Author Archives: jdingel

PTAs as first-mover advantages

Brookings’ Joshua Meltzer takes an extended look at the future of the global trading system (html / pdf / event). The introduction is a good overview of the status quo’s challenges, though knowledgeable observers will find plenty of room for disagreement in assessing the shape and magnitude of various obstacles (e.g. the bicycle theory of trade negotiations, PTAs’ diversion of attention from multilateral talks).

The discussion of WTO legitimacy at the end of the piece is very interesting, though I won’t focus on it in this post. (More on that subject can be found in this Oxford book on trade ethics.)

In the middle of the article, Meltzer hints at an argument that has perhaps not received sufficient attention:

For the United States, the European Union, China, and Japan, bilateral and even regional FTAs maximize their ability to get their own way. Were these outcomes to become templates for future multilateral trade rounds, then a two-level game that leverages FTA outcomes into the WTO might undermine the WTO’s legitimacy.

One such danger is that FTAs might be a means for the US or EU to try to lock in first-mover advantages in shaping regulatory standards (such as technical barriers to trade). While preferential tariffs can be undone relatively easy by further tariff cuts, plurilateral agreements that promulgate the adoption of a larger economy’s preferred technical standard might serve to determine which standard is later adopted multilaterally. A first mover might gain at the expense of others if its preferred standard is worse for world welfare. (This scenario would be most damaging if technical standards are to be harmonized, but it also highlights the difficulties of harmonization. If mutual recognition is the future of reconciling technical barriers to trade, then the scope for first-mover advantages may be reduced.)

Export pioneers

In a NBER working paper, Artopoulos, Friel, and Hallak describe how firms in Argentina learned to successfully export to high-income markets:

Several developing countries feature weak performances as exporters of differentiated goods to developed countries. This paper builds a conceptual framework to explain the obstacles that prevent producers of differentiated products from establishing a consistent presence in the developed world and the process through which those obstacles may be overcome. We build our framework based on case studies of export emergence in four Argentine industries: motorboats, television programs, wines, and wooden furniture. We find that exporting consistently to developed countries requires drastic changes in how business is conceived and conducted relative to the practices that prevail among domestically-oriented firms. Attempts by these firms to export often do not succeed because they approach foreign markets the same way that they approach the domestic one. Their failure to change the business approach stems from their inability to access critical (tacit) knowledge about differences in consumption patterns and business practices in developed countries. In three of the sectors we study, an export pioneer is the first to implement the necessary changes to established practices. His actions set a benchmark, unleashing a diffusion process that fosters export emergence in the sector. The most salient feature of export pioneers is their knowledge advantage about foreign markets stemming from their embeddedness in the business community of their industry in a developed country.

“Made in the world”

In line with my suggestion that labels simply say “made in a series of places”, the WTO has announced a “Made in the world” initiative. It aims “to support the exchange of projects, experiences and practical approaches in measuring and analysing trade in value added.” “Made in the world” should be a valuable initiative, at least until the arrival of interstellar trade.

"Made in the world"

In line with my suggestion that labels simply say “made in a series of places”, the WTO has announced a “Made in the world” initiative. It aims “to support the exchange of projects, experiences and practical approaches in measuring and analysing trade in value added.” “Made in the world” should be a valuable initiative, at least until the arrival of interstellar trade.

Building redundancies into global supply chains

The FT takes a look at global supply chains in the wake of the recent tsunami:

In the past decade, many manufacturers have shifted component production to multiple contractors, often in low-wage Asian nations. This is to cut costs but it is also part of a general shift to slim operations and concentrate on what they regard as core areas, such as product development and marketing.

However, concurrent moves towards “lean production” – shaving inventories to the minimum and pushing parts through the system as fast as possible to cope with sudden variations in demand – have made supply chains increasingly susceptible to the kind of disruption seen in recent weeks in Japan…

“If all a manufacturer based in the US thinks about is unit costs, then it’s likely to have a global supply chain in which it transports components long distances [to a US assembly facility],” says Matthew Lovejoy, Acme’s president and owner. “But once you think about all the hidden costs that such complex chains involve, including disruptions in transport, the need to vary production to meet changes in your customers’ demands, plus the impact of unpredictable events like the Japan earthquake, then you realise these kinds of networks do not make sense.”

Accordingly, Mr Lovejoy has established three supply chains – each built around Acme’s three factories in Chicago, Brazil and Shenzhen, China. Each is largely autonomous but capable of supplying components to other parts of the business in the event of a sudden, localised disruption…

The lesson for industry from the Japanese disaster is that the consequences of such events on the global production system are always likely to be considerable. There are ways to reduce the sensitivity of supply chains to the effects of such incidents, through better planning and more distributed operations, but too few companies are taking advantage of them.

The whole article is worth reading. I previously mentioned this topic here.

