Here’s an exercise for an undergraduate course in international economics: What’s wrong with this graph from a Fast Company special report on China in Africa?
Graphing each country’s foreign exchange reserves, the text says “China still has a huge war chest for African deals and, unlike the US, doesn’t make demands for transparency or human rights.”
[HT: Alex Gadzala]
Here’s an exercise for an undergraduate course in international economics: What’s wrong with this graph from a Fast Company special report on China in Africa?
Graphing each country’s foreign exchange reserves, the text says “China still has a huge war chest for African deals and, unlike the US, doesn’t make demands for transparency or human rights.”
[HT: Alex Gadzala]
Here’s an exercise for an undergraduate course in international economics: What’s wrong with this graph from a Fast Company special report on China in Africa?
Graphing each country’s foreign exchange reserves, the text says “China still has a huge war chest for African deals and, unlike the US, doesn’t make demands for transparency or human rights.”
[HT: Alex Gadzala]
I very much doubt that the empirical evidence supports Dan Mitchell on this:
Indeed, that [higher corporate taxation] is why American companies almost always become the subsidiary rather than the parent when there is a cross-border merger.
Almost always?!? UNCTAD’s stats for 2006 M&A say that US entities made $171.3b in purchases and $172.2b in sales.
GATT Article XXIV (which is supposed to discipline preferential trade agreements) 8(b):
A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.
Two views of how to interpret the ‘substantially all trade’ provision have crystallised. The quantitative approach favours a statistical benchmark on the proportion of trade covered – for example, 90 percent of all existing trade between the parties. The qualitative approach argues that no sector (or at least no major sector) should be excluded from RTA trade liberalisation…
[I]n the Trade and Development Cooperation Agreement concluded between the EC and South Africa… ‘substantially all trade’ was interpreted to mean an average of 90 percent of all items currently traded between the two countries. The inclusion of the word ‘average’ permits the use of an asymmetrical interpretation… approximately 94 percent of South African exports were covered versus 86 percent of EC exports.
But of course, that’s a perverse method of calculation. It overestimates liberalisation in the same way that the trade-weighted average tariff measure underestimates protection. Measuring “substantially all” by existing trade volumes stacks the deck against meaningful liberalisation:
A basic dilemma facing EU negotiators of these FTAs is that, according to their negotiating mandate, they must not undermine the finely tuned border protection of the CAP and the Common Fisheries Policy. At the same time, they must ensure that the agreement is compatible with Article XXIV… The European Union seeks to resolve this dilemma by interpreting WTO rules as requiring free trade to be established on 90% of the total bilateral trade flows. Since EU tariffs on most industrial products are zero or very low (exceptions are, for example, clothing and motor vehicles) the European Union has little difficulty in liberalizing imports of all, or practically all, industrial products. Also, since imports of agricultural products and fisheries are limited by (sometimes prohibitive) border protection they account for only a small proportion of existing total imports from the partner country. As a result, the European Union is able to make a sufficient contribution to the fulfillment of the 90% criteria by fully liberalizing imports of manufactured goods but, as shown in Table 6, only around 60% of its imports of agricultural products. Similar calculations, it is argued by the European Union, also enables the partner country to protect sensitive industrial and agricultural sectors of its economy while remaining within the EU’s interpretation of requirements of Article XXIV.
Australia has been pushing for WTO members to agree to a definition of “substantially all trade” at the Doha round, though I suspect they’re not making much progress.
GATT Article XXIV (which is supposed to discipline preferential trade agreements) 8(b):
A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.
Two views of how to interpret the ‘substantially all trade’ provision have crystallised. The quantitative approach favours a statistical benchmark on the proportion of trade covered – for example, 90 percent of all existing trade between the parties. The qualitative approach argues that no sector (or at least no major sector) should be excluded from RTA trade liberalisation…
[I]n the Trade and Development Cooperation Agreement concluded between the EC and South Africa… ‘substantially all trade’ was interpreted to mean an average of 90 percent of all items currently traded between the two countries. The inclusion of the word ‘average’ permits the use of an asymmetrical interpretation… approximately 94 percent of South African exports were covered versus 86 percent of EC exports.
