Farmers Union. I don’t need to go to the ideologues at the Cato Institute or Club for Growth to know what’s good for rural America. [Tim Walz (D-MN)]

The result?

The House Farm Bill allocates $286 billion over five years to agricultural programs—that’s an even bigger price tag than the one attached to the bloated 2002 Farm Bill, which increased agriculture spending by 80 percent over 1996’s Freedom to Farm Act, itself a huge bill.

It continues the tradition of giving huge subsidies to wealthier farmers, though on a more limited basis than the 2002 Bill. Where the 2002 Bill dished out subsidies to farmers earning up to $2.5 million annually, this bill establishes an annual income threshold of $1 million, or $2 million if a husband and wife each claims subsidies. A slight improvement, at best.

I think the House successfully avoided the Cato Institute’s contaminating influence.

What made the House's 2007 farm bill?

The people of the First District of Minnesota, I think, can probably lay claim to one of the richest agricultural pieces of land in the entire world . . . I had 14 hearings throughout my district with universal acceptance of making sure the safety net is maintained . . . When I need advice on the farm bill, I go to a couple of good farmers in my district, Kevin Papp, president of the Minnesota Farm Bureau, and Doug Peterson, president of Minnesota’s Farmers Union. I don’t need to go to the ideologues at the Cato Institute or Club for Growth to know what’s good for rural America. [Tim Walz (D-MN)]

The result?

The House Farm Bill allocates $286 billion over five years to agricultural programs—that’s an even bigger price tag than the one attached to the bloated 2002 Farm Bill, which increased agriculture spending by 80 percent over 1996’s Freedom to Farm Act, itself a huge bill.

It continues the tradition of giving huge subsidies to wealthier farmers, though on a more limited basis than the 2002 Bill. Where the 2002 Bill dished out subsidies to farmers earning up to $2.5 million annually, this bill establishes an annual income threshold of $1 million, or $2 million if a husband and wife each claims subsidies. A slight improvement, at best.

I think the House successfully avoided the Cato Institute’s contaminating influence.

What made the House's 2007 farm bill?

The people of the First District of Minnesota, I think, can probably lay claim to one of the richest agricultural pieces of land in the entire world . . . I had 14 hearings throughout my district with universal acceptance of making sure the safety net is maintained . . . When I need advice on the farm bill, I go to a couple of good farmers in my district, Kevin Papp, president of the Minnesota Farm Bureau, and Doug Peterson, president of Minnesota’s Farmers Union. I don’t need to go to the ideologues at the Cato Institute or Club for Growth to know what’s good for rural America. [Tim Walz (D-MN)]

The result?

The House Farm Bill allocates $286 billion over five years to agricultural programs—that’s an even bigger price tag than the one attached to the bloated 2002 Farm Bill, which increased agriculture spending by 80 percent over 1996’s Freedom to Farm Act, itself a huge bill.

It continues the tradition of giving huge subsidies to wealthier farmers, though on a more limited basis than the 2002 Bill. Where the 2002 Bill dished out subsidies to farmers earning up to $2.5 million annually, this bill establishes an annual income threshold of $1 million, or $2 million if a husband and wife each claims subsidies. A slight improvement, at best.

I think the House successfully avoided the Cato Institute’s contaminating influence.