Author Archives: jdingel

PNTR for Vietnam delayed

A bit of a hiccup heading into this weekend’s APEC meeting hosted by Vietnam:

The bill, which would have granted Vietnam ”permanent normal trade relations” with the US, is needed for the country to enjoy the full benefits of its forthcoming membership of the World Trade Organisation. The House of Representatives voted 228 to 161 to pass the bill, but it failed to reach the two-thirds majority needed to pass it under an accelerated process chosen by the Republican leadership of the House.

Susan Schwab, US trade representative, used her opening press conference at the Apec conference in Hanoi on Wednesday to argue that the defeat arose from procedural problems, not deep-seated rejection of trade deals.

“You have to be a student of our congressional system to understand the vote that took place yesterday,” she told reporters. “The fact is that there was strong bipartisan support in favour of permanent normal trade relations for Vietnam in the House of Representatives”.

With many lawmakers yet to return to Washington after the midterm elections last week, the House failed to muster the two-thirds majority required, Ms Schwab said.

A test of Melitz (2003) with regard to firm size

Virginia Di Nino, Rosen Marinov & Nadia Rocha – “Trade Liberalization and New Exporters’ Size: Theory and Evidence”

This paper tests an empirical implication of Melitz (2003) in the context of falling trade costs, using the EU’s intensive liberalization phase (1993−2002) as a natural experiment. Contrary to the model’s predictions, firms that switch from non-exporting to exporting over the studied period are not concentrated in a particular size range. Our findings, based on a rich data set of French manufacturing enterprises, suggest scope for fine-tuning of the theoretical framework.

Available here (pdf).

The Election & Trade: Seat-by-seat analysis

There were no cases of a “trade-sceptic” being replaced a “trade-friendly” member in either chamber.

Simon Evenett and Michael Meier have produced the race-by-race analysis that I briefly considered while writing this post before I set aside the project as too laborious.

Executive summary:

Tuesday’s U.S. Congressional elections assumed considerable importance for trade negotiators because it is thought that, even if significant progress were made on the Doha Round negotiations in early 2007, Congress would need to extend the U.S. President’s Trade Promotion Authority (TPA) to allow the Round to be completed. Much turns on how the newcomers to the U.S. House and Senate are expected to vote. In this note we examine the stance taken by the 62 individuals who won their elections to the House or Senate for the first time. We compared their stance on trade policy matters during their election campaigns with the incumbents that they will soon replace. Our analysis, therefore, takes account of every known case where a seat changed hands and not just the cases where a Democrat replaced a Republican office.

The degree of importance assigned to this increase in congressional hostility to trade liberalization depends upon one’s assessment of TPA renewal’s chances prior to the election. My Thursday post arguing that the electoral impact on trade liberalization would be small reflects my belief that TPA renewal has been out of the question for a while. Of course, we should be afraid that this increases the risk of protectionism.

In June 2004, I wrote a criticism of Bush’s “competitive liberalization” strategy that included the following paragraph:

The administration’s political capital is not only limited in regards to foreign trading partners – the US populace is likely to be unwilling to sign off on a large number of trade agreements. Congress will only pass a limited number of trade agreements before it becomes uncooperative, out of fear that it will be perceived as liberalizing too quickly. Pressure from protectionist constituents like steel workers has a significant impact upon political calculations. I perceive it as unlikely that free traders will have enough expendable political capital to win the swing votes required to pass both FTAA and Doha agreements in the same congressional session. The problems of domestic political capital also hint at another trouble feature of bilateral trade deals – they expose free trade advocates to lobbying and criticism from anti-trade organizations.

Evenett & Meier write:

This constitutes a major blow to the U.S. Administration’s trade strategy of “Competitive Liberalization.” Far from building a domestic political consensus behind trade reform, as USTR Zeollick had originally hoped, this strategy has probably created the seeds of its own destruction.

I am happy that I was right, but not really.

(To be fair to Zoellick, the strategy was sold as a means to stimulate international movement towards liberalization, not build a domestic political consensus.)

