Author Archives: jdingel

Doha and the food crisis

Agricultural liberalisation in the European Union and the US is good for several reasons, but it will not help moderate the food crisis. A key component of the proposed Doha agreement is a substantial reduction in agricultural subsidies. This would reduce the supply of grains from some countries that subsidise them and increase it from other countries, especially in the Cairns group. The net effect on supply would be negative.

— Jagdish Bhagwati and Arvind Panagariya in the FT.

An anti-MFN clause

Ever seen Article 14 of the Panama-Costa Rica 1973 preferential trade agreement? It’s an anti-MFN clause:

The Contracting Parties agree not to grant, through a most favored nation clause, the concessions they grant to each other through this Treaty now or in the future to third countries from outside Central America with whom they may sign trade treaties or conventions.

The two countries signed a PTA in 2007, which probably didn’t include such nonsense, though I can’t find the text.

[Hat tip: Lorand Bartels]

Obama mellows on trade

Reacting to a story that Barack Obama doesn’t think NAFTA is so bad after all, Juan Carlos Hidalgo says “he’s a politician after all,” as I noted (twice) back in March. Here’s Obama coming clean in Fortune:

Barack Obama is toning down his populist rhetoric – at least when it comes to free trade.

In an interview with Fortune to be featured in the magazine’s upcoming issue, the presumptive Democratic nominee backed off his harshest attacks on the free trade agreement and indicated he didn’t want to unilaterally reopen negotiations on NAFTA.

“Sometimes during campaigns the rhetoric gets overheated and amplified,” he conceded, after I reminded him that he had called NAFTA “devastating” and “a big mistake,” despite nonpartisan studies concluding that the trade zone has had a mild, positive effect on the U.S. economy.

Does that mean his rhetoric was overheated and amplified? “Politicians are always guilty of that, and I don’t exempt myself,” he answered.

Is China the trade troublemaker?

Fred Bergsten on Chinese global economic engagement in Foreign Affairs:

On trade, China has been playing at best a passive and at worst a disruptive role. It makes no effort to hide its current preference for low-quality, politically motivated bilateral and regional trade arrangements rather than economically meaningful (and demanding) multilateral trade liberalization through the WTO. Since China is the world’s largest surplus country and second-largest exporter, this poses two important challenges to the existing global regime.

First, China’s refusal to contribute positively to the Doha Round of international trade negotiations has all but ensured the talks’ failure. Beijing has declared that it should have no liberalization obligations whatsoever and has invented a new category of WTO membership (“recently acceded members”) to justify its recalcitrance. Such a stance by a major trading power is akin to abstention and has practically guaranteed that the Doha negotiations will go nowhere. And since the global trading system does not stay in place, but is always moving either forward or backward, a collapse of the Doha Round would be quite serious: it would represent the first failure of a major multilateral trade negotiation in the postwar period and place the entire WTO system in jeopardy. China is not the only culprit in the Doha drama, of course. The United States and the EU have been unwilling to abandon their agricultural protectionism, other important emerging economies have been unwilling to meaningfully open their markets, and several poor countries have resisted contributing to a global package of reforms. But China, with its major stake in open trade, exhibits the sharpest contrast of all the major players between its objective interests and its revealed policy.

Second, China’s pursuit of bilateral and regional trade agreements with neighboring countries is more about politics than economics. Its “free-trade agreement” with the Association of Southeast Asian Nations (ASEAN), for example, covers only a small share of its commerce with the countries in question; it is simply an effort to calm their fears of being swamped by their huge neighbor. Again, it is true that the United States and other major trading powers also factor foreign policy considerations into their selections of partners for regional and bilateral trade agreements. But they also insist on economic standards that largely conform to the WTO’s rules. China is able to escape legal application of those rules by continuing to declare itself a “developing country” and by taking advantage of “special and differential treatment.” But for a major global trading power to hide behind such loopholes provokes substantial international strains.

China is also hurting the global trading system by supporting the creation of a loose but potent Asian trading bloc. The network of regional agreements that started with one between China and ASEAN has steadily expanded to include virtually all other possible Asian permutations: parallel Japanese-ASEAN and South Korean-ASEAN deals; various bilateral partnerships, including perhaps a Chinese-Indian one; a “10 + 3” arrangement that brings together the ten ASEAN countries and all three Northeast Asian countries, and possibly even a “10 + 6” agreement that would broaden the group to include Australia, India, and New Zealand. All this activity is likely to produce, within the next decade, an East Asian free-trade area led by China.

Such a regional grouping would almost certainly trigger a sharp backlash from the United States and the EU, as well as from numerous developing countries, because of its new discrimination against them. Even more important, it would create a tripolar global economic regime — a configuration that could threaten existing global arrangements and multilateral cooperation.

