Author Archives: jdingel

Regressive US tariffs

Edward Gresser says that US tariffs are disproportionately applied to goods consumed by low-income Americans. Moreover, he says that there aren’t enough low-income Americans working in those industries for the employment benefits to outweigh the consumer costs of “taxing the poor.”

It is only a slight exaggeration to argue that the tariff system has essentially evolved into a tax on clothes and shoes, which generate most of the government’s revenue from tariffs. In 2007, clothes alone accounted for $9.5 billion of the $26 billion in U.S. tariff revenue, shoes added $1.9 billion, luggage and handbags another billion. The cost to the public, magnified by retail markups and sales taxes, is likely about $40 billion a year. It is a burden that disproportionately affects poor and working-class Americans.

Though the tariff system is smaller than other taxes, it is far more regressive. This is because poor people spend a greater share of their income on clothes and shoes than do wealthy or middle-class people. The cheap and simple goods made in poor countries and bought by low-income Americans are subject to far higher tariffs than luxury goods. An acrylic sweater attracts a 32 percent tariff, while a cashmere sweater gets only 4 percent; a polyester bra is tagged with a 17 percent tariff, while one made of silk gets less than three percent; and a cheap stainless steel fork is hit with a 19 percent tariff, while a silver-plated spoon has none at all…

In 1998, high-tariff industries — such as shoes and textiles — employed about 930,000 people in the United States. By 2002, the number had declined to 650,000. Now, with tariff rates unchanged, the figure has dipped to 400,000 U.S. workers. And the highest tariffs are often the least effective. The 48 percent sneaker tariff, for example, falls on a product that has not been made in the United States since the early 1970s. The United States today now finds itself clinging to an antiquated system that hits poor people hardest and protects few if any jobs while stunting growth and discouraging exports from some of the world’s poorest and most vulnerable countries.

Sachs & Warner (1995), again

Defending the $1 trillion estimate of American gains from globalisation he produced with co-authors, Gary Hufbauer writes:

Dani Rodrik took us to task for exaggerating the benefits of globalization. Professor Rodrik long ago established his reputation as a globalization skeptic; today he is the favorite Harvard economist among the backlash crowd. In 1997, Rodrik voiced a critical note in a book published by the Institute for International Economics, Has Globalization Gone Too Far? Two years later, Francisco Rodríguez and Rodrik (1999) [JD: link added] notched their academic guns against Jeffrey Sachs and Andrew Warner (1995), questioning the benefits of liberal trade policy for developing countries. As targets of Rodrik’s latest outburst, we share good company.

Who scored that fight in favor of Sachs & Warner?

Romain Wacziarg & Karen Horn Welch didn’t [UPDATE 1: See Wacziarg’s comments below.]:

Our cross-sectional results confirm recent criticisms of the SW findings by showing that they were sensitive to the chosen openness classification in the 1970-1989 period, and that they no longer hold for the 1990s. In the 1990s, a vast ma jority of the countries in our sample are classified as open, and a simple dichotomous indicator of openness no longer discriminates between slow and fast growing countries. Our findings suggest that researchers should exercise caution when using simple dichotomous policy indicators such as the SW dummy.

Gordon Hanson and Ann Harrison didn’t:

Although these studies typically show a positive relationship between trade reform and productivity growth, most are plagued by serious econometric and data problems. To illustrate the problems with this literature, we examine a popular measure of openness recently introduced by Sachs and Warner (1995). The evidence presented in this paper shows that their measure fails to establish a robust link between more open trade policies and long run growth…

Clearly, however, the Sachs and Warner measure captures many other aspects of openness than pure trade policy… The coefficients on all five factors which were used to construct the Sachs and Warner (“SW”) openness measure are reported in column (2). Out of all the five factors, only one is significant: whether or not the country had a socialist economic system. The results in column (2) seem to suggest that the factor driving statistical significance behind the composite measure is the market structure of the economy, not its trade policy orientation.

Sachs & Warner (1995) has nothing to do with the present Hufbauer et al. vs Rodrik debate, but I don’t think Rodrik did badly in that fight.

UPDATE 1: Romain Wacziarg comments below, noting that his paper actually debunks SW’s measure cross-sectionally but supports the SW dummy and growth relationship in a panel data, fixed effects setting. Admittedly, this boosts Sachs & Warner’s policy conclusion, but I don’t think it vindicates them from Rodrik & Rodriguez’s criticisms. Indeed, Wacziarg & Welch’s write: “We revisited the evidence on the cross-country effects of SW’s simple dichotomous indicator of outward orientation on economic growth, confirming the pitfalls of this indicator first underlined by RR.”

My point is not that the profession scores the debate in favor of Dani Rodrik in terms of policy conclusions (he makes his living as a dissenter), but that Rodriguez and Rodrik were right to argue that Sachs & Warner’s 1995 paper was not econometrically robust. Since no one seems to have refuted RR’s criticisms of the original article, it seems odd for Gary Hufbauer to invoke Sachs & Warner when facing a methodological criticism from Dani Rodrik.