[Massive hat tip to Ben Muse]

Network Topology of International Trade

“The Architecture of Globalization: A Network Approach to International Economic Integration” by Javier Reyes and Raja Kali:

We combine data on international trade linkages with network methods to examine the global trading system as an interdependent complex network. We map the topology of the international trade network and suggest new network based measures of international economic integration, at both a global system-wide level and a local country-level. We develop network based measures that incorporate not only the volume of trade but also the influence that a country has on the international trading system. These measures incorporate the structure and function of the network and may provide a more meaningful approach to globalization than current measures based on trade volumes. We find that in terms of participation and influence in the network, global trade is hierarchical with a core-periphery structure at meaningful levels of trade, though integration of smaller countries into the network increased considerably over the 1990’s. The network is strongly “balkanized” according to geography of trading partners but not as strongly by income or legal origin. Using these new measures we find that a country’s position in the network has substantial implications for economic growth and that network position is a substitute for physical capital but a complement to human capital. We therefore suggest that a network approach to international economic integration has potential for useful applications in international business, finance and development.

Last week, I saw Dr. Kali present an application of their measures: “Financial Contagion on the International Trade Network”

The data are from the Feenstra et al. NBER set of bilateral trade data by commodity for 1962-2000, which sounds powerful based on Kali’s description.

The WTO’s “window of opportunity”

Reuters carries the headline “Global free trade talks back on agenda,” but the only support within the article for that claim is “WTO chief Pascal Lamy… says that negotiators now have a brief ‘window of opportunity’ to resume talks.” Lamy’s job is to play the role of optimist, so that’s unsurprising. More insightful is this paragraph:

Three months on, nothing fundamental seems to have changed, and trade diplomats are pessimistic about concluding a deal that was supposed to rebalance trade rules in favour of the poor and boost business worldwide.

[HT: GI]

Latest NBER Papers

A fresh batch of NBER papers was announced yesterday. Here’s what may interest trade people:

Shang-Jin Wei & Zhiwei Zhang:

Trade reform conditions are common in IMF supported programs. Of the 99 countries that had IMF programs during 1993-2003, 77 had conditions on trade reforms in their programs. Since the WTO has not been found especially effective in promoting trade openness for most developing countries, it is of great interest to see if the IMF has been more effective as it combines carrots and sticks not available to the WTO. Yet, the effectiveness of trade conditions in IMF programs has not been systematically studied. Using a unique dataset, this paper provides such an assessment. It finds that trade conditions are associated with an increase in trade openness on average, but the effect comes mostly from countries that, by some measure, have a high degree of “willingness to reform.”

Jiandong Ju & Shang-Jin Wei:

International capital flows from rich to poor countries can be regarded as either too small (the Lucas paradox in a one-sector model) or too large (when compared with the logic of factor price equalization in a two-sector model). To resolve the paradoxes, we introduce a non-neo-classical model which features financial contracts and firm heterogeneity. In our model, free trade in goods does not imply equal returns to capital across countries. In addition, rich patterns of gross capital flows emerge as a function of financial and property rights institutions. A poor country with an inefficient financial system may simultaneously experience an outflow of financial capital but an inflow of FDI, resulting in a small net flow. In comparison, a country with a low capital-to-labor ratio but a high risk of expropriation may experience outflow of financial capital without compensating inflow of FDI.

Richard E. Baldwin & Virginia Di Nino:

This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members.

More on the election and trade

Larry Summers echoes my interpretation of the electoral impact on trade policy:

The challenge for trade policy in the next two years will be more to resist protection than to further liberalisation, since both parties want to respond to the economically anxious middle class that disproportionately projects its anxieties on trade agreements. [FT]

On the other hand, Dan Griswold claims that the partisan shift matters:

The election means that the president’s trade agenda has come to a screeching halt. [AFP]

What? I must have missed Bush’s swiftly speeding trade agenda! The election is a tap on the brakes of a vehicle was coming to a rolling stop anyway.

Thomas Friedman advocates FTAs he doesn’t understand?

This Thomas Friedman clip is saddening.

During a CNBC interview with Tim Russert in late July, the acclaimed savant made a notable confession: “We got this free market, and I admit, I was speaking out in Minnesota – my hometown, in fact – and guy stood up in the audience, said, ‘Mr. Friedman, is there any free trade agreement you’d oppose?’ I said, ‘No, absolutely not.’ I said, ‘You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.'”