But of course, that’s a perverse method of calculation. It overestimates liberalisation in the same way that the trade-weighted average tariff measure underestimates protection. Measuring “substantially all” by existing trade volumes stacks the deck against meaningful liberalisation:
A basic dilemma facing EU negotiators of these FTAs is that, according to their negotiating mandate, they must not undermine the finely tuned border protection of the CAP and the Common Fisheries Policy. At the same time, they must ensure that the agreement is compatible with Article XXIV… The European Union seeks to resolve this dilemma by interpreting WTO rules as requiring free trade to be established on 90% of the total bilateral trade flows. Since EU tariffs on most industrial products are zero or very low (exceptions are, for example, clothing and motor vehicles) the European Union has little difficulty in liberalizing imports of all, or practically all, industrial products. Also, since imports of agricultural products and fisheries are limited by (sometimes prohibitive) border protection they account for only a small proportion of existing total imports from the partner country. As a result, the European Union is able to make a sufficient contribution to the fulfillment of the 90% criteria by fully liberalizing imports of manufactured goods but, as shown in Table 6, only around 60% of its imports of agricultural products. Similar calculations, it is argued by the European Union, also enables the partner country to protect sensitive industrial and agricultural sectors of its economy while remaining within the EU’s interpretation of requirements of Article XXIV.
Australia has been pushing for WTO members to agree to a definition of “substantially all trade” at the Doha round, though I suspect they’re not making much progress.
Here’s a typical story on rice prices:
Experts say rice prices are rising because of a mix of irrational panic, weather problems – typhoons in the Philippines, a cyclone in Bangladesh, flooding in Indonesia and Vietnam – and an overall reduction in the amount of land dedicated to rice farming. There are also strong suspicions of hoarding, something that the Thai commerce minister recently encouraged before reversing himself.
And here’s a story from Steve H. Hanke and David Ranson:
The most recent rice price spike is partially the result of countries such as India and Egypt imposing restrictions and bans on exports, plus the desire of other governments including the Philippines, the world’s largest rice importer, to bulk up their stockpiles. But the blame for the long-term trend of higher prices should be placed upon those who’ve delivered a weak U.S. dollar…
But determining what’s behind the escalation in commodity prices involves a principle to which economists universally pay lip service but in practice often ignore or forget: the distinction between nominal prices and relative (real) prices. Nominal prices of commodities are determined by the value of the currency used to stipulate them, while relative prices of commodities are determined by supply and demand — scarcity, glut and other “real” causative factors…
Officials should stop wringing their hands over sky-high rice prices caused by alleged changes in rice’s supply-demand fundamentals, and politicians should refrain from pointing accusative fingers at speculators and hoarders. The rice-price problem is a weak dollar problem. Until the dollar strengthens, the nominal dollar prices of rice and other commodities will remain elevated.
The claim that the rice-price problem is a weak dollar problem implies that (1) buyers of rice using other currencies should be unaffected and (2) the price of rice relative to other imports should be unchanged for US consumers.
Here’s Thai rice, up 140% over the last year:
And here’s the dollar-baht exchange rate over the last year:
Looks like Thai rice exporters are enjoying an increase in real income (and Thai rice importers a real decline).
Moreover, domestic prices are up:
And it is not just the international market that is in crisis. From October, 2007, to March, 2008, domestic rice prices increased by 38 percent in Bangladesh, 18 percent in India, and more than
30 percent in the Philippines.
This isn’t just a nominal illusion.
Next, Hanke and Ranson offer some chart about gold prices that’s difficult to interpret:
Since none of my friends earn their income in gold, I have no idea why this matters. The nominal price of rice and gas are up over the last few months; the nominal prices of other imports (such as my holiday in Ibiza) are also a bit expensive, but their prices haven’t risen nearly as fast. When you divide one nominal price by another, you get a relative (real) price. And look, the real price of rice is up over the last year!
To see that this isn’t a dollar problem, look at the graph provided by Asia Times‘ anonymous columnist “Spengler,” who argues the opposite of Hanke and Ranson but is also wrong:
There are long-term reasons for food prices to rise, but the unprecedented spike in grain prices during the past year stems from the weakness of the American dollar…
The chart below shows the price of 100 pounds of rice against the euro’s parity against the US dollar during the past 12 months. The regression fit is 90%. There is an even tighter relationship between the price of rice and the price of oil, another store of value against dollar depreciation.
As the chart makes clear, the ascent of the cost of rice to $24 from $10 per hundredweight over the past year tracks the declining value of the American dollar. The link between the declining parity of the US unit and the rising price of commodities, including oil as well as rice and other wares, is indisputable.
Allow me to try my hand at disputing. Take a look at the left vertical axis. The dollar price of rice more than doubled over the last year. Check out the right vertical axis. The euro rose at most 20% against the dollar (and you inverted the axis label, oops). The price of rice in euros is up quite a bit, r-squared be damned. Find me a currency that has doubled against the dollar in the last year.
