Author Archives: jdingel

How much can trade preferences do for Africa?

CGD’s Kim Elliott criticizes Paul Collier’s trade policy recommendations:

[H]e overemphasizes the role that preferences can play in boosting Africa’s chances to cross the competitiveness threshold, while underestimating the potential for the Doha Round of global negotiations to do any good.

As Collier notes, sub-Saharan apparel exports to the United States grew sharply after the African Growth and Opportunity Act (AGOA) was passed in 2000, allowing duty-free exports of apparel and other goods. But apparel exports sank after the quotas restraining China and other competitive suppliers expired in 2005. 

Renewed restraints on Chinese exports appear to have slowed the decline, but those restrictions expire at the end of next year and the future for sub-Saharan apparel exports remains very uncertain.

This suggests that the current preference margin (the difference between the zero tariff on AGOA-eligible exports and the average 15 percent on other apparel exports) is not sufficient to overcome Africa’s other competitiveness problems and that the focus should be on improving infrastructure, skills, regional integration and other supply-side constraints. Given the importance of the rural sector in Africa, Collier also said too little about the need to expand AGOA to cover key agricultural products, including sugar, peanuts, and tobacco. This would extend the benefits of AGOA beyond the five countries responsible for nearly 90 percent of apparel exports…

And what of the costs of a Doha Round failure, which Collier applauds as opening the door for a trade policy focused on the bottom billion?… Collier is right that middle-income countries such as Brazil and Thailand would capture the bulk of these gains, but what of the West African cotton farmers whose plight he laments in his book? Perhaps most import, however, are the consequences of failure for the system of rules that protect the smallest and poorest countries from arbitrary discrimination by rich countries if the WTO loses its credibility. Yes, some new rules, such as those strengthening protection for intellectual property are potentially anti-poor, but the WTO rules provide substantial flexibility and offer a far better deal for developing countries than what they face under unilateral pressure and bilateral negotiations with much larger, richer trading partners.

Global savings glut

Michael Pettis defends Ben Bernanke’s global savings glut explanation of current account imbalances. Even if there are not excess savings globally, there are excess savings in certain parts of the world that likely explain imbalances:

If every part of the global system were completely rigid, a rise in savings in one part would result in a global rise in savings. But if at least one part of the system has a highly open and flexible financial system, it will act as the residual whose changes force the overall system back into balance. In the aggregate total savings and consumption may seem to have changed little, but what has happened is that an imbalance in one part has forced an equivalent but opposite imbalance in the other.

Not only does this seem to me an automatic outcome of excess savings, but it also seems to describe reality quite well. The US financial system is global in scope and so astonishingly flexible that it shifts very easily to accommodate global changes. If the rest of the world must produce more than it consumes (which is to say it saves more than it invests), the balancing entity must consume more than it produces as it absorbs those excess savings.

Read the full post and comments section for much more.

Chinese FDI is unexceptional

A recent NBER working paper argues that China is not receiving exceptional levels of foreign direct investment:

Abstract: Weak institutions ought to deter foreign direction investment (FDI), and mass media stories highlight China’s institutional deficiencies, yet China is now one of the world’s largest FDI destinations. This incongruity characterizes China’s paradoxical growth. Cross-country regressions show that China’s FDI inflow is not exceptionally large, given the quality of its institutions and its economic track record. Institutions clearly determine a country’s allure as an FDI destination, but standard measures of institutional quality can be problematic for countries undergoing rapid institutional development, and can usefully be augmented by economic track record measures. Deng Xiaoping’s 1993 “southern tour” heralded sweeping reforms, and this regime shift is insufficiently reflected in commonly used measures of institutional quality. China’s FDI inflow surge after these reforms resembles similar post-regime shift surges in the East Bloc, and so is also unexceptional. Recent arguments that China’s FDI inflow is inefficiently large because weak institutions deter domestic investment while special initiatives attract FDI are thus either unsupported or not unique to China.

NAFTA increased home ownership?!?

This is Reason‘s Dave Weigel using data and scholarship to refute labor protectionism:

“I don’t know many people who are ardent free traders and who want a wall built,” Kolbe says. “If you’re talking about the movement of goods, how can you not talk about movement of labor? How can you not talk about the movement of people? It’s absolutely absurd.”