China’s challenges to the global trading system are most visible in its opposition to the U.S. proposal, launched at the Asia-Pacific Economic Cooperation forum in 2006, for a free-trade area of the Asia-Pacific. The APEC initiative, immediately endorsed by a number of those smaller member economies that fervently want to prevent trade conflict between the group’s two superpowers, seeks to head off the looming confrontation between an Asia-only trading bloc and the United States, which could draw a line down the middle of the Pacific. The initiative would eventually consolidate the many preferential pacts in the Asia-Pacific region and offer an economically meaningful Plan B for widespread trade liberalization if the Doha Round definitively fails. China has led the opposition to the idea, demonstrating its preference for bilateral deals with minimal economic content and its lack of interest in trying to defend the broader trading order.

These criticisms seem a bit unfair, as the US and EU are equally guilty of every charge. Why would a two-bloc world divided between the EU and APEC be more appealing than a three-bloc world? What has China done to hamper the agricultural negotiations at Doha, which are the real stumbling block? What US bilateral trade deal was more about economics than politics? What economic standards is China avoiding in its trade deals, when the WTO has never really disciplined a PTA?

Bergsten is identifying all the problems correctly, but I think he’s a bit strained in trying to distinguish China from the United States and Europe.

Tovias on “cross-regionalism”

Alfred Tovias summarises good news and bad news about PTAs:

1. There is no danger of trading blocs emerging nor of a clash between them.

2. There are no new exclusive spheres of influence being created.

3. The new foreign policy goal of preferentialism is to neutralize the influence exerted by rival trading powers in a given zone; reverse trade diversion in favour of the distant trade power must be considered as positive, since it unravels previous trade diversion.

4. Economic opportunity is what drives the choice of preferred trade partners made by developing countries.

5. The proliferation of PTAs is taking place without any control whatsoever.

6. Large negotiating partners are favoured by the proliferation of preferential trading.

7. Least developed countries tend to be less favoured by emerging economies than other more developed ones (including other emerging economies).

Some highlights from #1 and #4:

The world is not evolving into three disparate, autarkic trading blocs. Countries are linked by a web of business ties across oceans that bind the world market together. If there are no trading blocs in sight, there is neither a danger of a clash nor trade wars between them. There is neither a perspective of a cartel-like arrangement emerging which would divide the world Yalta-like into trading blocs. On the contrary, there seems to be increasing competition of the leading trade blocs for influence. In fact the present trend is more likely to lead to anarchy, chaos and disorder, which are the real dangers the WTO should be aware of…

Setting aside the first best which is multilateral trade agreements based on MFN treatment, it can be argued that the present cross-regional trend although a second best is better than conventional regionalism. The reasoning is as follows: Small developing countries pick potential partners with which to negotiate preferential trade liberalization not because the latter are militarily powerful, ethnically similar or like-minded countries but simply because they are looking for markets, wherever they are. These multiple FTA dealings are driven by the private sectors of developing countries. If the market is in the US, so be it; if in China, so be it. Therefore there is less scope in developing countries for trade relations to be based on non-commercial considerations, which is what the introduction of MFN was trying to obtain as well.

But this comment baffles me: “There is increasing regulatory competition between the US and EU in bilateral negotiations, e.g. in the domain of Intellectual Protection. This is good per se.” The following discussion discuss tariff preferences (“giving a preference to everybody means not giving a preference to anybody”) and does not explore regulatory competition. I haven’t seen much enthusiasm for the intellectual property components of bilateral trade agreements, so what is Tovias arguing?

Tovias on "cross-regionalism"

Alfred Tovias summarises good news and bad news about PTAs:

1. There is no danger of trading blocs emerging nor of a clash between them.
2. There are no new exclusive spheres of influence being created.
3. The new foreign policy goal of preferentialism is to neutralize the influence exerted by rival trading powers in a given zone; reverse trade diversion in favour of the distant trade power must be considered as positive, since it unravels previous trade diversion.
4. Economic opportunity is what drives the choice of preferred trade partners made by developing countries.
5. The proliferation of PTAs is taking place without any control whatsoever.
6. Large negotiating partners are favoured by the proliferation of preferential trading.
7. Least developed countries tend to be less favoured by emerging economies than other more developed ones (including other emerging economies).

Some highlights from #1 and #4:

The world is not evolving into three disparate, autarkic trading blocs. Countries are linked by a web of business ties across oceans that bind the world market together. If there are no trading blocs in sight, there is neither a danger of a clash nor trade wars between them. There is neither a perspective of a cartel-like arrangement emerging which would divide the world Yalta-like into trading blocs. On the contrary, there seems to be increasing competition of the leading trade blocs for influence. In fact the present trend is more likely to lead to anarchy, chaos and disorder, which are the real dangers the WTO should be aware of…

Setting aside the first best which is multilateral trade agreements based on MFN treatment, it can be argued that the present cross-regional trend although a second best is better than conventional regionalism. The reasoning is as follows: Small developing countries pick potential partners with which to negotiate preferential trade liberalization not because the latter are militarily powerful, ethnically similar or like-minded countries but simply because they are looking for markets, wherever they are. These multiple FTA dealings are driven by the private sectors of developing countries. If the market is in the US, so be it; if in China, so be it. Therefore there is less scope in developing countries for trade relations to be based on non-commercial considerations, which is what the introduction of MFN was trying to obtain as well.

