Author Archives: jdingel

The relevance of going alone

Simon Lester inquires about unilateral trade liberalization:

Where exactly would be today in terms of free trade, without international agreements or organizations? My best guess is that trade barriers would be much higher, but is there some small chance that if we had spent the last 50 years talking about tariff cuts as something other than “concessions,” we would actually have made more progress?

“Much higher” may be too strong a statement. Remember that it’s surprisingly difficult to find evidence that WTO membership liberalizes trade using a naive indicator like formal membership.

For developing countries, a World Bank number I’ve often seen attributes two-thirds of their liberalization in recent decades to unilateral actions.

It’s also worth noting that most of the tariffs cuts being discussed at the WTO’s Doha Round of negotiations concerned bound rates that were significantly above the current applied rates.

If unilateral trade liberalization resulted in respectable outcomes while multilateral fora captured the attention of most policymakers, then perhaps fifty years of thinking differently would have paid significant dividends.

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Atypical thoughts on foreign aid

Oxford’s Adrian Wood proposes capping development assistance:

Some developing countries, most of them in Africa, have had high levels of aid dependence – in excess of 10 per cent of gross domestic product, or half of government spending – for decades. It is questionable whether this has been helpful.

There are various reasons to be concerned about high aid dependence, but the most worrying is the undermining of good governance by distortion of political accountability. Governments that are highly dependent on aid pay too much attention to donors and too little to their citizens. This might not matter if the interests of citizens and donors were identical. But all donors have some non-developmental motives and, even when they seek to promote development, they have their own priorities. The result is confused and shifting policies, volatile aid and spending and, as a result, slower growth.

I therefore propose that donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals…

About 30 countries with populations over 1m, of which more than 20 are in Africa, now get aid above this limit and in about half of them aid is more than 100 per cent of taxes…

A lot of countries, including some in Africa, still get too little aid – well below my 50 per cent limit and below what they could put to good use – so part of the agenda should still be to increase aid. But the dangers to development of too much aid for too long are sufficiently serious that donors also need to think strategically about upper limits.

Update: Bill Easterly notes that it isn’t likely to happen.

A guide to the very basics of Dixit-Stiglitz

Are you starting a (graduate) course in international trade this fall? If so, you’ll soon be encountering the so-called Dixit-Stiglitz CES function, a demand system that underlies trade economists’ work on everything from the gravity equation to the organization of multinational enterprises.

Because the specification is so popular, economists frequently skip to its well-known results, like consumers’ Marshallian demand functions and firms’ pricing strategies, without deriving them. And professors introducing the topic sometimes ask students to derive the results without giving them much guidance.

Here’s my introductory guide to the Dixit-Stiglitz demand system. It walks through the most basic derivations step-by-step, in hopes of helping those students so frustrated with wading through tedious algebra and integrals that they’ve turned to Google searching for a very basic introduction to Dixit-Stiglitz lite.

Comments and corrections (!) are most welcome; my email address is on the first page of the pdf.

Richard N. Cooper defends the US current account deficit

Richard N. Cooper defends global imbalances in the JEP:

I argue that the generally rising U.S. trade deficit over the last 10-15 years is a natural outcome of two important forces in the world economy — globalization of financial markets and demographic change — and therefore that the U.S. current account deficit is likely to remain large for at least a decade. In a globalized market, the United States has a comparative advantage in producing marketable securities and in exchanging low-risk debt for higher-risk equity. It is not surprising that savers around the world want to put a growing portion of their savings into the U.S. economy. I argue that serious efforts to reduce the U.S. deficit, even collaborative efforts with other countries, may well precipitate a financial crisis and an economic downturn every bit as severe as the one that many fear could result from a disorderly market adjustment to the trade deficit.

While Martin Feldstein disagrees:

I believe that such enormous deficits cannot continue and will decline significantly in the coming years. This paper discusses the reasons for that decline and the changes that are needed in the U.S. saving rate and in the value of the dollar to bring it about. Reducing the U.S. current account deficit does not require action by the U.S. government or by the governments of America’s trading partners. Market forces alone will cause the U.S. trade deficit to decline further. In practice, however, changes in government policies at home and abroad may lead to faster reductions in the U.S. trade deficit.

Bergsten is indeed unhappy with China

In Foreign Affairs, Fred Bergsten confirms my suggestion that he would be unhappy with the way China decided to actively engage the Doha round:

At the WTO ministerial meeting in Geneva in late July, China joined the organization’s inner steering committee for the first time. It seemed that China might be willing to help promote a fruitful outcome. But China, far from supporting liberalization, used its newfound clout to join India in seeking new protection beyond the red lines of most of the other participants, including many developing countries. Doha may thus become the first global trade negotiation to fail since the 1930s, when protectionism erupted everywhere and brought on a worldwide depression.

What does “for” mean? The US-European dispute over multi-function IT products

The United States and Europe are in a high-tech dispute. Their conflict lies in determining the difference between a LCD computer monitor and a flat screen television, and a WTO decision may wind up turning on the meaning of “for.”

But first, some background. The 1996 Information Technology Agreement (ITA), a plurilateral agreement adopted under the auspices of the WTO by the world’s major IT-producing nations, lowered those members’ MFN tariffs on information technology products to zero by 2000. Since 1996, another 42 WTO members have joined the original 29 signatories.

