Author Archives: jdingel

China’s take on Doha

The United States trade negotiators have been urging China to play a larger role in the Doha round, but I doubt this was what they were looking for:

The main stumbling block in the Doha Round of global trade talks is the failure of the United States and European Union to make substantial concessions on agriculture, China’s commerce minister said on Monday… ”The European Union and the United States, as the world’s two largest traders, have yet to make substantial concessions in terms of high import tariffs on agricultural products, export subsidies for agriculture and the huge domestic support for their agricultural products,” Mr Bo said.

Mr Bo, speaking on the sidelines of the annual session of the National People’s Congress, the largely ceremonial parliament, also urged Japan to do more to reduce its tariffs on farm goods, which he said were nearly three times higher than China’s.

China’s export profile: I need to know more

China’s export profile is a fascinating topic – hence the frequent debate and discussion. The latest contribution is by the FT‘s Guy de Jonquieres:

Now China’s manufacturing miracle is entering a second phase, as producers start to drive aggressively up-market. Exports of aircraft parts, ships, microchips and cars all grew by about 70 per cent last year, more than four times faster than traditional exports such as shoes and clothing. At the same time, it is set on becoming more than a processing economy that just screws together components made elsewhere. With official backing, industries such as steel, vehicles and electronics are steadily raising the value added locally by performing more advanced processes and making more parts in China.

That description echoes the message the FT‘s Richard McGregor has pushed repeatedly, but how much does the growth rate of sophisticated exports tell us about China’s development? China exports a lot of labor-intensive manufactures, so we would be shocked if their growth rate was anywhere near 70 percent. Reporting the level as well as the growth rate would substantially aid our understanding of China’s move up the value-added chain.

Newspapers are unlikely to print stories proclaiming “China’s exports not as sophisticated as some claim,” so we have to turn to the academic literature for contrary assessments. In a working paper titled “Measuring the Technology Content of China’s Exports,” Bin Xu argues that China’s export profile has not been so remarkable:

First, we reexamine the finding of Rodrik (2006) that China is an outlier in terms of technology sophistication of exports. Without adjusting product quality in the measurement, our data confirms Rodrik’s finding: China is an outlier in every year from 1989 to 2000. However, using our quality-adjusted measure of TCE [technology content of exports], China disappeared to be an outlier after the mid 1990s. This result highlights the importance of considering the product quality dimension in evaluating the technology content of China’s exports. By ignoring the low quality nature of Chinese exports, Rodrik (2006) overestimated the technology sophistication of Chinese exports.

Second, we find that the product-level TCE of China is significantly lower than that of a country at the same development level in every year from 1991 to 2001. Moreover, the gap had been widening steadily during the period. Low TCE at the product level is driven by low product quality. This result is a mirror image of Schott’s (2006) finding of increasing price discounts of Chinese exports.

In the paper we identify several new features that help to explain the pattern and trend of the technology content of Chinese exports. First, at both the industry and product levels, we find a positive correlation between the growth rate of an industry/product’s export share (in China’s total exports) and its TCE level. On average, industries/products with higher TCE levels expanded more in exports.

Tragically, econometric analyses will always lag behind anecdotes – Xu’s work covers 1989-2001. So the recent FT reports may be right, but it’d be nice if their coverage were more informative — please describe not only the trend but also the current state of play! Similarly, Brad Setser casts his assessment in terms such as China “increasingly has the export and industrial production profile of a middle income country” and “China no longer just imports parts… for final assembly” rather than commenting on the levels.

When will China actually have the export profile of a middle-income country? When will less than X percent of China’s exports be labor-intensive low-quality manufactures? Obviously it is difficult to construct, measure, and obtain data needed to answer such questions. That’s one reason why the discussion often centers upon more easily accessed numbers, such as those used by the FT reporters. But we would learn a lot by contextualizing them with a few more pieces of information.

[Update: Emmanuel of IPE Zone points to this World Bank update. It also describes the increased importance of non-processing exports without reference to level.]

The latest in preferential trade

A round up of the latest PTA news, all available at bilaterals.org.

Central African preferential trade may soon emerge:

The Central African Economic and Monetary Community (CEMAC) yesterday held a meeting of its Finance Ministers in Cameroon’s biggest city, Douala, where the fast-tracking of regional integration was on the agenda. Four of the six member countries agreed to move on with a plan to create a free trade zone in the region, while Gabon and Equatorial Guinea asked CEMAC to await further discussions at home before joining the programme, at earliest in June.

South Korea is stubbornly protecting its agricultural markets in FTA talks with the US:

South Korea and the United States made no headway in high-level talks to resolve outstanding agricultural issues that have been a sticking point in bilateral free trade negotiations, the government said Tuesday… “Negotiators wrangled over market liberalization for ’sensitive’ South Korean agricultural produces, but were unable to reach any clear cut conclusions,” the official said. He did not elaborate on details, but Seoul said items like rice must be put on the sensitive items list even if a FTA is signed.

The EU’s tariff preferences for ACP countries are at risk:

EU trade commissioner Peter Mandelson reiterated the EU threat at a meeting last week that the ACP countries would lose their preferential access to EU markets if Economic Partnership Agreements (EPAs) were not signed by the end of the year… The 79 ACP countries in six regions (the Caribbean, four African regions and the Pacific) seem divided on the urgency of an agreement.

Trade on the Hill

Eoin Callan and Alan Beattie report on the Bush administration’s difficulties in garnering votes for its PTAs with Colombia, Panama and Peru:

The Bush administration may have to advance its trade agenda with narrow bipartisan support if there is no breakthrough in ongoing talks with the Democratic-controlled Congress.

This scenario would see the White House force votes on pending trade deals in the hope of forging a majority with backing from Republicans and a handful of Democrats in the House of Representatives.

The votes are likely to be divisive and would further strain political support for free trade in the US. It could also slow efforts to reach a successful conclusion of the Doha round of world trade talks and hamper US efforts to initiate new agreements.

Perhaps the efforts to conclude Doha are moving so slowly that that tradeoff is not a real concern.

New estimates of FTAs’ impact on bilateral trade flows

Scott Baiera & Jeffrey Bergstrand:

For over 40 years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and — in particular — the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross-industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: trade policy is not an exogenous variable. We address econometrically the endogeneity of FTAs. Although instrumental-variable and control-function approaches do not adjust for endogeneity well, a panel approach does. Accounting econometrically for the FTA variable’s endogeneity yields striking empirical results: the effect of FTAs on trade flows is quintupled. We find that, on average, an FTA approximately doubles two members’ bilateral trade after 10 years.

That’s from last summer’s JIE.

Trade liberalization and illicit goods

Here’s an odd anti-FTA argument:

A negative fallout of the South Asian Free Trade Area (SAFTA) agreement could be an increase in the narcotic traffic in the region, said Dr MM Bhatnagar, member of the International Narcotic Control Board (INCB). Releasing the annual report of the INCB [pdf], Dr Bhatnagar said that past experiences of free trade zones around the world had shown that they at times had become free zones for narcotic trade as well.

I know of good reasons to oppose SAFTA, but the belief that lower import duties will increase the smuggling of illicit goods is not one of them. The experience in other free trade zones has been that increased trade flows provide more shipments within which to hide drugs. But that is an argument against trade flows, not preferential trade agreements.