Author Archives: jdingel

Rose: Protectionism is acyclical

Andrew Rose:

Almost everyone agrees that protectionism is countercyclical; tariffs, quotas, and the like grow during recessions. The abstract of Bagwell and Staiger (2003) begins “Empirical studies have repeatedly documented the countercyclical nature of trade barriers”; for support, they provide citations of eight papers which “all conclude that the average level of protection tends to rise in recessions and fall in booms.” Meanwhile, Costinot (2009) states: “One very robust finding of the empirical literature on trade protection is the positive impact of unemployment on the level of trade barriers. The same pattern can be observed across industries, among countries, and over time.” …

The sample is split into two in the scatter-plots to the right. Above, the data show a positive relationship between 1906 and 1942; high unemployment in the 1930s tends to coincide with high tariffs. This relationship is strikingly reversed in the graph below, which scatters tariffs against unemployment for the period between 1946 and 1982. Since World War Two, high American unemployment seems to coincide with low American tariffs; protectionism seems to be, if anything, cyclical…

The goal of my recent work has been to show that, at least since World War II, protectionism has not been countercyclic. While this runs counter to conventional wisdom, the evidence is reasonably strong; no obvious measure of protectionism seems to be consistently or strongly countercyclic.

An interesting question occurs: why is protectionism no longer countercyclic? Before World War I (and in contrast to more recent times), tariffs contributed greatly to the national treasury, there was no GATT, and the Gold Standard ruled. But it turns out that protectionist policies of countries with large and small budget deficits seem to react similarly to business cycles, as do those of countries inside and outside the GATT/WTO, those with fixed and floating exchange rates, small and large countries, and open and closed countries. If there has been a shift in the cyclicality of protectionism since WWII, it’s hard to be sure why.

Perhaps, just perhaps, the switch in the cyclicality of protectionism – if there has indeed been one – is a triumph of modern economics. After all, there is considerable and strong consensus among economists that protectionism is generally bad for welfare. And there is no doubt that economists are aware and actively involved in combating countercyclic protectionism; this was especially visible during the Great Recession, which saw the successful launch of Global Trade Alert in June 2009. If – and it’s a big if – the efforts of the economic profession are part of the reason that protectionism is no longer countercyclic, then the profession deserves a collective pat on the back. But in that case the profession should also consider setting its sights higher. If economists have helped reduce the cyclicality of protectionism, then perhaps they should focus on actually reducing protectionism.

Cross-country comparisons of large cities

A number of people have highlighted a new McKinsey Global Institute report on US cities in the global economy.

Here’s the MGI summary:

In a world of rising urbanization, the degree of economic vigor that the economy of the United States derives from its cities is unmatched by any other region of the globe. Large US cities, defined here as those with 150,000 or more inhabitants, generated almost 85 percent of the country’s GDP in 2010, compared with 78 percent for large cities in China and just under 65 percent for those in Western Europe during the same period. In the next 15 years, the 259 large US cities are expected to generate more than 10 percent of global GDP growth—a share bigger than that of all such cities in other developed countries combined.

I find this definition of a “large city” to be puzzling. I’ve searched the report for the word “150,000” and the authors don’t seem to have provided an explanation for this measurement choice. That’s unfortunate, because using this cutoff for cross-country comparisons has big implications that may lead readers astray. But before we get into those measurement details, let’s just make clear what the report’s executive summary does and doesn’t say.

At Ezra Klein’s place, Brad Plumer says:

The report’s authors argue that the city gap between the United States and Europe account for about three-quarters of the difference in per capita GDP between the two. In other words, the United States appears to be wealthier than Europe because it has a greater share of its population living in large, productive cities.

That second sentence isn’t plausible. Look at Exhibit 1 in the McKinsey report, which I’ve reproduced here:

 

The gap in per capita GDP between the US and Europe is about 35%, according to the MGI figures in Exhibit 2. The “large city” premia in the United States and Europe of 34% and 30% are virtually the same. That means that the difference in per capita income attributable to the difference in “large city” population shares is the large city premium (~30pp) times the difference in large city population shares (22pp). The six to seven percentage points explained by this difference in population shares is at best one-fifth of the 35% gap between US and EU incomes. You can confirm this quick calculation by studying the decomposition in MGI’s Exhibit 2. Moving more people into large cities wouldn’t meaningfully reduce the US-EU per capita income gap.

