Author Archives: jdingel

Protection for sale?

New evidence isn’t friendly to Grossman & Helpman’s “Protection for Sale” (AER, 1994):

Unlike existing methods in the literature, our approach does not require any data on political organizations. We formally show that the PFS model predicts that the quantile regression of the protection measure on the inverse import penetration ratio divided by the import demand elasticity, should yield a positive coefficient for quantiles close to one. We test this prediction using the data from Gawande and Bandyopadhyay (2000). The results do not provide any evidence favoring the PFS model.

That’s Susumu Imai, Hajime Katayama, and Kala Krishna in NBER WP 13900. They argue that the past literature testing PFS doesn’t cut it:

In sum, we argue that if we are to structurally estimate the PFS model using the data used by Goldberg and Maggi (1999) and Gawande and Bandyopadhyay (2000), we should not use an arbitrary classification scheme along with the campaign contributions to generate political organization dummies. The structural estimation and testing of the PFS model would require treatment of the political organization dummies to be fully consistent with the prediction of the
PFS model. To our knowledge, this has not been done in the literature.

Of course, the old literature on testing the PFS model of trade protection produced the (puzzling) result that governments cared much more about consumer welfare than contributions. But this attack on the relationship between protection, demand elasticity, and import penetration is even more fundamental.

Two letters on Lighthizer

Robert Lighthizer’s protectionist NYT oped was so bad that I don’t mind piling on a week later. Here are two letters from professors of economics.

First, Dartmouth’s Doug Irwin writes:

Robert Lighthizer’s “Grand Old Protectionists” (March 6) is riddled with distortions and errors that one hopes is not representative of all trade lawyers who represent special interests seeking protection. Let’s just take two claims: first, that “free traders . . . . allow no room for practicality, nuance or flexibility. . . even when it means bowing to the whims of anti-American bureaucrats at the World Trade Organization.” The WTO agreements were largely written by the United States, are riddled with exceptions and escape clauses, and there is no evidence that the dispute settlement system is biased. The United States wins just about every case it brings before the body, just as other countries tend to win cases brought against the United States – simply because countries only bother to bring strong cases to the WTO. Second, Lighthizer argues that temporary import protection during the Reagan administration, such as that granted to Harley-Davidson, “worked.” In fact, Japanese firms already produced heavyweight motorcycles like Harley’s in the United States. And the import quota on 700cc and above motorcycles was completely evaded by Japanese exporters when they started producing a 699cc version that was not affected by the trade restriction. The recovery from the 1981-82 recession, not trade protection, allowed Harley to rebound.

Douglas Irwin
Hanover, NH

George Mason’s Don Boudreaux writes:

Among Robert Lighthizer’s objections to principled free-traders is their opposition to protectionism “no matter how many jobs are lost” (“Grand Old Protectionists,” March 6).

If Mr. Lighthizer is referring to overall employment, his facts are wrong. Free trade does not reduce net employment. But perhaps he’s talking about specific jobs, such as those lost in Carolina textile mills when Americans buy more textiles from abroad. The argument seems to be that practical statecraft often justifies protecting such jobs even if doing so prevents the creation of other jobs in their place. If this is Mr. Lighthizer’s point, he’s too modest when calling for trade policies that allow for “practicality, nuance or flexibility.” Because technology destroys far more jobs than does trade, Mr. Lighthizer should endorse also a “pragmatic” approach to innovation – empowering government with the flexibly and nuance to block firms’ introduction of efficiency-enhancing production techniques that displace workers. Surely, according to Mr. Lighthizer’s practical logic, we must reject the “dogma” that tolerates “unbridled” improvements in firms’ operating efficiencies.

Sincerely,
Donald J. Boudreaux

For more criticisms see here and here. The only person I could find applauding the op-ed was “The National Conservative.”

(This post is the first in a week because I am on holiday. Posting will continue to be light for the next two weeks.)

Grand Old Protectionists

Today’s NYT op-ed column calling for a revival of conservative protectionism is frustrating for numerous reasons.

Free trade has long been popular with liberals, and it remains so with liberal elites today. The editorial pages of major newspapers consistently support free trade. Ted Kennedy supported the advance of free trade.

It’s been popular with elite liberals. When was it popular with the liberal base? And are elite liberals not to be trusted by conservatives, regardless of the merits of the issue? When the elites disagree with the populist base, shouldn’t that increase their credibility in the eyes of those conservatives who dislike the liberal populists?

