Author Archives: jdingel

How big are the gains from trade?

From an interview of Ed Prescott: “People can quantify what gains there are from it [trade]. If you calibrate the models… most people want to get a big number, but a small number comes out.”

Ed explained that the importance of the difference between openness and free trade lies in explaining the big gains that “trade” generates.  Empirically we know that periods of openness coincide with periods of strong economic growth and periods of protectionism coincide with recession.  Yet the traditional models of trade don’t bear those big-gains results.

There are three theories traditionally used to explain trade, Ed explained:

The first is the Heckscher-Ohlin factor endowments model.  China has a lot of low-skill workers so they produce goods that are labor-intensive, and since the U.S. has a lot of skilled workers, we produce goods that are skill-intensive.  But the gains according to that model turn out to be small.

The second model is David Ricardo’s comparative advantage.  It’s the textbook example: England had a comparative advantage in wool and Portugal had a comparative advantage producing wine, so England produces wool and trades for wine and Portugal produces win and trades for wool.  But that model also yields small gains from trade.

Then there is the increasing returns to scale model from Paul Krugman, who use the Dixit-Stiglitz monopolistic competition model to explore the potential gains from increasing returns.  Yet that, too, turned out small gains.

So clearly there’s got to be some other reason that trade yields big gains for the economies that engage in it. The answer is that “trade” is about much more than the exchange of goods. With openness, there is diffusion of knowledge.

[This isn’t a transcript, but it’s an accurate paraphrasing of the original audio.]

http://www.gabcast.com/mp3play/mp3player.swf?file=http://www.gabcast.com/casts/35524/episodes/1282090030.mp3&config=http://www.gabcast.com/mp3play/config.php?ini=mini.0.35524

For two examples of such calculations, I’d look at Bernhofen & Brown (AER, 2005) and Broda & Weinstein (QJE, 2006). The former uses the minimal framework of putting an upper bound on the equivalent variation by looking at autarky prices and a counterfactual import vector. The latter impose more structure by using a CES demand system and look at the gains from new imported varieties.

Now, I won’t dispute that technological spillovers and knowledge diffusion are additional channels offering more gains from economic exchange. But how does Prescott know that the gains from trade are bigger than those estimated using the theories above? What is his benchmark? How could one quantify the gains from trade without using some theory?

What tariff lines do US PTAs liberalize?

Marco Fugazza & Frédéric Robert-Nicoud look at the swiftness of US PTA tariff cuts:

This paper investigates the empirical relationship between cuts in MFN bound rates negotiated during the Uruguay Round of the GATT (1986-1994) and the depth and breadth of Preferential Trade Agreements signed in the aftermath of its completion. Our empirical investigation focuses on the United States using official tariff line level data. To the best of our knowledge, our paper is unique in looking at the causal relationship from multilateralism to regionalism. The existing empirical literature is exclusively looking at the relationship running the other way…

[T]he imports of goods that the US liberalises swiftly the most frequently on a preferential basis are also the goods for which it granted the boldest tariff cuts during the Uruguay Round…

In the US, resistance to preferential trade liberalisation (conditional on it taking place) cannot take the form of positive preferential tariffs for institutional reasons, as we explain in the data section of the paper. It can only take the form of delayed liberalisation. Therefore, our measure of the intensity of post-Uruguay Round preferential trade liberalisation (or ‘PTL’) for each good is the frequency at which the US grants immediate duty-free access to its market to its FTA trading partners…

We find that an increase in the tariff CUT of one percentage point is associated with an increase in the probability of the US granting immediate duty-free access to its market to all trade partners by about twenty-five percent at the sample mean. Given that the standard error for CUT in the sample is 4.34 percentage points, this is a large effect…

[W]e introduce the Uruguay Round MFN tariff rate as a control in all our regressions. The estimated coefficient is negative, implying that the US disproportionately grants duty free access to its market on a preferential basis for goods that have a low MFN tariff rate already.

The authors interpret their findings as showing a complementarity between multilateral and preferential trade negotiations.

Quick links

The WTO Public Forum is this week, and they’re live-tweeting it.

Ryan Avent still believes what he believes about renminbi revaluation. Fred Bergsten still believes what he believes about it. But then he springs the suggestion of “countervailing currency intervention”, in which the US government would sell dollars and buy renminbi – check it out at 7:05 of the video.

Dani Rodrik says that Chinese undervaluation hurts growth prospects in other poor countries.

Google wants to influence trade negotiations

USTR Ron Kirk visited Google last week for a round table on “Supporting Silicon Valley in the Global Economy.” One of the big headlines coming out of event is an argument, pushed by Google, that online censorship is a trade barrier.

The analogy/conflation between web openness and trade openness seems increasingly prevalent. The Economist devoted a cover story to the internet’s openness earlier this month and said that “the internet is as much a trade pact as an invention… Just as a free-trade agreement between countries increases the size of the market and boosts gains from trade, so the internet led to greater gains from the exchange of data and allowed innovation to flourish.”

While at some level the analogy is appropriate because there are common lessons, such as the fact that specialization is limited by the size of the market, I doubt that it’s as valuable when discussing the nuts and bolts of such (informational or economic) exchanges or the policies that should be adopted. But Google is pushing it hard:

Chief Legal Officer David Drummond… said Google is seeing an “alarming increase” in governments around the world censoring the Web, and he called on the U.S. government to treat the issue much as it would if a foreign nation was blocking the trade of physical goods.