Over at Atlantic Cities, Nate Berg summarizes Exhibit 1 as “though cities all over the world are responsible for major contributions to the global gross domestic product, the concentration of large – and especially semi-large – cities in the U.S. outperforms them all.” He quickly notes that “the sheer number of large cities in the U.S. is clearly a major part of the difference, especially with about 80 percent of the country’s population concentrated in these metropolitan regions.” In fact, it’s more than a major part of the difference – it’s basically all of it.

“Large city” economic output is a larger share of total economic output in the United States because “large city” population is a larger share of population in the United States. US “large cities” have 80% of the US population and produce 84% of US output. European “large cities” have 58% of their population and produce 64% of their output. If “large cities” are more important to GDP in the United States (or in Plumer’s interpretation the US “derives more economic benefit from its cities than any other country on the planet”), it’s because a larger fraction of the population lives there.

This is a statistical artifact created by using the same population cutoff to define “large cities” in countries with quite different national populations. It’s not clear that telling us that a greater share of Americans live in metropolitan areas with populations greater than 150,000 than Europeans tell us that these economies operate differently.

The typical country’s city size distribution is decently characterized by a power law, Zipf’s law, which implies a log-linear relationship between a city’s size and its rank in the size distribution. Zipf’s law doesn’t hold for the entire distribution, but we know from Rozenfeld, Rybski, Gabaix & Makse (AER 2011) that it’s a decent approximation for places with more than 10,000 or so people in both the US and UK.

I’ve displayed the city size distributions for both the US and UK in the figure below. The US distribution stops around 10.8 because only 280 (consolidated) metropolitan areas were defined in 2000. Rozenfeld et al have shown that it’s safely to linearly extrapolate down to something like 9.4.

 

 

Given the UK population, increasing the fraction of UK residents who live in “large cities” with populations greater than 150,000 would require the emptying out of smaller metropolitan areas. While such migration is entirely possible, it would violate the expected city size distribution. We don’t see such top-heavy city size distributions in economies with a decent number of cities (of course, city-states like Singapore violate Zipf’s law). If you know the populations of New York and London and are familiar with Zipf’s law, then it’s not at all surprising that a greater fraction of the US population is found in metropolitan areas above some common population threshold. I don’t think that tells us much about the economic mechanisms determining the role of US cities in the global economy.

Addendum: The MGI report compares Western Europe to the United States, but Zipf’s law holds at the country level. Using Western Europe, which has an aggregate population akin to that of the US, doesn’t give us reason to expect  a similar share of the population to live in cities with populations exceeding 150,000. There is no Western European city the size of Los Angeles or New York. [Thanks to @ptitseb for suggesting this clarification.]

What good is trade adjustment assistance?

Timothy Taylor, managing editor of the JEP, points to some recent literature on the effect of trade adjustment assistance. In Contemporary Economic Policy, Kara M. Reynolds and John S. Palatucci find that

using propensity score matching techniques we find that while the required training component of the program improves the employment outcomes of beneficiaries, on average the TAA program has no discernible impact on the employment outcomes of the participants…

We do find strong evidence, however, suggesting that those workers who participate in TAA-funded training opportunities are more likely to obtain reemployment, and at higher wages, when compared to TAA beneficiaries who do not participate in training.

That’s in line with prior research suggesting that the only realized benefits accrue to trainees. But note that due to some data limitations:

It is possible that these results are being  driven by differences between the training and  nontraining participant samples that we are  unable to control for. Recall that although TAA  beneficiaries must participate in training in order  to receive extended unemployment benefits,  nearly 20% of TAA participants receive a waiver  from the training requirement. Program administrators are allowed to grant waivers for a wide  variety of reasons, including the health, age,  and skill level of the worker. Waivers are also  granted to workers who can prove that training  is unavailable in their area. Although we control  for such characteristics as the age and education level of the participant, we do not have  information on other characteristics such as the  health status or the local labor market conditions  of the participant. It is likely that workers in poor  health would be both more likely to receive a  waiver and more likely to remain unemployed.  Moreover, workers in small rural areas may be  limited in both the number of training and the  number of new employment opportunities.

