Author Archives: jdingel

Financial globalisation ends offshore financial centres

FT:

The distinction between “offshore” and “onshore” financial centres has been dropped by the International Monetary Fund, in a victory for more than 40 small countries that complained they had been unfairly stigmatised in the fight against financial crime.

The IMF said the distinction between on- and offshore centres “had been blurred by globalisation”, which had increased the range of cross-border transactions in many countries, as well as the launch of new financial centres catering to non-residents in countries such as Botswana, Brunei, Dubai and Uruguay.

End biofuel subsidies

Kim Elliott says that precise estimates aren’t key to the biofuels debate: “Whether biofuels are responsible for 75 percent of the recent food price hikes, as Don Mitchell contends, or 30 percent, or even just 5 percent, tax incentives and subsidies for biofuels make no sense.”

US opinion on trade declining

Protectionism becomes more likely during economic downturns, and Emmanuel notes that public support is headed that way:

The most recent Pew Global Attitudes survey found that, in a sample of twenty-four countries, the United States came dead last in terms of viewing trade favourably… “Support for international trade continues to decline in the United States – 53% of Americans say trade is good for their country, down from 59% last year and 78% in 2002. Support for trade is lower in the U.S. than in any other country included in the survey.”

Addendum: See Ben Muse (1,2), who is on top of this topic.

US M&A nonsense watch

I very much doubt that the empirical evidence supports Dan Mitchell on this:

Indeed, that [higher corporate taxation] is why American companies almost always become the subsidiary rather than the parent when there is a cross-border merger.

Almost always?!? UNCTAD’s stats for 2006 M&A say that US entities made $171.3b in purchases and $172.2b in sales.

Do you know where your firms are?

As production comes to depend more on intangible productive assets, the location of production by multinational firms becomes increasingly ambiguous. The reason is that, within the firm, these assets have no clear geographical location, but only a nominal location determined by the firm’s tax or legal strategies.

The effects of these location ambiguities, and the resulting distortions for tax reasons of the location of production, are described and it is estimated that for U.S. firms’ affiliates in a few tax havens alone, the exaggeration of value added in those locations amounted, in 2005, to about 4 percent of worldwide affiliate sales, and the exaggeration of sales to about 10 percent of worldwide affiliate sales.

Robert Lipsey – Measuring the Location of Production in a World of Intangible Productive Assets, FDI, and Intrafirm Trade NBER WP 14121

Heterogeneous firms and wages

Mary Amiti & Donald R. Davis – “Trade, Firms, and Wages: Theory and Evidence” NBER WP 14106

We develop a general equilibrium model which features firm heterogeneity, trade in final and intermediate products, and firm-specific wages. In doing so, it builds on the work on heterogeneous firms of Marc J. Melitz (2003) as amended to allow trade in intermediate goods by Hiroyuki Kasahara and Beverly J. Lapham (2007). Both of these models maintain the assumption of homogeneous labor and a perfect labor market, so that the wages paid by a firm are disconnected from that firm’s performance. We continue to focus on homogeneous labor, but introduce a novel variant of fair wages which links the wages at a firm to the profitability of the firm…

A decline in output tariffs reduces the wages of workers at firms that sell only in the domestic market, but raises the wages of workers at firms that export. A decline in input tariffs raises the wages of workers at firms using imported inputs, but reduces wages at firms that do not import inputs…

We test our model’s hypotheses with a rich data set covering the Indonesian trade liberalization of 1991-2000. The trade liberalization provides us with over 500 price changes per period, covering both input and output tariffs. A distinctive feature of the Indonesian data set is the availability of firm level data on individual inputs, making it possible to construct highly disaggregated input tariffs. This, in turn, enables us to disentangle the effects of output and input tariffs…

A 10 percentage point fall in output tariffs decreases wages by 3 percent in firms oriented exclusively toward the domestic economy. But the same fall in the output tariff increases wages by up to 3 percent in firms that export. A 10 percentage point fall in input tariffs has an insignificant effect on firms that don’t import, but increases wages by up to 12 percent in firms that do import. In short, liberalization along each dimension raises wages for workers at firms which are most globalized and lowers wages at firms oriented to the domestic economy or which are marginal globalizers. Ours is the first paper to show an empirical link between input tariffs and wages, and the first to show differential effects from reducing output tariffs on exporters and non-exporters.

