Author Archives: jdingel

What's the best scope for WTO negotiations?

Former USTR Charlene Barshefsky makes the case for emphasizing sectoral agreements rather than trade rounds at the WTO:

The longer the time-spread between global developments and WTO agreements, the less relevant the WTO will become. That, to me, suggests a policy, as we pursued in the 1990’s under President Clinton, under which parties use the WTO the way it was meant to be used – and that is as a forum for continuing negotiations among the members on issues of growing concern, so as to handle these issues in a rapid and effective manner. In the 1990’s, we concluded global agreements on telecommunications market opening, financial services market opening, information technology (which brought to zero tariffs on all information technology products), and duty-free cyberspace. These were all done under WTO auspices in a sectoral fashion, in a timely way.

The last global round of trade talks was launched in 1986. This round will not conclude until year-end 2007, at the earliest. Had we not pursued these critical sectoral agreements when we did, global telecom and financial services markets would not be nearly as open to the United States as today. Would that have made make any sense, when financial services and telecom are perhaps the most critical aspects of wealth creation?

If we keep waiting for meaningful trade liberalization in large rounds, which can be held up by any issue countries wish to interpose, then we risk the future of the WTO. I believe Doha will conclude. Once it concludes, the WTO must take a hard look at its own responsiveness, and its own role as a regulator, if you will, of global economic behavior, and move toward the negotiation of agreements with the greatest salience.

The most relevant academic piece I’ve found on this topic is a chapter in Economic Development and Multilateral Trade Cooperation by Philip Levy (PDF available online). In his introduction, he writes:

What is the appropriate scope of a negotiating round? Is it generally possible to reach agreements sector by sector? If it is possible, is it advisable?

This paper will attempt to bring existing economic theory to bear on these questions. In the next section, we will review the traditional case for package deals in trade rounds, bolster that case with some theory and then challenge it with the apparent success of sectoral negotiations. We will argue that track record of the sector-by-sector approach is less attractive than it seems and that its successes may well have had negative effects on future negotiations beyond the unfortunate procedural precedent.

Pointers to additional literature on this topic would be much appreciated.

Trade Liberalization and Industrial Restructuring through M&A

Today, I had the pleasure of hearing Holger Breinlich present his most recent work, which introduces new evidence about the reactions of heterogeneous firms to trade liberalization:

This paper analyzes mergers and acquisitions (M&A) as a previously neglected channel of industrial restructuring in the face of trade liberalization. Using the Canada-United States Free Trade Agreement of 1989 as a source of exogenous variation in trade barriers, I show that trade liberalization leads to a significant increase in M&A activity. I also provide evidence that resources are transferred from less to more productive firms in the process and that the magnitude of the overall transfer is quantitatively important. Taken together, these results suggest that M&As are an important alternative to the previously studied adjustment channels of firm and establishment closure and contraction.

Full paper here (pdf).

Farm Bill announcement Wednesday

The farm bill will come down the pipe this week:

[T]he U.S. Agriculture Department announced it will outline its proposals on Wednesday for revamping U.S. farm subsidy programs, which are up for renewal this year. Many countries could see the proposal as a barometer of how serious Washington is about reforming agriculture in the Doha round.

And Bush is spending today asking for TPA extension.

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.