And Kennedy?

* Voted NO on free trade agreement with Oman. (Jun 2006)

* Voted NO on implementing CAFTA for Central America free-trade. (Jul 2005)

* Voted NO on establishing free trade between US & Singapore. (Jul 2003)

* Voted NO on establishing free trade between the US and Chile. (Jul 2003)

* Voted NO on extending free trade to Andean nations. (May 2002)

* Voted YES on granting normal trade relations status to Vietnam. (Oct 2001)

* Voted YES on removing common goods from national security export rules. (Sep 2001)

* Voted YES on permanent normal trade relations with China. (Sep 2000)

* Voted NO on expanding trade to the third world. (May 2000)

* Voted NO on renewing ‘fast track’ presidential trade authority. (Nov 1997)

* Voted YES on imposing trade sanctions on Japan for closed market. (May 1995)

I doubt those 2001 – 2006 votes against PTAs were driven by a strong conviction that free trade must be non-discriminatory.

Back to Robert Lighthizer in the NYT:

President Reagan often broke with free-trade dogma. He arranged for voluntary restraint agreements to limit imports of automobiles and steel (an industry whose interests, by the way, I have represented). He provided temporary import relief for Harley-Davidson. He limited imports of sugar and textiles. His administration pushed for the “Plaza accord” of 1985, an agreement that made Japanese imports more expensive by raising the value of the yen.

Each of these measures prompted vociferous criticism from free traders. But they worked. By the early 1990s, doubts about Americans’ ability to compete had been impressively reduced.

Yes, American sugar and textiles have been competitive ever since. That’s why those import barriers were pragmatic temporary measures, as opposed to the “ivory tower” “utopian dreams of free traders.” It’s a down-to-earth conservative principle to hand out welfare to big corporations and influential lobbies for decades rather than letting competitive market pressures determine economic outcomes.

My only consolation is that I don’t think Mr Lighthizer’s views are representative of most Republicans’.

Addendum: Obviously the rest of the column is equally ridiculous, but I’m short on time, so let’s divide up the labor burden by letting Dan Drezner tackle VERs and the Plaza accord.

Obama: Protectionist or strategist?

Willem Buiter and Anne Sibert say “Barack Obama’s proposal is reactionary, populist, xenophobic and just plain silly.”

Jagdish Bhagwati describes Obama as a saavy strategist:

Mr Obama has smartly seized John Kerry’s proposal to remove the incentive to invest abroad and has gone further by proposing that those who invest at home will be given a tax incentive. It is dubious that this proposal will survive challenges from existing bilateral and World Trade Organisation agreements, or can achieve much when other countries can do the same. It is exactly the sort of policy that a constituency fearful of losing jobs demands but, by meeting that demand, President Obama would be left free to abandon the anti-trade rhetoric and embrace the multilateral free trade that has served the American and the world interest so well.

But won’t publishing the machination’s workings in the Financial Times spoil the ruse?

HT: Muse

Multilateralising Regionalism: The Book

Richard Baldwin writes:

The world’s most important trade talks – the Doha Round – appear to be slipping into a coma while key nations play a waiting game. What are they waiting for? Some are waiting to see if Europe commits to unilaterally dismantling the EU’s massively distortionary agricultural policies during its 2008/2009 review. Others are waiting to see if the next US president is more protectionist or more accommodating. And the major developing nations see their exports growing at double-digit rates despite the stalemate, so what’s the rush?

But trade liberalisation is not standing still. Nations around the global are falling over themselves to liberalise trade regionally, bilaterally and unilaterally. The world trade system is labouring under a massive proliferation of regional trade agreements and the problem gets worse month by month. The resulting tangle of trade deals conspires to inject both inefficiency and discrimination against poor countries into the multilateral system.

Most amazingly, the WTO has had next to no involvement in this important development. The WTO – and this means the WTO membership since the institution only does what its members want – has adopted the role of “innocent bystander”. Key figures in world trade – negotiators, ministers, the WTO secretariat, academics, civil society and the media – need to look beyond the Doha Round. Doha or not, countries will continue to strike bilateral and regional deals. Doha will do little or nothing to ‘tame the tangle’. What is needed is a WTO Action Plan on Regionalism.

