The Economist argues against a US carbon border tax:

[T]he costs of a border tax could be huge, not just because of the massive bureaucracy needed to certify the carbon content of different goods imported from different factories in different countries, but also because such a tax would be a dangerous weapon in the hands of America’s growing gang of protectionists.

The people who worry most about the costs of trying to constrain carbon emissions are the very ones demanding protectionist measures. But if those measures are passed, America risks something far costlier than a switch to cleaner energy: a global trade war.

Philippe Martin, Thierry Mayer & Mathias Thoenig on trade and war (pdf), forthcoming in the Review of Economic Studies:

This paper analyzes theoretically and empirically the relationship between military conflicts and trade. We show that the conventional wisdom that trade promotes peace is only partially true even in a model where trade is economically beneficial, military conflicts reduce trade and leaders are rational. When war can occur because of the presence of asymmetric information, the probability of escalation is lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains. However, countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country and the cost of a bilateral conflict. We test our predictions on a large data set of military conflicts on the 1950-2000 period. Using different strategies to solve the endogeneity issues, including instrumental variables, we find robust evidence for the contrasting effects of bilateral and multilateral trade openness. For proximate countries, we find that trade has had a surprisingly large effect on their probability of military conflict.

Cesar Conda and Brian Reardon say America’s tax code is punishing US corporations for producing at home:

In 2005, 137 nations accounting for 94 per cent of trade with the US had some form of border-adjusted taxes on manufactured goods and services. By contrast, the US has direct taxes, such as the corporate income tax, which is precluded from being refunded on US exports or assessed on imports under World Trade Organisation rules.

The net effect is an unfair disadvantage for US companies and their staff, as the goods they produce and export are hit with taxes abroad, while foreign goods coming into the country are not. The additional embedded tax burden for US companies exporting goods is at least $100bn annually.

We must fix the US tax code so that American manufacturers can export more goods and services, not more jobs. The challenges of moving the US corporate income tax toward a border-adjustable system are sizable, but they can be overcome. Two stand out: WTO rules prohibit border adjustments of direct taxes and America’s corporate income tax is not readily border adjustable. These challenges suggest a two-front attack. First, the US must aggressively engage the Europeans to repeal the distinction between direct and indirect taxes… Second, Congress should move our corporate code towards a consumption-based tax…

For free-trade politicians, promoting tax-relief for American-made goods will help stem the growing tide against free trade and globalisation among voters. Without a proactive trade agenda, we are in grave danger of enacting protectionist policies proven in the past to hurt workers and industry alike. On the other hand, promoting a border-adjustable corporate tax allows pro-trade candidates to offer a workable, proactive and populist response to the ongoing decline in US manufacturing jobs.

Echoing the Fisman and Wei results for Chinese trade with Hong Kong, Beata Javorcik and Gaia Narciso find that people misclassify products to avoid tariffs. Moreover, it’s easier to do so with differentiated products:

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, the authors find empirical support for this hypothesis. They 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, the authors show that the responsiveness of the trade gap to the tariff level is greater for differentiated products than for homogeneous goods. A one-percentage-point increase in the tariff rate is associated with a 0.6 percent increase in the trade gap in the case of homogeneous products and a 2.1 percent 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.

World Bank working paper 4123.

Bruce Blonigen & Alyson C. Ma have a very interesting piece up at VoxEU:

The allegation: China extracts rents and technology from foreign competitors, thus allowing it to grow even faster and longer than most would have imagined possible. The evidence: China’s industrial policies have been successful in attracting foreign investment, but not necessarily in increasing the sophistication of its own firms through technology transfer…

First, while China’s range of exported products overlaps more with OECD countries than other less-developed countries, China sells these more-sophisticated products at a very large discount relative to competitors. This suggests that they are breaking into these “sophisticated” categories with relatively low-quality offerings. Interestingly, the Chinese discount in these products relative to OECD countries has been growing over time, not diminishing.

Second, if one looks at firm-level productivity data, foreign-owned firms in China are currently nine times more productive than their Chinese-owned counterparts!…

There are also a few other pieces of evidence from the analysis of Chinese trade data that argue against any effective role for Chinese industrial policy in these areas. First, price/quality gaps do not close at all for sectors targeted by the Chinese government for foreign investment encouragement or for ones where foreign firms are restricted to have a domestic partner. Second, price/quality gaps do not close more in high-technology sectors that are supposedly being targeted by the Chinese government.

Though I have yet to read Dani Rodrik’s new book (it’s certainly on my Christmas list!), I’m keen to read Crooked Timber’s seminar on the text.