“If this was happening with physical trade, we’d all be saying this violates trade agreements,” he said…

Drummond said barriers take several forms, such as blocking access to Google’s YouTube video service or by imposing licensing requirements that stipulate the company must install servers within a country in order to create a “local presence”–a definition that subjects content on those servers to local laws.

This argument, as presented by the WSJ, isn’t consistent with WTO law. Trade barriers discriminate between domestically produced goods and imports produced abroad. To quote myself:

Banning the consumption of tradable goods and services isn’t a WTO violation per se; international trade law emphasizes non-discrimination in the treatment of foreign and domestic products. Consider Antigua’s online gambling case against the US at the WTO. The basis for its claims was not that the US was obliged to allow online gambling, but that if it allowed domestic online gambling (such as allowed by the Interstate Horseracing Act), it was obliged by its GATS commitments to also allow online gambling provided by foreign suppliers. Similarly, I suspect that censorship only constitutes a trade barrier if foreign sources of information are censored more heavily than domestic providers, i.e. a difference in national treatment.

In short, “free trade” doesn’t mean “everything goes” and local laws can’t govern consumption. Free trade means non-discrimination with respect to producers’ origins.

The more plausible line of argument is that trade agreements can be used as leverage in negotiating non-trade issues:

“In our view at Google it’s high time for us to start really sinking our teeth into this one,” said Drummond.

“We have great opportunities now with pending trade agreements to start putting some pressure on countries to recognize that Internet freedom not only is a core value — that we should be holding them to account from a human rights standpoint — but also that if you want to be part of the community of free trade, you are going to have to find a way to allow the Internet to be open.”

But making trade negotiations contingent on pledges against government censorship doesn’t mean that Chinese-style internet censorship constitutes a trade barrier in the traditional WTO sense.

What is “African growth”?

Lant Pritchett provides some numbers to underscore a classic argument:

Perhaps the best thing the developed world could do for the growth prospects of Africa is to stop talking about the growth prospects of Africa…

The growth rate of GDP per capita across 155 countries in the world from 2000-2005 (using data from the latest Human Development Report) was 2.2% per annum and the standard deviation of that growth rate was 3.8.

Among the 21 countries in Western Europe the average growth rate over this period was 3.5% and the standard deviation among countries in Western Europe was 1.5. Now that’s a pretty good aggregate, knowing that country X is in the group “Western Europe” shifts my priors a bit upward, European growth was better and reduces my uncertainty about its growth rate by a lot—I am pretty sure it didn’t have negative growth nor growth at 8%.

Now take the 45 countries in Sub-Saharan Africa. Over 2000-2005 the average growth rate was 2.2%—exactly the global average—but the standard deviation among African countries was 6.1%—much higher than the global variance. This is a terrible aggregate. All knowing that country X is “African” has done for me is increase the variance—I am not sure whether it was growing very fast (as were Sierra Leone and Mozambique) or collapsing (as were Liberia and Cote d’Ivoire).

Hufbauer and Lawrence: “Let’s Make a Deal”

In Foreign Affairs, Gary Hufbauer and Robert Lawrence posit a deal that they think would make concluding Doha feasible:

Many observers blame the complexity involved in getting 153 WTO members to reach consensus on an agenda with dozens of issues, but in fact the matter is far simpler. If China and the United States produced the sort of new offers described below, the momentum for a speedy agreement would be unstoppable.

Yet it appears that political considerations will prevent this from happening. US President Barack Obama pushed trade policy to the back burner while he concentrated on health care and financial reform. He needed nearly unanimous support from Democrats in Congress to enact his domestic agenda; trade agreements, meanwhile, are risky for Democratic politicians because many depend on unions, which wrongly believe that free trade means lost jobs. To counter such arguments, the Obama administration must demonstrate that trade agreements would boost US employment by doubling exports. The White House also needs strong support from Republicans, who tend to be allied with business. So far, US firms are lukewarm about the Doha Round because it seems to offer little from the large emerging economies, especially China…

These proposals could make the Doha Round a political winner: Major concessions by China and a few other emerging countries would be seen in the United States as evidence of greater access in markets that count. And China would advance its status as a full participant in the world trading system, while also positioning itself as the leader that delivered the benefits of the Doha agenda to all developing countries. The world would recover that much faster from the hangover of the Great Recession.

They want China to join the Government Procurement Agreement and liberalize services in exchange for the US recognizing China as a market economy and ending its annual compliance reviews. They also suggest that the US should end its cotton subsidies and ethanol tariffs. I doubt we’ll see these suggestions implemented any time soon.

Disaster-driven trade liberalization

EU members are thinking about helping Pakistan’s economy by liberalizing tariffs on some of its imports:

The most realistic option, according to some diplomats, would be for the EU to identify a list of products beneficial to Pakistan and then unilaterally reduce the so-called “most-favoured nation” tariffs it charges trading partners. Depending on the products and the tariff reductions, such a move could result in €100m to €150m in additional annual exports for Pakistan, according to preliminary calculations.

One challenge in devising a list, say people familiar with the matter, would be to help Pakistani exporters without providing unintended benefits to their Chinese rivals.

It’d be nice to see “preferential” liberalization come via MFN tariff reductions.

[HT: Seb]