Author Archives: jdingel

NYT: “The U.S. Is Losing Market Share. So What?”

Prosperity and economic logic contend with a bit of hysteria and xenophobia:

The United States is losing market share in the global economy, and that is not necessarily a bad thing…

Ultimately, the decline of economic pre-eminence may be more damaging psychologically than economically. Ms. Mann notes that many people gauge their well-being not simply as a function of how much their income grows, but how much it grows relative to that of their neighbors. “By virtue of the world becoming richer, in part because of our engagement in international trade, we are getting richer, but many of the poor are getting richer, too,” she said. “Psychologically, a lot of people are going to view that narrowing gap as a negative.”

More broadly, the fact that economies that were closed to outside investment a generation ago are now creating systems of market capitalism should be seen as a victory for the United States, not a defeat. “Many of the countries that are doing well are mimicking the best of what America has stood for — globalization and the export of the American capital markets culture,” said Mr. O’Neill at Goldman Sachs. “There’s nothing that New York and U.S. policies can do about it unless they want to roll back globalization.”

For more on anti-foreign biases, see Robin Hanson and Bryan Caplan.

FDI diversification in Asia

Great article in the Economist:

In the calculus of costs, risks, customers and logistics that goes into building global operations, an increasing number of firms are coming to the conclusion that China is not necessarily the best place to make things…

China is the emerging giant, but the investments that are being diverted away from the Middle Kingdom present the rest of Asia with a huge opportunity to become manufacturing hubs in their own right…

So far, most industrial development in China has taken place in the country’s eastern coastal regions, particularly around Shanghai and the Pearl River Delta near Hong Kong. But costs in these centres are now rising sharply. Office rents are soaring, industrial land is in short supply and utility costs are climbing. Most significant of all are rocketing wages. In spite of the mass migration of workers from China’s vast interior to the coast, pay for factory workers has been rising at double-digit rates for several years. For managers, the situation is worse still…

Equally important are concerns about growing protectionism. The United States and the European Union are becoming more assertive in holding China to account over its World Trade Organisation obligations. Companies worry that this could lead to sudden interruptions to trade…

South-East Asia has been the chief beneficiary of companies’ decisions to diversify out of China. The problem is that the ten ASEAN nations have yet to form a single market. Although the region offers plenty of opportunity for export-based manufacturing, as a single market it remains highly fragmented. Companies want to be able to set up one factory to serve the whole region, but numerous barriers prevent them from doing so.

Read the full piece.

Cotton in India

The Economist has a short piece on India’s cotton sector:

Only one in 12 of India’s farmers has ever heard of the World Trade Organisation (WTO). The mostly illiterate cotton farmers of Vidarbha—the north-eastern corner of Maharashtra, where Wardha is located—surely count among the other 11. But even the most exalted of trade officials has heard of them. In the past 18 months more than 1,200 farmers in this, the cotton bowl of India, have taken their own lives to escape debts to money-lenders…

Prices are low partly because cotton is so heavily subsidised by rich countries, principally America. The Doha round aims to cut these handouts “ambitiously” and “expeditiously”. If they were cut completely, it might add about 13% to world prices, according to one recent estimate by two World Bank economists. But the Doha round is unlikely to be so slick. A more likely scenario, in which cotton subsidies are cut by a third (and export subsidies eliminated), would add less than 5% to the price.

In the meantime, India’s government could impose a “countervailing” tariff on dumped cotton. But cheap fibres please its textile industry, which is keen to take advantage of the end in 2005 of the old global quota regime…

In the abstract, the answer to the farmers’ distress seems easy: move from growing cotton to weaving it in factories. But India’s onerous labour laws inhibit industrial employment, and the lack of a safety net leaves farmers clinging to their marginal patches of land.

No push from the in Doha negotiations

If this portrayal of the Bush administration’s approach is accurate, then I’d think TPA renewal is unlikely:

“I don’t think the urgency [of Lamy, Mandelson, and analysts] is well-placed. The content is going to drive the pace of this negotiation,” the U.S. official, asking to remain anonymous due to the sensitivity of the Doha talks, told Reuters…

U.S. officials argue that the round will not drift into oblivion if a Doha deal remains elusive through 2007 or beyond, and more importantly today’s multilateral trading system will not unravel, no matter what the critics warn.

Sizable trade effects: tariff evasion and capital controls

Shang-Jin Wei has his hand in a pair of recent papers that sound interesting.

Raymond Fisman, Peter Moustakerski, Shang-Jin Wei – “Outsourcing Tariff Evasion: A New Explanation for Entrepot Trade”

Traditional explanations for indirect trade through an entrepot have focused on savings in transport costs and on the role of specialized agents in processing and distribution.  We provide an alternative perspective based on the possibility that entrepots may facilitate tariff evasion.  Using data on direct exports to mainland China and indirect exports via Hong Kong SAR, we find that the indirect export rate rises with the Chinese tariff rate, even though there is no legal tax advantage to sending goods via Hong Kong SAR.  We undertake a number of extensions to rule out plausible alternative hypotheses based on existing explanations for entrepot trade.

Shang-Jin Wei & Zhiwei Zhang – “Collateral Damage: Exchange Controls and International Trade”

While new conventional wisdom warns that developing countries should be aware of the risks of premature capital account liberalization, the costs of not removing exchange controls have received much less attention. This paper investigates the negative effects of exchange controls on trade. To minimize evasion of controls, countries often intensify inspections at the border and increase documentation requirements. Thus, the cost of conducting trade rises. The paper finds that a one standard-deviation increase in the controls on trade payment has the same negative effect on trade as an increase in tariff by about 14 percentage points. A one standard-deviation increase in the controls on FX transactions reduces trade by the same amount as a rise in tariff by 11 percentage points. Therefore, the collateral damage in terms of foregone trade is sizable.