Yesterday, the United States, Japan, and Taiwan filed a request for a WTO dispute settlement panel to review the European Union’s compliance with the ITA. In the USTR’s words:

The EU in the past several years has adopted a series of measures that resulted in new duties on imports of specific high-tech products – cable boxes that can access the internet, flat panel computer monitors, and certain computer printers that can also scan, fax and/or copy… These products were included in the ITA… However, the EU claims it can now charge duties on these products simply because they incorporate technologies or features that did not exist when the ITA was concluded.

Of course, the European Commission sees it differently:

The EU, as required by WTO law, bases its customs classification exclusively on the objective characteristics of the products. Where changes in technology have given a product multiple functions – for example, a digital photo camera that also records large amounts of high-quality video – then these products in many cases are objectively different products falling outside of the original product categories covered by the ITA and are classified as such by the EU and others. The US claims this is a violation of the ITA. But both the spirit and explicit provisions in the ITA make it clear that extension to new products to reflect technological change would not be automatic, but based on periodic review by signatories…

Is it a LCD monitor or a flat screen TV? The ITA gives duty-free treatment to computer monitors, not to monitors for consumer electronics such as TV or DVD players. What the US claims are LCD computer monitors are in fact screens equipped with a Digital Visual Interface to allow use with consumer electronics such as DVD players. They are therefore properly classified as video monitors and not covered by the ITA. Incidentally, the classification of such products by US customs is similar to EU practice.

It’s a little unusual to see a WTO dispute about product classifications – usually conflicts revolve around how to calculate duties, the eligibility of safeguard mechanisms’ application, etc. Why can’t we just match a Harmonized System code from the text of the ITA to the EU tariff schedule and make sure the the latter number lies below the former?

First, the Information Technology Agreement was negotiated under the HS1996 product classification scheme. High-tech products have certainly evolved by leaps and bounds since then (should we just say an iPod is a CD player for tariff purposes?) and the HS2007 revisions were dedicated to information technology and communication products. Unfortunately, it is difficult to translate HS1996 tariff agreements into HS2007 tariff schedules:

The WCO Members agreed as a primary goal of the third HS review to conduct an overhaul of the provisions in the technology area in the HS2007 amendment…

In order to assess the impact of HS2007, and to serve as guidelines in transposing the schedules of concessions, the ITA participants asked the Secretariat to prepare a model list in HS2007 through a technical transposition which, like the methodology used for schedules of concessions, maintains the actual product coverage of the new list strictly identical to the original one. However, it goes without saying that several of the above-mentioned divergences in classification would not be solved through this technical exercise.

If ITA participants decide to strictly adhere to the original product coverage, the list in HS2007 cannot take advantage of the improved HS structure on IT products. In many cases, the new HS2007 subheading cannot be directly included in ITA lists because these subheadings normally combine previous “ITA” with some “non-ITA” subheadings. In order to exclude these non-ITA parts, many ex-outs and complicated descriptions need to be introduced by the Secretariat in the HS2007 model list, even though those non-ITA parts sometimes consist of only a minor part of the subheading and represent a very small amount of trade.

But more importantly, the Information Technology Agreement didn’t even use HS1996 codes in many cases!

[P]roducts were specified in two attachments of the Ministerial Declaration: Attachment A and Attachment B. Attachment A consists of two lists of categories of products legally defined by their HS1996 codes. Attachment B is a list of legal product descriptions without reference to their HS codes; restrictions on these products shall be liberalized “wherever they are classified”. Although these lists have provided a good guidance in terms of product coverage, there are still some ambiguities due to the lack of clear HS classifications…

[F]or the products listed in Attachment B and a number of items in Section 2 of Attachment A, consensus was reached only on the textual description of the products, but not on the corresponding HS codes. The ITA participants need to designate national codes based on their own interpretations and classifications.

A WTO committee that was supposed to add new products to the original coverage never reached any agreements.

Flat panel displays fall into Attachment B, which also specifically excludes TVs:

Flat panel displays (including LCD, Electro Luminescence, Plasma and other technologies) for products falling within this agreement, and parts thereof… The agreement does not, therefore, cover televisions, including high definition televisions.

So the LCD monitor needs to be for an automatic data processing machine, as computers are known under the ITA. And the European Commission’s description of the US tariff schedule seems to be right. LCD computer monitors entering the US under tariff line 8528.61 are duty-free, as they are projectors “of a kind solely or principally used in an automatic data processing system of heading 8471.” But tariff line 8528.69.50, for “other projectors, color, with a flat panel screen, display diagonal exceeding 34.29cm” applies a tariff of 5%. Flat panel televisions (8528.72.72) also face a 5% duty.

How will the WTO dispute panel evaluate the difference between a LCD monitor and a flat panel TV? Will the panel have to think hard about the meaning of “for”? I leave any further analysis to the good folks at the International Economic Law and Policy Blog, who may actually be qualified to predict where this case is going.

It seems unavoidable that product innovations will outpace their regulatory classification, especially in trade agreements that must be negotiated between governments. Are trade conflicts resulting from that lag equally unavoidable?