I suspect that the correlations mentioned by Hanke and Ranson are equally meaningless:
For example, during the long period of the dollar’s strength, from the end of 1979 to the end of 2001, gold suffered a cumulative decline of 40%, while rice experienced a cumulative decline of 52%. During the subsequent six years from the end of 2001 to the end of 2007, the price of gold rose 191% and the price of rice rose 127%.
Goldbugs can eat more rice then. But this doesn’t explain the (real) crisis in rice.
Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole… It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England…
If Portugal had no commercial connexion with other countries, instead of employing a great part of her capital and industry in the production of wines, with which she purchases for her own use the cloth and hardware of other countries, she would be obliged to devote a part of that capital to the manufacture of those commodities, which she would thus obtain probably inferior in quality as well as quantity.
The quantity of wine which she shall give in exchange for the cloth of England, is not determined by the respective quantities of labour devoted to the production of each, as it would be, if both commodities were manufactured in England, or both in Portugal.
England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth.
Prior to the late 1600s, the British drank plenty of wine, mostly French, a little Spanish, but virtually nothing from Portugal. The wars of 1689-1713 gave the Portuguese allies the opportunity of ten lifetimes. Beginning in 1703 a treaty was signed granting Portugal access to British markets for their wines—generally of a much lower quality than those of France, and often needing to be fortified with brandy or spirits in order to keep from going bad. The Methuen Treaty (as it was known) promised that Portuguese tariffs would always be at least a third lower than those of other nations, most especially France.
Of course, most of the Portuguese wine trade was dominated by British ships, merchants, and even vintners working in Iberia. The end of hostilities between Britain and France was seen as a grave threat to all these British interests, and vigorous lobbying by brewers, distillers, and the Anglo-Portuguese merchants stopped attempts to return to the period of open trade with the French.
Trade theorists have learned their lesson: use Greek letters rather than real world examples!
Hat tip: EconTalk.
David Albouy recently posted a new (Feb ’08) version of his critique of Acemoglu, Johnson, and Robinson’s 2001 AER paper that used European settler mortality rates as an instrument for modern institutional quality.
I haven’t had time to read through the back-and-forth exchanges to form my own judgment. Has any third party summarised the dispute and commented? Albouy is revising and resubmitting at AER, so at least some of his claims must be plausible, huh?
Emmanuel has spotted a howler in Joe Stiglitz’s 2006 book, Making Globalization Work:
Anderson and Cavanagh of the Institute of Policy Studies famously noted in 2000 that of the world’s 100 largest economic entities, 51 are now corporations and 49 are countries. Stiglitz recycles this idea in ch. 7 of his book on multinational corporations…
Before you do, I feel obligated as an educator to tell you that this argument comparing national output with corporate revenues is technically incorrect and fallacious. It is irksome that Stiglitz did not consult two books on globalization that came out earlier in 2004 that pointed out the flaws in this countries-companies comparison…
As I have previously discussed, the anti-globalization crowd often pumps up factual errors to taboid-ish proportions to make their points. If they are to be taken seriously, then they should start to make sensible arguments instead of bloopers and practical jokes like this one. It is unfortunate that those who should know better sometimes buy into this balderdash.
I would attribute it as an oversight if one of my undergraduate students made this sort of error, but it should absolutely not pass muster with a Nobel laureate in economics.
This one has indeed been around a while. In fact, I recall debunking it myself using the very same sources in 2004!
While we’re reading Stiglitz, let’s return to his first popular book on the topic, Globalization and Its Discontents (see my review from a few years ago). On pages 73–74, Stiglitz writes:
Behind the free market ideology there is a model, often attributed to Adam Smith, which argues that market forces – the profit motive – drive the economy to efficient outcomes as if by an invisible hand. One of the great achievements of modern economics is to show the sense in which, all the conditions under which, Smith’s conclusion is correct. It turns out that these conditions are highly restrictive…
The Washington Consensus policies, however, were based on a simplistic model of the market economy, the competitive equilibrium model, in which Adam Smith’s invisible hand works, and works perfectly. Because in this model there is no need for government – that is, free, unfettered, ‘liberal’ markets work perfectly – the Washington Consensus policies are sometimes referred to as ‘neo-liberal,’ based on ‘market fundamentalism,’ a resuscitation of the laissez-faire policies that were popular in some circles in the 19th century…
The theory says that an efficient market economy requires that all of the assumptions be satisfied.
As Alex Tabarrok reminded Dani Rodrik a while back, those conditions are sufficient but not necessary!
Hat tip to my friend Sabrina (who may or may not endorse my analysis) for the second Stiglitz story.
Trade Diversion 