Jagdish Bhagwati: “Of course, those who are used to sound bites and cannot think of more than two words at the same time will read ‘free trade areas’ as ‘free trade.'” (Free Trade Today)

The US Election & Trade

What will Democratic control of the US Congress mean for trade policy? Opinions vary. In short, I don’t think the legislative shift implies much for the WTO negotiations, which were going to be quiet for a while regardless.

Even prior to Tuesday, the majority of analysts expected the Doha Round to lay dormant for some time. The most notable dissident is Jagdish Bhagwati, who wrote last week:

But Doha is far from dead. Pascal Lamy, World Trade Organisation director-general, has only “suspended” the talks… George W. Bush is deeply committed to the success of Doha: it would be a rare multilateral triumph for a US president who never wavered in his support for free trade, even as John Kerry, his opponent in the last presidential election, was condemning US companies that outsource as traitors. With the elections to the US Congress pending, and with Democrats out to exploit every opportunity, he simply could not make the necessary concessions in agriculture and risk losing his own “farm belt” support. But with the elections behind him, he can return to act forcefully on his convictions.

In contrast, Brad DeLong says that “free trade does not appear to be a priority for the types of Republicans who get elected president–and definitely not for their staffs.” Nonetheless, so that we can focus on the legislative branch, let’s assume that Bush would like to renew trade promotion authority (TPA) and use it to achieve a meaningful Doha round outcome. What do the mid-terms spell for the US in the WTO negotiations?

Pat Buchanan welcomes the election results as hailing a “new era of economic nationalism”:

Among the more dramatic events of this election year was one that has been little debated: The return of the trade-and-jobs issue, front and center, to American politics. Note: Almost no embattled Republican could be found taking the Bush line that NAFTA, or CAFTA with Central America, or MFN for China, or globalization was good for America and a reason he or she should be re-elected. But in Ohio, Pennsylvania and Michigan, attacks on free trade were central elements of Democratic strategy…

With the 2006 election, America appears to have reached the tipping point on free trade, as it has on immigration and military intervention to promote democracy. Anxiety, and fear of jobs lost to India and China, seems a more powerful emotion than gratitude for the inexpensive goods at Wal-Mart.

While I dissent from Buchanan’s enthusiasm, it’s true that free trade was not a platform plank likely to attract many swing voters on Tuesday. But if public opinion of trade liberalization is so low, would Republican victories have made a difference? Sen. Charles Grassley recently noted that “even if the Republicans continue to control the Congress we’ve already moved into a more protectionist atmosphere.”

President Bush imposed steel tariffs a few months before the 2002 mid-terms in order to win TPA and the election, and free traders were told that a bit of protectionism up-front would buy them much greater liberalization in the future. It didn’t pan out. Then, in 2004, we were told that the Doha round needed to wait until after the presidential election so that Republicans wouldn’t lose critical farm state votes. But the administration didn’t make any serious push at the WTO in 2005, and by the Hong Kong ministerial in December, you could look ahead to Tuesday’s mid-terms. Moreover, the July 2005 pork-laden passage of CAFTA exposed the President’s limited ability to pressure Congress on even the most watered-down trade deals and made me pessimistic about the future of trade liberalization long before a Democratic takeover of Congress seemed likely.

That’s why I disagree with Bronwen Maddox, who wrote that “if the Democrats win back the House of Representatives today, that is the end of the enthusiasm in the US for free-trade deals.” There never was any enthusiasm. Congressional staffers tell me that no one in Washington has considered TPA renewal to be feasible for a couple of years, and Chuck Grassley told Pascal Lamy that it had no chance back in February. While the Democratic Congress will “probably be marginally more protectionist than the current one,” I don’t think that means much difference in terms of further liberalization. The WTO talks were dormant already, Bhagwati’s “far from dead” optimism notwithstanding, and no one expects them to go anywhere without TPA after it expires on July 1.

When might the Doha round resume? Richard Baldwin previously commented that EU CAP reform in 2008/2009 may revive the round. Last Friday, Alan Beattie described the negotiations as in a “deep freeze.” He said they wouldn’t have a chance until after the next US presidential election, and some analysts have even said 2012. I haven’t seen anyone predicting substantive action prior to 2008.

So don’t blame Democrats for hurting Doha, which had already collapsed and wasn’t going anywhere soon even if Republicans kept control of Congress. The interesting question: do the election results increase the risk of protectionist backsliding that we’ve managed to avoid thus far?