Hat tip: Seb

“Ricardo revisited”: Back to 2004

In a piece titled “Ricardo Revisited: Sino-American Trade and Economic Conflict,” Ralph E. Gomory and William J. Baumol write:

In this note we look carefully at the impact on a developed nation of the economic development of its trading partner; a trading partner that is developing from a rather undeveloped state. If you want to keep the China-U.S. relationship and the impact on the United States of China’s development in mind as a possible example, you will not go far wrong.

We will discuss what a very standard model, the Ricardo model, shows about this situation. We will see that this very familiar model, properly analyzed, has a number of very unfamiliar consequences. Notably:

  1. The economic development of your trading partner can be harmful to you, the home country.  Although the effect of that development starts out good, it ends badly.
  2. That there is a dominant and dominated relation possible between the two countries that is good for the dominant one and bad for the dominated one.
  3. A country can attain a dominant position only by having an undeveloped trading partner. This can occur naturally if the trading partner is simply there in an underdeveloped state, or the underdevelopment can be brought about by mercantilist actions that destroy that partner’s industries.
  4. There is inherent conflict not only between a nation in a dominant position and its trading partner, but also between that dominant nation and what may loosely be called the interests of the world. In a two-country model of the sort we discuss here this simply is measured as the sum of the benefits obtained by the two countries’ economies.  We assert that from a world point of view, having either nation dominant is bad.
  5. While a country cannot gain a dominant position solely by building up its industries, it can avoid a dominated position by developing its own industries and not allowing them to be destroyed.

We will explain more clearly what we mean by these assertions as we go along… We will also explain enough about the Ricardo model to make that intelligible to those not already familiar with it.

A quick skim of their Appendix A shows that this is literally the standard Ricardian model. They’re just going to discuss comparative statics — what happens to the equilibrium outcome when countries’ productivities change? Unfortunately, a lot seems to obscured by their choice of words.

In the model, countries are symmetric in size and the representative consumers have identical Cobb-Douglas preferences. The “dominant” country is the economy with a larger share of world income — this means that it is more productive and/or makes the good with the larger expenditure share. The words “mercantilist” and “destroy” only appear in the introduction and conclusion, so I can’t say how they’re related to the analysis. Productivity is exogenous in the model and there are no policy instruments, so I don’t see how one avoids destroying industries or can actively frustrate the other economy’s productivity growth.

The word choice is frustrating, because some commentators have interpreted this as an attack on mainstream international economics: “Ralph Gomory and William Baumol, who have posited a much more widely applicable, if equally mathematically watertight, challenge to conventional trade theory.”

Nonsense. This is conventional trade theory. Whip out your copy of Dornbusch, Fischer, and Samuelson (AER, 1977) and turn to page 827:

An alternative form of technical progress that can be studied is the international transfer of the least cost technology. Such transfers reduce the discrepancies in relative unit labor requirements — by lowering them for each z in the relatively less efficient country — and therefore flatten the A(z) schedule in Figure 1. It can be shown that such harmonization of technology must benefit the low-wage country, and that it may reduce real income in the high-wage country whose technology comes to be adopted. In fact, the high-wage country must lose if harmonization is complete so that relative unit labor requirements now become identical across countries and all our consumer’s surplus from international trade vanishes.

According to Arvind Panagariya, this result was first shown by Harry Johnson in the 1950s. It had another widespread discussion in 2004 when Paul Samuelson revived it with a JEP article. (I remember blogging that seven years ago!) I see no challenge to orthodoxy here.

The standard Ricardian model doesn’t have intertemporal dynamics, so Gomory and Baumol aren’t in a great position to do welfare analysis, but let’s discuss it nonetheless. Note that free trade is preferable to autarky in every period. So cutting ourselves off from trade with China isn’t the answer. The options are either to (1) improve US productivity or (2) retard Chinese technical progress. I’m not aware of any free trader opposing the former, and the policy instruments available for the latter are, in the words of Avinash Dixit and Gene Grossman, “to ‘bomb China back into the stone age’ of their older lower productivity.”

Labor mobility and international tax differences

The latest NBER Digest summarizes work by Henrik Kleven, Camille Landais, and Emmanuel Saez documenting how football [soccer] players respond to tax incentives.

[I]n studying teams’ performances from 1980 through 2009, they find that low-tax nations had better teams after Bosman. “This suggests that low-tax countries experienced an improvement of club performances by being better able to attract good foreign players and keep good domestic players at home,” they write.

Their study also looks at the impact of tax reforms in specific countries. For example, in 2004 Spain introduced the so-called “Beckham Law” (named after British superstar David Beckham, who was one of the first footballers to take advantage of it). It allowed nonresidents to be taxed at a flat rate of 24 percent instead of the progressive rate for residents, whose top marginal rate by 2008 stood at 43 percent. After the law, Spain saw its share of foreign players increase while nearby Italy, which had a similar top league, saw its share of foreign talent shrink.