Author Archives: jdingel

Horse-trading on CAFTA might boost agricultural subsidies

I’m not sure if this paragraph from the WaPo story on CAFTA refers to agricultural subsidies or another agricultural program:

The last-minute negotiations for Republican votes resembled the wheeling and dealing on a car lot. Republicans who were opposed or undecided were courted during hurried meetings in Capitol hallways, on the House floor and at the White House. GOP leaders told their rank and file that if they wanted anything, now was the time to ask, lawmakers said, and members took advantage of the opportunity by requesting such things as fundraising appearances by Cheney and the restoration of money the White House has tried to cut from agriculture programs.

The Rise of Fair Trade

“Fair trade” means many different things to different people, but collectively, fair trade activists have made themselves a powerful constituency. See the opening sentence of USTR Rob Portman’s press release on CAFTA:

Tonight is an historic night for American leadership on free and fair trade.

That’s a throw-away line, so one can argue that the phrase was merely included to mollify fair traders who had criticized CAFTA. Regardless, it’s both impressive and frustrating that fair traders have become so relevant to trade politics.

CAFTA Passes House

CAFTA’s congressional fight was a lose-lose situation. Either protectionists would succeed in promoting a general anti-trade message or CAFTA proponents would successfully pass a preferential agreement that would further warp the global trading system and only benefit the US thanks to trade diversion.

I had difficulty evaluating which type of loss might be worse for free trade in the long run. I’m still uncertain, but CAFTA passed yesterday, by a vote of 217 to 215, thanks to a lot of horse-trading.

Wikipedia on New Trade Theory

It looks like the Wikipedia entry on “new trade theory” could use some work. For example, the initial summary currently reads:

New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scale and the network effect. Beginning in the 1970s some economists asked whether it might be effective for a nation to shelter infant industries until they had grown to sufficient size to compete internationally.

New trade theory is a methodological alternative to pure trade theory, not a critique of a policy position. New trade theory explains international trade in terms of monopolistic competition, whereas traditional theory assumes perfect competition.

For example, under pure trade theory, two absolutely identical countries (with identical factor endowments) would not gain from trade (especially in the presence of international transport costs). Under new trade theory, however, gains from trade would occur due to increasing returns to scale. This is the classic argument from Adam Smith that specialization is limited by the extent of the market, and that greater specialization results in greater productivity.

The long dominance of Ricardo over Smith – of comparative advantage over increasing returns – was largely due to the belief that the alternative was necessarily a mess. In effect, the theory of international trade followed the perceived line of least mathematical resistance. [Paul Krugman, Rethinking International Trade, p.4]

The wikipedia entry is misleading, because it emphasizes the possibility for protectionism to be welfare-improving under new trade theory, rather than the nature and content of the theory itself. The importance of new trade theory is its examination of how models featuring imperfectly competitive markets both reinforce and alter our traditional views of trade, not the fact that it might breathe new life into the infant industry argument (unless one is not a theorist, but a protectionist hunting for a theory).

Traditional theory is the usual basis for advocating free trade… the new trade theory suggests a more complex view. The potential gains from trade are even larger in a world of increasing returns, and thus, in a way, the case for free trade is all the stronger. On the other hand… new trade models show that it is possible (not certain) that such tools as export subsidies, temporary tariffs, and so on, may shift world specialization in a way favorable to the protecting nation. [Rethinking International Trade, p.3]

Thus, new trade theory provides an explanation for international trade wholly independent of comparative advantage. The Wikipedia entry summary ought to emphasize that Adam Smith’s contributions to international economics complement those of David Ricardo, rather than obsessing over the potential for free trade to be sub-optimal.

[New trade theory is not my specialty. Please note any errors or contrasting interpretations in the comments. Thanks.]

A Word on Greenspan’s CAFTA Comments

I just caught a replay of Alan Greenspan’s Wednesday testimony before the House Financial Services Committee. As Bill Day of Business Express complained, much of the discussion wasn’t enlightening. I just want to comment on one exchange.

Rep. Maxine Waters, in the briefest terms, asked: CAFTA will increase outsourcing. Is outsourcing good or bad?

Chairman Greenspan chose to reply by defending outsourcing as efficient and desirable. In doing so, he granted Waters’ premise. But there are good reasons to believe that CAFTA will not affect, or perhaps even reduce, outsourcing!

CAFTA primarily lowers the other nations’ barriers to US exports, not US barriers to theirs. Most of the six other nations’ exports already have duty-free preferential access to the US market under the Caribbean Basin Trade Partnership Act program. As such, CAFTA won’t introduce any new competitive pressures upon US import-competing industries. It will, however, reduce incentives for US companies to establish factories in CAFTA countries in order to circumvent (pre-CAFTA) trade barriers by allowing the US corporations to freely export their goods to the Latin American nations.

It’s silly how anti-globalizers try to impose all of their arguments upon every trade deal. CAFTA is a fairly narrow agreement that opens up Latin American markets to US exports. It doesn’t encourage outsourcing, doesn’t significantly reduce American tariffs, and doesn’t lower labor standards in our partner countries. Those that oppose free trade are using CAFTA as a proxy for globalization as a whole, ignoring that their complaints have little relevance to CAFTA itself.

[That said, I still oppose the deal, because it’s a preferential agreement that will do more harm than good.]

