Author Archives: jdingel

How to construct your PTA

Michael G. Plummer has an article titled “‘Best Practices’ in Regional Trading Agreements: An Application to Asia” in the latest issue of The World Economy:

Given that regionalism in Asia and, indeed, the entire world is a ‘fact on the ground’, the main objective of this paper is to go beyond the traditional ‘building blocs versus stumbling blocs’ debate by underscoring the potential benefits of bilateral and regional agreements under the condition that they follow ‘best practices’, which we develop in Section 3. As an application of these ‘best practices’, we analyse existing regional accords between Asian countries and their regional and extra-regional partners in Section 4…

In fact, the economics literature, as well as the GATT/WTO rounds themselves, have placed far too much emphasis on tariffs. It is true that they are easiest to analyse (for economic models) and negotiate (for policy makers) but they are no longer the most important obstacles to international trade. In fact they have become increasingly irrelevant, and with them much of the standard ‘trade creation and trade diversion’ approach to estimating the worthiness of a regional trading agreement. According to the World Bank (2005, p. 66), the average tariff of NAFTA countries comes to approximately three per cent and that of AFTA slightly less than five per cent. Obviously, the effects of these FTAs, for better or worse, will ultimately not be decided by the usual net efficiency calculations. The economics of FTAs have become far too complicated, and generally speaking economic analysis and negotiators have often failed to keep pace.

In any event, the regionalism trend is here to stay. Regardless of the argumentative merits of the pro- and anti-regionalism camp, it is a ‘fact on the ground’ that preferential trading agreements, in particular FTAs, have been flourishing. There are myriad reasons behind this movement, with convincing economic, political-economy and strictly political arguments. But this does not mean that evaluating regionalism is the economic equivalent of counting how many angels can dance on the head of a pin. An inward-approach to regional economic cooperation could pose serious risks to the countries espousing them as well as to the international marketplace. Given that all major countries now subscribe to regional trading accords to various degrees, this suggests a threat that must be evaluated with continued vigilance.

A successful conclusion to the Doha Development Agenda would be very favourable to the global economy. With respect to the regionalism movement, not only would it, perhaps, strengthen openness rules on Article XXIV beyond the 1994 GATT Understanding, but it would also mitigate the effects of discrimination inherent in regionalism. However, not even a successful Doha will likely turn back the clock on bilateral and regional FTAs. Even if we leave aside the diplomatic and political-economy aspects of regionalism that tend to support the movement, there will remain salient economic influences that will continue to make bilateral, regional and plurilateral FTAs and other forms of regional economic cooperation attractive. Hence, it behoves economists to accept regionalism as a reality, and proscribe means to ensure that the trend be consistent with global market integration as well as being as efficient as possible in terms of minimising costs associated with this second-best commercial policy.

Does the WTO promote trade? Specification matters

Reviving the debate started by Andrew Rose, Xuepeng Liu says the WTO promotes trade strongly (pdf):

Abstract: Some recent research papers challenge the conventional view on the impact of the GATT/WTO on trade. This paper investigates the sample selection bias and the gravity model specification issues in the existing studies and provides strong evidence that the GATT/WTO has been very effective in trade creation. First, the GATT/WTO not only makes existing trading partners trade more (intensive margin), but also creates new trading relationships (extensive margin). Some existing
studies exclude zero trade observations from their analyses and hence ignore the extensive margin. Secondly, the violation of some maintained assumptions in the traditional log-linear gravity regression accounts for the failure to uncover the role of the GATT/WTO even at the intensive margin. Using a large bilateral panel dataset including zero trade flows and a more appropriate econometric method, this paper finds that the GATT/WTO has been very effective in promoting the world trade at both the intensive and the extensive margins.

Asymmetric trade costs

Iowa’s Michael Waugh says trade costs are very asymmetric (pdf):

Poor countries import a larger volume of goods from rich countries, than rich countries
import from poor countries. Furthermore, there is little difference in comparable price indices
for tradable goods between rich and poor countries. Standard empirical implementation of the
gravity model with distance and other symmetric relationships for trade costs cannot account for
both of these facts. To account for these facts, I argue that trade costs must be systematically
asymmetric with poor countries facing higher costs to export relative to rich countries. I then
demonstrate that asymmetry is quantitatively important accounting for at least a third of the
variation in bilateral trade—on par or more important than distance and other symmetric
relationships.

Eichengreen and Mundell on China

Bloomberg’s Tom Keene interviews Barry Eichengreen (mp3) about his recent article “A Blueprint for IMF Reform” (pdf), which appeared in International Finance, as well as China’s possible future revaluation of the renminbi, the post-Bretton Woods era, and “strong dollar” rhetoric.

Keene also interviewed Robert Mundell last week (mp3), discussing the origins of the Mundell-Fleming model, China’s domestic macroeconomic reasons for pegging the renminbi to the dollar, Chinese portfolio choices with regard to US assets, and other topics.

Exports & HIV in Africa

Emily Oster finds a downside to exports in Africa – transportation and trade spread epidemics (pdf):

I find a large and significant positive relationship between HIV and exports: a doubling of exports appears to lead to as much as a quadrupling in number of new HIV infections, which suggests that if exports overall had been 25% lower in Africa over the course of the epidemic only about half as many people would have become infected. In addition, this relationship seems to explain at least some of the very large decline in HIV prevalence in Uganda in the 1990s, which is typically attributed to the ABC (Abstain, Be Faithful and use Condoms) campaign, a widely replicated anti-HIV education effort. A decline in the coffee market accounts for between 30% and 60% of the decline in HIV incidence, suggesting the success of the ABC campaign may be overstated…

A central concern with interpretation is the possibility that is not the export-transit mechanism which drives the result but, rather, some omitted variable (for example, GDP) which drives both exports and HIV. Although this is potentially consistent with the primary results, I argue that there is evidence in favor of a causal interpretation of exports. First, the relationship between HIV and exports is stronger in areas with a greater density of roads and areas closer to ma jor cities, which is consistent with the transit mechanism. Second, instrumenting for export volume with world commodity prices also points to a positive and significant relationship. Third, the relationship between exports and HIV is stronger in countries where the major export is more closely linked to trucking. Finally, new HIV infections can be linked directly to truck imports, which strongly points to an effect of transit.

Of course, it’s not international trade per se that increases the spread of HIV. If economic activity within national borders spurred increased use of truckers to transport goods, that would result in the same effect. And the benefits of economic growth may outweigh the costs of higher HIV incidence. Nonetheless, this isn’t good news.

[HT: MR]