ICTSD: “Doha “Plan B” Hits Early Roadblock”
It is already proving complicated. On Tuesday afternoon, WTO Director-General Pascal Lamy postponed a meeting of the Doha Round’s supervisory Trade Negotiations Committee (TNC) that had been scheduled for 9 June, after his consultations with member governments determined that they were not yet in a position to provide the hoped-for direction on how to proceed. No new date was announced.
In his Nobel lecture, Paul Krugman suggested the new trade theory’s relevance might be fading in some dimensions, as trade between countries with vastly different incomes and capacities rose rapidly in recent decades:
And nobody doubts that trade between the United States and Mexico, where wages are only 13 percent of the U.S. level, or China, where they are only about 4 percent, reflects comparative advantage rather than arbitrary, scale-based specialization. The old trade theory has regained relevance.
But a couple of recent pieces of evidence supposedly point towards the decline of traditional Ricardian forces for trade. In a recent NBER working paper, Andrei Levchenko and Jing Zhang calibrate a multi-sector Eaton-Kortum model along the lines of Costinot, Donaldson, and Komunjer and claim:
First, we find strong evidence that comparative advantage has become weaker. Controlling for the average productivity growth of all sectors in a country, sectors that were at the greater initial comparative disadvantage grew systematically faster. This effect is present in all time periods, and is similar in magnitude in both developed and developing countries. The speed of convergence in sectoral productivities implied by the estimates is about 25% per decade.
This morning, Dani Rodrik posted a graph that shows convergence in labor productivity in manufacturing industries since the 1980s. I believe Rodrik’s graph comes from directly estimating labor productivity using UNIDO data, rather than a model-derived measure of productivity. (Rodrik blogged the results without mentioning the underlying/forthcoming paper from which they’re excerpted, so not all the details are clear.)
So two different measures of cross-country productivity differences suggest that Ricardian comparative advantage may be declining as a force for international trade volumes. It’ll be interesting to see how, both theoretically and empirically, we can resolve the contrasting claims of Krugman and Levchenko, Zhang, and Rodrik.
Further: A commenter suggests looking to Heckscher-Ohlin-Vanek rather than Ricardo. Indeed, some of Krugman’s Nobel lecture comments are referring to factor-driven comparative advantage rather than Ricardian comparative advantage. That resolution gives one interesting answer to the question I posed in the post’s title.
Pao-Li Chang and Myoung-Jae Lee look at the WTO’s impact on trade flows without assuming linear functional forms for trade frictions. This is forthcoming in the JIE:
This paper re-examines the GATT/WTO membership effect on bilateral trade flows, using nonparametric methods including pair-matching, permutation tests, and a Rosenbaum (2002) sensitivity analysis. Together, these methods provide an estimation framework that is robust to misspecification bias, allows general forms of heterogeneous membership effects, and addresses potential hidden selection bias. This is in contrast to most conventional parametric studies on this issue. Our results suggest large GATT/WTO trade-promoting effects that are robust to various restricted matching criteria, alternative GATT/WTO indicators, non-random incidence of positive trade flows, inclusion of multilateral resistance terms, and different matching methodologies.
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Richard Baldwin & Simon Evenett, Next Steps: Getting Past the Doha Round Crisis, VoxEU eBook, May 28: A number of former ambassadors to the WTO present suggestions for how we might get out of the Doha dilemma in which negotiators neither make progress nor are willing to kill the round. The task is identifying a way to make a “Doha down payment” and then head for the exits.
Susan Houseman, Christopher Kurz, Paul Lengermann, and Benjamin Mandel, “Offshoring Bias in U.S. Manufacturing“, Journal of Economic Perspectives, Spring 2011: In short, the authors say price indices for imported intermediate inputs do not fully reflect the cost savings achieved through offshoring, which means that the real growth of imported intermediates has been understated. Underestimating inputs means overestimating productivity, so that’s bad news for the growth of value added in US manufacturing.
The agendas for the Princeton IES Summer Workshop (June 28–30) and the NBER Summer Institute trade session (August 1–4) are online.
Christina Romer has a nice introduction to the “strong dollar” mantra and the economics of exchange rates in the NY Times. She concludes:
Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.
At VoxEU, Richard Baldwin and Fred Bergsten are debating the state of trade politics. Baldwin thinks that the Doha round is the greatest opportunity for meaningful increases in US exporters’ market access and is pessimistic about the outcomes of pursuing a series of bilateral trade deals. Fred Bergsten thinks that the Doha round is failing because it doesn’t offer meaningful market access improvements and defends the Free Trade Area of the Asia Pacific proposal.
Doug Irwin has posted the preface to his forthcoming Ohlin Lectures book, Trade Policy Disaster: Lessons from the 1930s, on his website.
Via an aside from Gary Hufbauer, I learn that President Obama is going to push PTAs with Colombia, Panama, and South Korea in Congress.
Trade Diversion 