China Revalues Yuan

As you’ve no doubt already read, China has announced that the yuan will no longer be fixed at 8.277 to the dollar, revaluating it to 8.11. They also announced that the fixed peg will now be more flexible, allowing flotation within a band of about 0.3 percent. Whether that band is fixed or will crawl isn’t clear. The move seems popular:

China’s long-awaited decision to allow its currency to strengthen was greeted with widespread praise from its main trading partners in Southeast Asia and the Pacific, signaling a diplomatic triumph for Beijing despite the mixed economic consequences the move will bring to the region. [IHT]

Malaysia followed suit:

Malaysia’s announcement, made less than an hour after China said it would abandon its dollar peg, suggested that the Malaysian authorities had been waiting for the Chinese government to act before allowing the ringgit to float and reacted immediately in order to avoid a buildup of speculative pressure. [IHT]

Daniel Drezner has a link-rich post with details.

Trade Balance vs Trade Volume

In a generally well-written piece criticizing the Bush administration’s fondness for bilateral trade agreements, Bruce Bartlett writes:

A 2003 study by the Congressional Budget Office found the economic potential of bilateral agreements very limited. It noted NAFTA, one of the largest such agreements, had virtually no effect on the U.S. trade balance with Mexico even after eight years. However, the study also noted there might be important noneconomic reasons to support free trade agreements. [WaTi]

The balance of trade is not a measure of economic well-being (though it can signal problems in the economy). It’s an accounting figure that must balance vis-a-vis the capital account (or in the case of capital immobility, balance to zero itself). A more appropriate measure of the economic potential of bilateral agreements is the trade volume, though it too is not a measure of welfare.

To illustrate via the most extreme example possible, imagine a world of two countries with immobile capital. Under both autarky and free trade, each nation’s trade balance would be zero. Clearly there would be welfare differences between these two policy-worlds. Volume, though not a welfare measure, is a more relevant statistic than balance.

The Diversion Begins…

Welcome to my new blogging home.

I took a month-long mid-summer break from the blogosphere. Although I missed the opportunity to blog about topics such as CAFTA’s congressional battles, the Live8 concert, and the abolition of US cotton subsidies, I think the hiatus was beneficial. Taking a break promoted thinking about the topics that I cover from a perspective uninfluenced by a temptation to blog about them. Now I’m back and ready to offer fresh commentary.

Why the new location? I’m still the same author and the content will be similar in focus. The new blog merely better reflects what I do; the old blog title implied that I’d be discussing sweatshops and labor conditions in developing countries, but, as I blogged, my interest shifted away from debunking anti-globalization arguments. This new blog title reflects my interest in agricultural subsidies, preferential market access and other issues that are not nearly as black-and-white as whether the low wage jobs MNCs provide in poor countries are preferable to imposing US-level labor standards.

Plus, everyone loves a bad pun. Thanks for reading.

Countries Still Rule

[This post originally appeared on another blog written by Jonathan Dingel. It has been imported into Trade Diversion. I apologize for the hyperbolic rhetoric of my former years.]

Tyler Cowen at Marginal Revolution recently unknowingly resurrected an old fallacy. He writes that, of the world’s one hundred largest economic entities, “[f]ifty-one are corporations, and General Motors comes in at number twenty-three, just ahead of Denmark (the data are from 2000, Wal-Mart should be higher than listed, among other changes).” The caveat Cowen offers (“To be sure, these comparisons are problematic. Yearly sales are not strictly comparable to gross domestic product”) is woefully insufficient.

Jagdish Bhagwati tackles this fallacy in his new book, In Defense of Globalization.

This dramatic statistic is misleading, however, as the two sets of data are not comparable… So when we compares sales volumes, which are gross values, with GDP, which is value added, we are comparing oranges with apples. The comparison, while conceptually flawed, also exaggerates the role of corporations because sales figures across the entire economy will add up to numbers that will vastly exceed the GDPs of the countries where these sales occur. [p.166]

This idea of corporations ruling the world was manufactured by left-wing critics of globalization in order to instill fear. Corporations, despite all their incentives to please populaces and customers, are not democratic, so people prefer to see democratic governments remain powerful enough to control corporations when necessary. “Wal-Mart and GM are stronger than most governments!” is a great catch-phrase to scare people undecided about the desirability of globalization.

Martin Wolf took this Institute for Policy Studies “paranoid delusion” to task over two years ago; it’s too bad that Professor Cowen blogged without catching this criticism of the data. Here’s how Wolf reads the data in his February 6, 2002 Financial Times column:

In fact, only two of the top 50 economies, measured by value added, and 37 of the top 100 were corporations. For the critics, GM is bigger than Denmark and Wal-Mart is bigger than Poland. Properly measured, Denmark’s economy is more than three times bigger than GM. Even impoverished Bangladesh has a bigger economy than that of GM.

But the flaw in such claims is not just factual but also conceptual, since countries and companies are radically different. A country has coercive control over its people and its territory. Even the weakest state can force millions of people to do things most of them would far rather not do: pay taxes, for example, or do military service. Companies are quite another matter. They are civilian organisations that must win the resources they need in free markets. They rely not on coercion but on competitiveness. [GlobalPolicy.org]

In short, leftists trying to critique corporate power have bastardized the data until it produced an interesting statistic. Hopefully the Marginal Revolution will revise its take on the matter to include a stronger disclaimer than its mere “these comparisons are problematic.” Something along the lines of “these comparisons are ridiculous and misleading” would be more appropriate.