It’s especially absurd when you look at the actual data. According to a 2005 study by the University of Bologna’s Gianmarco Ottaviano and the University of California at Davis’ Giovanni Peri, the surge of illegal laborers between 1990 and 2000 raised native-born wages overall but lowered the wages of Americans without high school diplomas by about 1 percent. These workers account for only 8 percent of the labor market, and their numbers are shrinking. In 2006 and 2007, tighter border controls managed to drive down the number of illegal workers picking crops in the Southwest. Americans didn’t flood the fields to do those jobs; the jobs went unfilled.

And this is Weigel, in the same article, defending NAFTA:

When you consider what NAFTA actually wrought—and you don’t count Bernie Sanders’ angina—this is all a bit mysterious. Americans are wealthier than they were 14 years ago and, with unemployment under 5 percent, are more likely to have jobs. (In the decade before NAFTA, unemployment averaged more than 7 percent.) More Americans own their own homes. Fewer Americans are going to bed hungry—dramatically so, if you scan the data on obesity.

I’m not as disappointed as Emmanuel by the piece, but that’s a really bad defense of NAFTA.

“Comparative Advantage and Heterogeneous Firms”

You have likley already seen “Comparative Advantage and Heterogeneous Firms,” as Andrew Bernard, Stephen Redding, and Peter Schott worked on it for more than four years. If you haven’t, now is the time. The paper was finally published early this year in the Review of Economic Studies (journal pdf; older ungated pdf). It’s a fabulous piece of theory that introduces heterogeneous firms (via a Pareto distributed productivity term) and fixed trade costs to the classic 2x2x2 monopolistic competition model of trade.

Here’s the abstract:

This paper examines how country, industry, and firm characteristics interact in general equilibrium to determine nations’ responses to trade liberalization. When firms possess heterogeneous productivity, countries differ in relative factor abundance, and industries vary in factor intensity, falling trade costs induce reallocations of resources both within and across industries and countries. These reallocations generate substantial job turnover in all sectors, spur relatively more creative destruction in comparative advantage industries than in comparative disadvantage industries, and magnify ex ante comparative advantage to create additional welfare gains from trade. The improvements in aggregate productivity as countries liberalize dampen and can even reverse the real-wage losses of scarce factors.

This is clearly an improvement over existing models of trade with hetereogeneous firms, which often feature a numeraire that pins down the wage and labor as the only input. Now we get to talk about wage effects and comparative advantage! Unfortunately, the resulting mathematical complexity is such that closed-form solutions don’t exist for some of the endogeneous variables. The authors have to resort to numerical simulations to describe some areas of interest. Nonetheless, I really like this paper.

"Comparative Advantage and Heterogeneous Firms"

You have likley already seen “Comparative Advantage and Heterogeneous Firms,” as Andrew Bernard, Stephen Redding, and Peter Schott worked on it for more than four years. If you haven’t, now is the time. The paper was finally published early this year in the Review of Economic Studies (journal pdf; older ungated pdf). It’s a fabulous piece of theory that introduces heterogeneous firms (via a Pareto distributed productivity term) and fixed trade costs to the classic 2x2x2 monopolistic competition model of trade.

Here’s the abstract:

This paper examines how country, industry, and firm characteristics interact in general equilibrium to determine nations’ responses to trade liberalization. When firms possess heterogeneous productivity, countries differ in relative factor abundance, and industries vary in factor intensity, falling trade costs induce reallocations of resources both within and across industries and countries. These reallocations generate substantial job turnover in all sectors, spur relatively more creative destruction in comparative advantage industries than in comparative disadvantage industries, and magnify ex ante comparative advantage to create additional welfare gains from trade. The improvements in aggregate productivity as countries liberalize dampen and can even reverse the real-wage losses of scarce factors.

This is clearly an improvement over existing models of trade with hetereogeneous firms, which often feature a numeraire that pins down the wage and labor as the only input. Now we get to talk about wage effects and comparative advantage! Unfortunately, the resulting mathematical complexity is such that closed-form solutions don’t exist for some of the endogeneous variables. The authors have to resort to numerical simulations to describe some areas of interest. Nonetheless, I really like this paper.