UPDATE 2: Romain Wacziarg writes:

The cross-sectional part surely was fragile, due to the coarseness of the cross-sectional dummy variable. But they [Sachs and Warner] also had a couple of longitudinal regression of the kind
that Karen Welch and I ran more systematically. Those stand up well to the update, and to the Rodriguez and Rodrik critique.

RR did have good points on the methodology, and it’s a good thing to force the profession to work harder. But they also had a substantive point to make about the literature, which was that the growth gains from trade were either zero or not very large. Here I have to part ways with them. I still read the preponderance of the empirical evidence as supportive of large positive effects of openness.

I tend to agree with Prof Wacziarg on the substantive issues, but I’m still less fond of the Sachs & Warner index methodologically. Trade openness is dichotomous, really? Call me an Anderson & Neary kinda guy.

Did China cause the Doha stalemate?

Alex Gadzala says that China played a role in the special safeguard mechanism stalemate that ended last week’s negotiations in Geneva. If China was really India’s co-equal in balking at the Quad’s position on SSM, as the IHT portrayed it, then the emerging power terribly disappointed those, like Fred Bergsten, who called for China to be an active participant in the round rather than playing a passive part. The fear was that China, having undergone significant liberalization and enjoying significant payoff from its 2001 accession, would have little impetus to push for further liberalization at the Doha round. Now, it seems, China has become an engaged stakeholder, but not as Bergsten & co. had hoped.

The pros and cons of rising food prices

Brookings’ Homi Kharas says that rising food prices are a symptom of demand outstripping supply and the price system is working – today’s high prices are triggering a new wave of investment that will increase future supply and may also cause reform in some countries. He’s optimistic:

[F]or the majority of the world’s poor, to be found among the 1.7 billion rural residents of India, China and Indonesia, the dream of a “chicken in every pot” is becoming more attainable because world food supply is rising again. That is the upside for humanity from today’s high food prices.

IFPRI’s Joachim von Braun is less sanguine:

[M]arket failures and new misguided policies are likely to keep food prices high and volatile for years to come… [M]ost small farmers in developing countries are actually net buyers of food, so they feel the pinch from rising food prices.

John Parker, moderating this debate for the Economist, interprets this as:

For Mr von Braun, it is the speed, rather than the fact of the price increase that matters. Prices have risen so quickly—the food index of the Food and Agriculture Organisation (FAO) rose by 50% in the year to May 2008, he says—that people have not been able to adjust. Or rather, “adjustment” has taken the form of the poor eating less and going hungry…

The very phrase “food crisis” may predispose participants against a proposition that there is an upside to rising prices. On the other hand, it’s an ill wind that blows absolutely nobody any good; there is always some sort of upside. The question for the audience is how big, and whether it is big enough to be meaningful.

The Economist has a roster of guests that will also be participating in the debate over the next week.

Mandelson on negotiations in Geneva

It’s not exactly liveblogging, but Peter Mandelson is posting daily updates from Geneva. It’s a bit informal and potentially interesting:

Word gets around that the Indian Commerce Minister Kamal Nath has arrived in Geneva fresh from the successful vote of confidence in the Indian Parliament that confirmed the Singh government. True to form, Nath immediately takes the opportunity to set out his stall in the morning Trade Negotiating Committee meeting. Nath goes straight on the attack; criticising the US’ offer to reduce farm subsidies and dismissing the idea of an Anti-Concentration Clause in industrial goods negotiations. Nath is playing to the gallery, and he is wrong when he suggests that such a clause would claw back many of the additional flexibilities that developing countries have fought to hard to include in the Doha package as a way of sheltering growing industry or protecting sensitive sectors.

Mandelson also says that “we are potentially closer than we have ever been to a deal.” Sadly, the European Commission hasn’t included a comments section on its website.

Evading tariffs: Misrepresenting differentiated product prices

Beata Javorcik and Gaia Narciso’s paper on “Differentiated Products and Evasion of Import Tariffs” is forthcoming in the Journal of International Economics. Here’s the abstract from an older, ungated version:

An emerging literature has demonstrated some unique characteristics of trade in
differentiated products. This paper contributes to the literature by postulating that
differentiated products may be subject to greater tariff evasion due to the difficulties associated
with assessing their quality and price. Using product-level data on trade between Germany and
10 Eastern European countries during 1992-2003, we find empirical support for this hypothesis.
We show that the trade gap, defined as the discrepancy between the value of exports reported
by Germany and the value of imports from Germany reported by the importing country, is
positively related to the level of tariff in 8 out of 10 countries. Further, we show that the
responsiveness of the trade gap to the tariff level is greater for differentiated products than for
homogenous goods. A one-percentage-point increase in the tariff rate is associated with a 0.6%
increase in the trade gap in the case of homogenous products and a 2.1% increase in the case of
differentiated products. Finally, the data indicate that greater tariff evasion observed for
differentiated products tends to take place through misrepresentation of the import prices.

The most well-known use of double-reporting in international trade to detect tax evasion is Ray Fisman and Shang-Jin Wei’s paper on “missing” trade between China and Hong Kong.