Author Archives: jdingel

David Atkin's "Trade, Tastes and Nutrition in India"

In “Trade, Tastes and Nutrition in India“, David Atkin introduces habits in consumption into a specific factors model of agricultural trade. If a country starts in autarky, then people become habituated to consuming the food produced by their abundant factors. This correlation of tastes and endowments means that when the economy opens to trade, the relative price of that good (for which autarkic consumers developed a habit) will rise. This reduces the consumption of food nutrients in the short-run compared to the habit-free case, as consumers don’t shift over to newly cheap imported foods as quickly as assumed.

Atkin doesn’t focus much on welfare comparisons, which are difficult in such a dynamic, habit-formation context; rather, he’s concerned with nutritional intake. He argues that nutrition matters – policymakers do care, nutrition impacts growth potential, and childhood malnutrition can have persistent long-run effects.

Atkin’s empirical testing ground is India, which has internal agricultural markets that are not very integrated. There are high transport costs, poor infrastructure, and state governments set agricultural policy, including production subsidies and tariffs on agricultural imports from other states.

I examine the predictions of this model of trade with habit formation using household survey data from India, where internal agricultural trade remains highly restricted. I identify tastes with the unexplained regional variation in household demand for agricultural products and find that regional tastes favor food crops that are well-suited to local agro-climatic conditions. I predict that the liberalization of internal agriculture trade in India will generate short-run caloric losses unless income gains from trade are relatively large, and that there would be no such losses if tastes were identical across the country. I also examine the consumption patterns of inter-state migrants, and find that they consume fewer calories for a given level of food spending than otherwise similar consumers. This effect only disappears two generations after migration, as tastes adjust to local prices. These findings, which reflect the higher prices of preferred origin-state goods in the migrant’s destination state, further corroborate the assumptions of my model.

Firms can't answer the questions we have about PTAs

Masahiro Kawai and Ganeshan Wignaraja try to use an ADB survey of Asian firms to assess the Asian “noodle bowl” of preferential trade agreements:

Properly designed FTAs keep trade and FDI flowing, even when crisis strikes. Yet, the plethora of overlapping and complex FTAs in East Asia carries the risk of becoming unwieldy and making business cumbersome. Influenced by Jagdish Bhagwati’s famous remark about a spaghetti bowl of FTAs, critics argue that the explosion of deals, with complex rules and variable tariffs, has increased transaction costs, particularly for small- and medium-sized enterprises (SMEs) – those that can least afford them (see Bhagwati, 2008 for an excellent synthesis). They also argue that the multiplicity of bilateral and plurilateral deals hinders the broader push toward a global trade agreements. The spaghetti bowl phenomenon is popularly known as the “noodle bowl” effect in Asia and has led Richard Baldwin and Philip Thornton (2008) to propose a “WTO Action Plan on Regionalism” that includes deepening of the transparency mechanism for FTAs.

For the first time, the ADB study on FTAs sought the views of those most directly affected – the region’s export-oriented firms. The results showed that these businesses view FTAs as a benefit rather than a burden and use them to expand trade to a far greater degree than had been previously thought. The benefits of FTAs include wider market access and preferential tariffs that make it easier to import intermediate materials needed for finished goods. Multiple country rules of origin (ROOs), which determine where goods originate from for a variety of purposes, including quotas and labelling, may add some administrative and transaction costs. But the large majority of exporters do not view ROOs as a significant hindrance to business activity. In addition, bilateral and plurilateral FTAs counter protectionist tendencies amid the current economic uncertainty. They provide a valuable stepping stone toward broader trade liberalisation in support of economic recovery.

Unfortunately, this is not compelling evidence. Surveying firms is simply not a persuasive means of assessing the costs and dangers identified by skeptics of preferential trade. Questions about exporters’ preference utilization and perceived trouble with rules of origin cannot answer questions like:

  • Do PTAs dampen protectionist pressures or just shift them onto less-preferred trading partners?
  • Do PTAs divert political energy away from multilateral negotiations – are they building blocks or stumbling blocks?
  • Do these PTAs create more trade than they divert?
  • Will latecomers in the PTA race find themselves forced to join agreements that favor the first movers, through mechanisms such as decisions on technical barriers to trade?

It’s good to collect evidence on preference utilization (28% of firms utilize some preferences, though that’s not as meaningful as evidence on the percentage of trade flows that utilize preference), but this survey doesn’t answer any of the big questions about Asia’s noodle bowl.

Against aggregative theories of growth

Abhijit Banerjee and Esther Duflo make the case against aggregative theories of economic growth:

The premise of the aggregative approach to growth was that markets function well enough within countries that we can largely ignore the fact that there is inefficiency and unequal access to resources within an economy when we are interested in dynamics at the country level. The evidence suggests that this is not true: The cross-country differences in marginal products or technology that we want to explain are of the same order of magnitude as the differences we observe within each economy. A theory of cross-country differences has to based on an understanding and an acknowledgment of the reasons why rates of returns vary so much within each country.

Missing markets and charging immigrants

Gary Becker wants to charge immigrants $50,000 to enter the United States. He thinks that letting a large number of immigrants come at that price would be preferable to the current quota, which effectively sets the price to infinity for some immigrants.

The crazy thing is that the international labor market is so distorted that migrant laborers are estimated to gain something like $10,000 – $17,000 annually (Lant Pritchett, Let Their People Come), so many might be willing to pay $50,000. But for this proposal to have any credibility, we’d need loans so that immigrants could purchase this massive increase in lifetime earnings. And what would impoverished immigrants pledge as collateral on the loan? This missing market seems crucial, and Becker’s offhand comments (“along the lines of student loans. There would be some role of government because there would have to be some enforcement provision”) aren’t very convincing.

Oddly, the only reason to offer such a proposal is to try to buy off public opposition to increased immigration, but Becker admits that it is a political non-starter.

HT: Emmanuel.

Chinese tire tariff reactions

“We may import fewer tyres from China, but this decision is not going to jumpstart moribund domestic tyre production. This is protectionism without the protection. Pure appeasement politics: calculated and cynical.” – Charles Freeman, CSIS

“This is a grave act of trade protectionism. Not only does it violate WTO rules, it contravenes commitments the United States government made at the [April] G20 financial summit.” – Chen Deming, China’s minister of commerce

“Barack Obama does something really stupid.” – Brad DeLong

Obama invokes safeguards against Chinese tires: 35% tariff

The Obama administration will put steep import duties of 35% in the first year on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs, U.S. Trade Representative Ron Kirk announced Friday night.

China’s government responded quickly to the announcement, saying in a statement that it “strongly opposes” what it called “a serious act of trade protectionism.”

Thankfully these safeguards expire in 2013. Meanwhile, keep an eye out to see if a mob mentality develops.