Overestimating liberalisation: GATT XXIV and “substantially all trade”

GATT Article XXIV (which is supposed to discipline preferential trade agreements) 8(b):

A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

In practice:

Two views of how to interpret the ‘substantially all trade’ provision have crystallised. The quantitative approach favours a statistical benchmark on the proportion of trade covered – for example, 90 percent of all existing trade between the parties. The qualitative approach argues that no sector (or at least no major sector) should be excluded from RTA trade liberalisation…

[I]n the Trade and Development Cooperation Agreement concluded between the EC and South Africa… ‘substantially all trade’ was interpreted to mean an average of 90 percent of all items currently traded between the two countries. The inclusion of the word ‘average’ permits the use of an asymmetrical interpretation… approximately 94 percent of South African exports were covered versus 86 percent of EC exports.

But of course, that’s a perverse method of calculation. It overestimates liberalisation in the same way that the trade-weighted average tariff measure underestimates protection. Measuring “substantially all” by existing trade volumes stacks the deck against meaningful liberalisation:

A basic dilemma facing EU negotiators of these FTAs is that, according to their negotiating mandate, they must not undermine the finely tuned border protection of the CAP and the Common Fisheries Policy. At the same time, they must ensure that the agreement is compatible with Article XXIV… The European Union seeks to resolve this dilemma by interpreting WTO rules as requiring free trade to be established on 90% of the total bilateral trade flows. Since EU tariffs on most industrial products are zero or very low (exceptions are, for example, clothing and motor vehicles) the European Union has little difficulty in liberalizing imports of all, or practically all, industrial products. Also, since imports of agricultural products and fisheries are limited by (sometimes prohibitive) border protection they account for only a small proportion of existing total imports from the partner country. As a result, the European Union is able to make a sufficient contribution to the fulfillment of the 90% criteria by fully liberalizing imports of manufactured goods but, as shown in Table 6, only around 60% of its imports of agricultural products. Similar calculations, it is argued by the European Union, also enables the partner country to protect sensitive industrial and agricultural sectors of its economy while remaining within the EU’s interpretation of requirements of Article XXIV.

Australia has been pushing for WTO members to agree to a definition of “substantially all trade” at the Doha round, though I suspect they’re not making much progress.

Overestimating liberalisation: GATT XXIV and "substantially all trade"

GATT Article XXIV (which is supposed to discipline preferential trade agreements) 8(b):

A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

In practice:

Two views of how to interpret the ‘substantially all trade’ provision have crystallised. The quantitative approach favours a statistical benchmark on the proportion of trade covered – for example, 90 percent of all existing trade between the parties. The qualitative approach argues that no sector (or at least no major sector) should be excluded from RTA trade liberalisation…

[I]n the Trade and Development Cooperation Agreement concluded between the EC and South Africa… ‘substantially all trade’ was interpreted to mean an average of 90 percent of all items currently traded between the two countries. The inclusion of the word ‘average’ permits the use of an asymmetrical interpretation… approximately 94 percent of South African exports were covered versus 86 percent of EC exports.

But of course, that’s a perverse method of calculation. It overestimates liberalisation in the same way that the trade-weighted average tariff measure underestimates protection. Measuring “substantially all” by existing trade volumes stacks the deck against meaningful liberalisation:

A basic dilemma facing EU negotiators of these FTAs is that, according to their negotiating mandate, they must not undermine the finely tuned border protection of the CAP and the Common Fisheries Policy. At the same time, they must ensure that the agreement is compatible with Article XXIV… The European Union seeks to resolve this dilemma by interpreting WTO rules as requiring free trade to be established on 90% of the total bilateral trade flows. Since EU tariffs on most industrial products are zero or very low (exceptions are, for example, clothing and motor vehicles) the European Union has little difficulty in liberalizing imports of all, or practically all, industrial products. Also, since imports of agricultural products and fisheries are limited by (sometimes prohibitive) border protection they account for only a small proportion of existing total imports from the partner country. As a result, the European Union is able to make a sufficient contribution to the fulfillment of the 90% criteria by fully liberalizing imports of manufactured goods but, as shown in Table 6, only around 60% of its imports of agricultural products. Similar calculations, it is argued by the European Union, also enables the partner country to protect sensitive industrial and agricultural sectors of its economy while remaining within the EU’s interpretation of requirements of Article XXIV.

Australia has been pushing for WTO members to agree to a definition of “substantially all trade” at the Doha round, though I suspect they’re not making much progress.

Variable geometry

Robert Z. Lawrence argues that the WTO should serve as an umbrella organisation for plurilateral agreements on behind-the-border measures — the so-called “variable geometry” approach.