But this comment baffles me: “There is increasing regulatory competition between the US and EU in bilateral negotiations, e.g. in the domain of Intellectual Protection. This is good per se.” The following discussion discuss tariff preferences (“giving a preference to everybody means not giving a preference to anybody”) and does not explore regulatory competition. I haven’t seen much enthusiasm for the intellectual property components of bilateral trade agreements, so what is Tovias arguing?

Competitive liberalisation: A really bumpy road

Alan Beattie and Anna Fifield in the FT on hard bargains:

Protests against imports of American beef, which have brought thousands of Koreans on to the streets, highlight problems with the White House’s policy of “competitive liberalisation”, or trying to bring down trade barriers worldwide by signing a flurry of bilateral and regional deals. With other leading economies also encountering difficulties in signing such pacts, are the wheels coming off the bilateral bandwagon?…

The administration of President George W. Bush has won the congressional votes approving each of its pacts. Yet bilateral deals allow trade lobbies to concentrate their fire, whereas they can struggle to make themselves heard in wider negotiations. This applies particularly to the US, which applies the same demanding model in each negotiation…

To win approval on Capitol Hill, sensitive sectors such as sugar and cotton need to be protected, while the main agricultural exporters, including beef and pork farmers, must gain in market access…

Most of the deals Congress has approved so far are with relatively small countries.

Securing even those agreements is becoming harder. The politics of trade in the US itself is also explosive, given widespread suspicions among the Democrats of the effects of trade and globalisation. A framework for trade deals between the congressional leadership and the White House, agreed in May last year and involving tougher rules on labour law and environmental standards, was enough to get through a deal with Peru. But the next agreement that came down the pipeline, a pact with Colombia, has caused the already sour relations on trade between the White House and Capitol Hill to turn poisonous…

Much of the White House rhetoric in the Colombia stand-off has been geopolitical, not economic… But whatever the motives, competitive liberalisation has ended up with the White House expending a huge amount of time, energy and limited political capital, including sending multiple cabinet secretaries on trips to Colombia, to pass a deal covering less than 1 per cent of US trade.

It would be extrapolating too much from the US experience to suggest that bilateral and regional trade diplomacy around the world has stalled. Some other big trading powers are having less difficulty negotiating agreements. But deals delivering deep and broad liberalisation, particularly involving developing countries, remain an endangered minority…

The EU’s attempts to negotiate collectively with Asean are meanwhile foundering on the near-impossibility of getting a broad and detailed agreement with a grouping of economies that range from one of the richest in the world, Singapore, to a least-developed country such as Laos.

More generally, economists say that differences in economic development and competitiveness mean that most intra-Asia trade pacts are currently generating more flows of talk and ink than movements of goods and services. They certainly are not adding up to serious advances for reciprocal liberalisation.

Prof Baldwin points at an unhelpful combination of sensitivities among the big three trading powers of east Asia. The collective positions of Japan, South Korea and China reflect the sum of their fears. “Japan and Korea won’t accept free trade in food if they sign with China; the Chinese are afraid of being locked into low-end manufacturing if they sign with Japan or Korea; and Korea is concerned at being squeezed competitively between Japan and China if it signs with Japan,” he says. “This combination has brought everything to a halt.” Japan and China are separately signing a flurry of bilateral deals with other countries around the region but many of these are limited in coverage…

it has also become clear that doing trade liberalisation step by step involves travelling a much bumpier road than at first appeared.

Most of those observations are already known to regular Trade Diversion readers, but it’s nice to see them appear in an extended FT analysis.

NBER highlights

“Using trade weighted as opposed to consistently aggregated tariffs overstates real income for India by nearly 1%.” — James Anderson, “Consistent trade policy aggregation”

“Trade cooperation is almost surely dependent upon nations’ perceptions of costs and benefits of deviating. Unfortunately, the terms-of-trade approach is focusing on the trees and missing the forest. Its insights as to whether an RTA makes cheating on a tariff more or less attractive misses the point altogether since the main carrots and sticks supporting cooperation have nothing to do with tariffs.” — Richard Baldwin, “Big-think regionalism: A critical survey”

“Suppose that over the next nine years all of inshoring and offshore outsourcing grew at rates experienced during 1996-2005… Then workers in occupations that are exposed to inshoring and offshore outsourcing (1) would switch 4-digit occupations 2 percent less often, (2) would spend 0.1 percent less time unemployed, and (3) would earn 1.5 percent more. These are not annual changes – they are changes over nine years – and are thus best described as small positive effects. ” — Runjuan Liu & Daniel Trefler, “Much ado about nothing: Americans jobs and the rise of service outsourcing to China and India”