The fact that regionalism is here to stay is not news to those who follow these issues. But Baldwin and Philip Thornton have a new book that makes a first pass at policy recommendations to address the new reality:

The action plan outlined in the book calls for:

· Quicker and more detailed disclosure of the start and extent of negotiations on regional trade agreements.
· A WTO-sponsored forum for small countries to exchange experiences of RTAs.
· The creation of a WTO advisory centre on RTAs for developing countries.
· Voluntary guidelines on disciplines for new RTAs and modifications of existing ones.
· Harmonisation of key elements of RTAs, such as “rules of origin” to create templates for existing and new deals.
· The adoption of “most favoured nation” (MFN) clauses in future RTAs that give other countries the protections offered by the RTA.
· Countries to lower their MFN tariff rates on goods that dominate inter-regional trade.

In defense of Dean Baker

The NYT‘s David Leonhardt writes that NAFTA has little to do with Ohio’s economic troubles. Dean Baker charges (as usual) that protectionism favoring low-skilled American workers is reviled while protectionism benefiting highly skilled workers is given a free pass, as US firms can’t hire Mexican professionals happy to work for lower wages than US skilled workers. The Economist objects, noting that “much of the world does not share Mr Baker’s opinion that immigration policy must be mentioned any time the subject of trade comes up.”

Perhaps, but that doesn’t address the pressing need for greater liberalisation of trade in services, which would increase the competition facing highly skilled workers. For an example, look at radiology: Hospitals rarely outsource reading x-rays to India because the Indians are required to have medical degrees from US universities.

Opting out of NAFTA? Nonsense

Clinton: “I will say to Mexico that we will opt out of NAFTA unless we renegotiate it.”

Drezner: “Democrats cannot simultaneously talk about improving America’s standing abroad while acting like a belligerent unilateralist when it comes to trade policy.”

No president will pull out of NAFTA. That would be an unmitigated foreign policy disaster. (It wouldn’t be an economic disaster, as the US already has low MFN tariffs on most products it imports from Canada and Mexico.) There simply won’t be a belligerent unilateral scuttling of our trade deal. On the other hand, diplomacy is about words, not merely actions. The neighbors may tire of being made scapegoats.

Drezner: “Scary fact of the day: the anti-NAFTA pandering is not the worst trade rhetoric emanating from the candidates. No, for that you’d have to turn to Obama’s co-sponsoring of the Patriot Employer Act — which Willem Buiter and Anne Sibert label, ‘reactionary, populist, xenophobic and just plain silly.'”

Pulling out of NAFTA may be worse. The Patriot Employer Act offers a voluntary tax break, not mandated protectionism.

Can the WTO “transform nations”?

Former GATT DG Peter Sutherland says that the WTO has transformative powers:

The power of the WTO to aid national transformation is easily forgotten. All too often, many developing countries measure their success in the WTO’s Doha Round of trade negotiations by the extent to which they avoid obligations to open up their economies. And in polite conversations in Geneva, the potential of WTO disciplines to encourage radical market, institutional, and regulatory reform is a politically incorrect topic. It is the countries that have joined the WTO over the past decade that have drawn the most benefit from global trade rules. Older members, which did not need to negotiate their entry, have probably gained the least.

The WTO has changed the world in the past decade by welcoming China. And if it has changed national fortunes, in Cambodia and Saudi Arabia, for example, it is thanks to its accession procedures. Compared with the terms of bilateral free-trade areas, the terms of WTO membership amount to a revolution. The process is now lengthier than ever. China applied to the WTO’s predecessor (the General Agreement on Tariffs and Trade, or GATT) in 1986 and joined the WTO in 2001, Cambodia applied in 1994 and joined in 2003, and Saudi Arabia joined in 2005 after 12 years of preparation and negotiation.

Why do governments put themselves through such trials to enter what was once tagged a rich man’s club? The answer might simply be to get rich. This is trite, and it cannot explain the efforts by China or Saudi Arabia, where the opportunities for getting rich have long existed. In fact, a better explanation is that at a certain point political leaders understand that fundamental change is necessary, or unavoidable, and that it cannot be achieved without support from the outside. They need a catalyst; the WTO provides it. Change often means confronting vested interests, reducing the role of the state, reforming institutions, and taking on corruption. Change also means shaking up the private sector by encouraging competition, setting entrepreneurs free from government controls, and ensuring efficient and affordable services. In an era of broadening and deepening globalization, small or struggling economies thrive only in an environment that generates opportunity and supports entrepreneurship. Much of what the WTO does is, in fact, about helping achieve good or better governance.

Nowhere is the WTO’s power to transform nations more evident than in its accession process.