AmPro on the TPP

Kevin Gallagher isn’t very keen on the Trans-Pacific Partnership:

The Trans-Pacific Partnership is best understood as President Barack Obama’s extension of the Bush-era doctrine of “competitive liberalization.”… The Trans-Pacific Partnership (TPP) certainly isn’t about raising standards of living. The most ambitious estimates of the gains from the TPP suggest that participating nations will gain a mere one-tenth of 1 percent of the gross domestic product. Sixty percent of the projected gains go to Vietnam and the United States, and the other 20 percent goes to Malaysia—largely because the U.S. already has trade pacts with the other proposed big players in the TPP.

However, the proposed deal is far from popular in Asia. In exchange for the small portions of trade and growth that will go to some big exporters and foreign investors, each TPP nation will have to give up many of the policies they use to make trade and foreign investment work for employment, growth, and financial stability…

the investment and financial-services provisions in the TPP would restrict the ability of these nations to use joint ventures, local content rules, and regulation of cross-border financial flows to spread benefits, stimulate local manufacturing, promote employment, and provide financial stability.

It may be difficult to grasp that the TPP could harm the broader economic interests of both the U.S. and smaller Asian nations. But if balanced development requires a managed form of capitalism, then a trade deal like the TPP, which strengthens investors and weakens governments, can harm Asians and Americans alike…

I can’t say I share all those concerns, but it’s fair to say that the TPP isn’t a traditional trade deal in the sense of cutting tariffs and quotas. That column comes from a special issue of The American Prospect devoted to critiquing the TPP. For a contrary view, see Fred Bergsten and Jeff Schott, though much of their support for the initiative seems grounded in foreign-policy concerns rather economic benefits.

US abandons zeroing (for now?)

I’m seeing a lot of news about the US federal government dropping its practice of zeroing in calculating antidumping duties. The WTO news item is uninformative. I don’t have time this week to follow the latest developments, so I’ll just drop links:

FT:

The US has reached deals with the European Union and Japan to drop a contentious practice in its anti-dumping calculations known as “zeroing”, ending a longstanding international trade dispute in order to prevent retaliation against American products. The agreements, signed in Geneva, will close the books on a fight that began in 2003 when the EU first filed a case against the US at the World Trade Organisation.

USTR press release:

After the WTO found that the United States had not brought its antidumping methodologies into compliance, the EU and Japan requested authorization to impose hundreds of millions of dollars of trade retaliation. Had these agreements not been reached today, substantial volumes of U.S. exports could have been closed out of markets in the EU and Japan, resulting in job loss for U.S. workers and financial loss for U.S. farms and businesses…

Under the agreements signed today, the United States will complete the process – which began in December 2010 – of ending the zeroing practices found in these disputes to be inconsistent with WTO rules. In return, the EU and Japan will drop their claims for trade retaliation.

Politics-oriented coverage from The Hill includes this detail: “the Obama administration said it will try to negotiate a future deal at the WTO to permit the practice.” Here’s Scott Lincicome on the news.

Don’t go to Shanghai for your Big Mac

Richard Florida says “While it’s commonly thought that globalization has put the world’s global cities on an increasingly level playing field, substantial differences in prices persist”:

What should leap to mind? Trade costs.

The biggest price gap (a ratio of 100) is for a good that is completely non-tradable and varies greatly in quality (bus fare is 7 cents in Mumbai and $7 in Oslo). A good of relatively uniform quality that is perishable varies quite a bit (Big Mac, from $2 in Shanhai to $6 in Oslo). A durable good with a high value-to-weight ratio, the iPad 2, exhibits less variation, a ratio of under two ($1058 in Buenos Aires and $548 in Bangkok). So it looks like trade costs are a pretty good explanation for nominal price differences.

That iPad gap may not be as large as it seems. You’ll want to adjust for taxes. The VAT is 21% in Argentina and 7% in Thailand.

How can there still be a ~$350 price difference when one can probably mail an iPad to most countries for less than a hundred bucks? Shouldn’t arbitrage drive price differences for identical products down to the shipping cost? Not so fast. It turns out it’s quite difficult to arbitrage iPads. Apple tracks its customers and doesn’t allow bulk purchases.

Why is gasoline, a very homogeneous and fungible commodity, $2 in Amsterdam but only 42 cents in Dubai? Taxes in the former and subsidies in the latter.

In short, these data are a lesson about trade costs. You’ll notice that Richard Florida didn’t title his post “why you should buy a bus ticket in Mumbai instead of Oslo”!

(Relatedly, price comparisons of personal services, as opposed to goods, suggest a lesson about global labor mobility. A one-hour Thai massage costs $6 in Bangkok and about $100 in New York City!)