Author Archives: jdingel

New Bhagwati book

I am excited to learn that Jagdish Bhagwati is working on a new book:

I am actually halfway through writing a small book titled Termites in the Trading System: How Preferential Trade Agreements are Undermining Multilateral Free Trade. It will advance many other ways in which the proliferation of PTAs is undermining multilateralism in trade.

I hope that he also invests considerable time in suggesting politically feasible solutions to clean up the spaghetti bowl. Regionalism is here to stay, and we need to do more than merely bemoan MFN’s erosion.

[HT: PSD]

Trade Gains & Pains; Concentrated & Diffuse

Brad DeLong:

In the United States, at least, the problem is that most beneficiaries from globalization don’t really know that they are beneficiaries, or how much they benefit.

Brad Setser, via MR:

Walmart’s customers are diffuse and unorganized.  Walmart itself is not.   The customers of US electronics firms that source production in China are diffuse.  But the US firms that make money off the China trade, and benefit from China’s willingness to sell its “assembly services” on the cheap, are a rather concentrated interest. And when it comes to the politics of trade, it seems to me like the customer – represented by the firms that organize global supply chains – usually win, at least on the big issues of real importance to global firms (liberalizing agricultural trade isn’t one of them). 

Richard Baldwin (pdf):

To understand juggernaut liberalisation of intra-industry trade, it is necessary to reach for the very latest trade theories, the so-called new-new trade theory (Melitz 2003, Eaton and Kortum 2002). These models allow for differences in firm size and efficiency and explain why the largest, most efficient firms export while smaller firms sell only domestically. In addition to matching many important aspects of reality, this implies that there is what might be called ‘intra-sectoral special interest politics’. In the new-new trade models, reciprocal trade liberalisation raises the profits of big export firms while lowering the profit of small firms in the same industry that sell only in the local market (Falvey, Greenaway and Yu 2004, Baldwin and Forslid 2004). The intuition is simple. Reciprocal liberalisation harms small firms that sell only locally since it raises the degree of competition they face; they have no exports to benefit from the expanded foreign market access. This leads to a downsizing of such firms with some of them exiting the industry. For the big firms, by contrast, the extra competition at home is offset by better market access abroad. On net they gain since their sales benefit from the downsizing and exit of small firms in both markets. Turning from the economic impact of reciprocal liberalisation to the political economy aspect, the key fact is that there are many more small firms than big firms. Thus, Olsen’s Asymmetry suggests that industries engaged in intra-industry trade will tend to be pro-liberalisation. Notice the juggernaut’s liberalisation-begets-liberalisation features of this mechanism. Big exporting firms drive the liberalisation of sectors marked by intra-industry trade since they are better organised politically than the small firms in the same sector, and the liberalisation itself downsizes the anti-trade small firms while upsizing the pro-trade big firms.

This approach to political economy suggests structural reasons to be optimistic about freer trade, despite the Doha round’s struggles.

Fairtrade problems on the ground

Not a good week of press for Fairtrade. FT:

“Ethical” coffee is being produced in Peru, the world’s top exporter of Fairtrade coffee, by labourers paid less than the legal minimum wage. Industry insiders have also told the Financial Times of non-certified coffee being marked and exported as Fairtrade, and of certified coffee being illegally planted in areas of protected rainforest.

And more from Alex Singleton, who just visited Africa:

Out in rural Kenya last week, I found that there was some scepticism towards the traditional view the co-operatives are always forces for good. In fact, in Kenya, the coffee co-operatives have suffered from significant mismanagement, with individual farmers often exploited by the leaders of the co-operatives. In fairness, Kenya has been trying to help rebalance the situation, for example introducing six year term limits on co-operative leaders. I do worry that spokespeople for the Fairtrade movement suffer from a myopic romantic vision of the coffee farmer in a co-operative, which the truth such an existence is backbreaking and mired in exploitation.

Dollar Depreciation and the Trade Balance

New NBER paper on the J-curve:

The pattern of international trade adjustment is affected by the continuing international role of the dollar and related evidence on exchange rate pass-through into prices. This paper argues that a depreciation of the dollar would have asymmetric effects on flows between the United States and its trading partners. With low exchange rate pass-through to U.S. import prices and high exchange rate pass-through to the local prices of countries consuming U.S. exports, the effect of dollar depreciation on real trade flows is dominated by an adjustment in U.S. export quantities, which increase as U.S. goods become cheaper in the rest of the world. Real U.S. imports are affected less because U.S. prices are more insulated from exchange rate movements — pass-through is low and dollar invoicing is high. In relation to prices, the effects on the U.S. terms of trade are limited: U.S. exporters earn the same amount of dollars for each unit shipped abroad, and U.S. consumers do not encounter more expensive imports. Movements in dollar exchange rates also affect the international trade transactions of countries invoicing some of their trade in dollars, even when these countries are not transacting directly with the United States.

Hat tip to Tyler Cowen, who comments:

This asymmetry is no accident but rather stems, in large part, from the central role of the dollar as a reserve currency and a medium for invoice pricing. When an Asian export is priced in terms of dollars in the first place, exchange rate movements lead to less pass-through. In other words, to the extent we would see an improvement in our trade balance, from dollar depreciation, it would be vis-a-vis the countries with the highest propensity to consume more American exports. It would not be with the countries whose exports we are most likely to consume. This also means that we cannot in every way extrapolate European currency experience to the United States.

The paper’s claim has important implications for papers like this one, which claimed that a dollar devaluation had a one-for-one impact on import price inflation while minimally impacting overall US inflation. Is this effect strong enough to render calls for a Chinese revaluation of the renminbi irrelevant? Or does the lower pass through rate just mean that the RMB will have to rise even higher?

(I don’t have NBER access at the moment, so I don’t know if the phrase “depreciation of the dollar” implies across-the-board appreciation of other currencies. If so, conclusions about the RMB revaluation question may be different.)

Doha Round update

NYT:

RIO DE JANEIRO, Sept. 10 — Despite repeated declarations of their desire to resuscitate suspended global trade negotiations, representatives of leading industrial and developing nations meeting here this weekend were unable to agree on a resumption date.

Robert McMahon has a nice round up of the latest talks at CFR.

DeLong on Wade

Adopting the 1:3:2 framework, Brad DeLong argues that the existing international economic institutional framework is likely to last:

The current neoliberal rules of engagement make it difficult for the rich post-industrial core to succumb to protectionist and nativist pressures that would slow growth for the three billion significantly. And the current neoliberal rules of engagement give the largely-kleptocratic rulers of the two billion nice lives as well.

Stiglitz’s Trade Unilateralism

Joseph Stiglitz:

“Rich countries should simply open up their markets to poorer ones, without reciprocity.”

Josh Hendrickson:

A man such as Dr. Stiglitz should know better to make such a comment. A basic concept of economics is that in order for a transaction to take place, it must benefit each party. While I am certainly an advocate of free markets and free trade, this statement ignores important political and social factors associated with doing so and is strikingly idealistic.

If Mr. Hendrickson is an advocate of free trade, then he ought to recognize unilateral trade liberalization when it is proposed. Lower US trade barriers would benefit each party. Stiglitz’s proposal is idealistic because if the US was unwilling to make “concessions” at Doha, then it certainly won’t reverse course and make them unilaterally. But Hendrickson ought to support Stiglitz’s position if he believes in the classic case for free trade.