# On the NYT’s “Building Trade Walls”

The Trump administration has certainly increased public discussion of trade policy. Yesterday, the New York Times ran a series of graphics accompanied by a thousand words on “Building Trade Walls” in its online business section. I found the piece frustrating. At a number of points, the article presents valid information in a way that muddles meanings or implies misleading conclusions.

Are sales taxes akin to import tariffs?

Consider these two consecutive paragraphs:

But many countries have additional taxes. For example, China and other countries, but not the United States, also charge a steep value-added tax, which is a kind of national sales tax on imports and home-produced goods alike. Exports are exempt from value-added taxes.

Once value-added taxes and sales taxes are included in an international comparison, America’s taxes on imports are much lower than those of almost every other country.

Why would you make an international comparison that counted VATs or sales taxes as taxes on imports? Since VATs and sales taxes apply to both “imports and home-produced goods alike”, they aren’t protectionist. An import tariff applies to imports and not to domestic-produced goods. The discriminatory nature of the import tariff is why it protects domestic firms from foreign competitors.

Back in September, Paul Krugman lambasted Donald Trump for accusing Mexico’s VAT of being a trade barrier. Now, his NYT colleagues have produced a good-looking map that relies on this premise. A quick mashup of the two makes the contrast clear:

In short, the NYT‘s first paragraph noting the non-discriminatory nature of VATs and sales taxes means that the international comparison offered in the second paragraph is nonsensical.

Is China a developing country?

In another troublesome part of the article, a series of facts about China’s GDP and GDP per capita are somehow combined to say that China might be a developed economy:

Today, China’s designation as a developing country is more debatable. China is the world’s second-largest economy and the biggest producer of steel and cars.

Still, China trails most developed nations by some measures, and Chinese officials argue that it is still developing and does not yet qualify as industrialized.

China’s economy is still roughly two-thirds the size of the American economy, even though China has four times as many people. Average incomes in China are still one-fifth to one-quarter of levels in the United States, and much of China’s interior is still underdeveloped.

Based on the first paragraph, I have to ask: is Iceland a developing economy? It’s quite small, with a GDP of maybe $15 billion. But of course it’s developed, as it has a GDP per capita in the neighborhood of$50,000. Development is about income levels (and accompanying socioeconomic changes), not population size. I have never before seen GDP (as opposed to GDP per capita) used to inform the “developing country” designation.

The NYT article raises the (novel) question of whether China is developed or developing in the context of its trade-policy obligations:

The World Trade Organization, the global trade adjudicator, has allowed developing countries to impose far higher tariffs than industrialized countries, while they build up industries at home. China has been counted as a developing country.

This is unhelpful in a few important respects. First, the WTO does not designate countries as developing or developed. In the narrow areas where developing countries are given special and differential treatment, member nations identify themselves as developing. Second, the “global trade adjudicator” language is potentially confusing. Countries’ MFN tariff schedules are negotiated among member nations at the WTO. There’s no separate WTO entity announcing tariff rates for developing (or developed) countries. Past rounds of negotiations among members have resulted in the tariff schedules of China and other economies. Third, China has lower tariff bindings than a typical developing country, partly because it acceded to the WTO later than most developing countries. Branstetter and Lardy say that “China agreed to a set of conditions that were far more stringent than the terms under which other developing countries had acceded”. Compare China’s 10% average bound tariff to Brazil’s 31% or India’s 49%.  Fourth, there is not much evidence that “far higher tariffs” have allowed countries to “build up industries at home”. China’s export growth, in particular, has involved integration into global value chains and assembly processing, not import-substitution industrialization behind a tariff wall.

A few other concerns

• It would be more helpful to plot the trade deficit as a percent of GDP than in nominal dollars.
• A focus on the bilateral deficit with China is unhelpful.
• A discussion of border adjustments that does not mention exchange rates omits a first-order feature, according to the policy’s proponents.
• The NYT reporters say: “When China joined the W.T.O. in 2001, the expectation was that its tariffs would later be adjusted lower during global trade talks, known as the Doha Round. But those talks fell apart for a variety of reasons.” China’s bilateral negotiations with the US wrapped up in 1999. The protests in Seattle that year accompanied a failed round of WTO negotiations. I don’t think expectations of the Doha Round – which started two years later in a post-9/11 context – were clear when China’s accession protocol was being determined.

Alan Beattie and Joshua Chaffin in the FT:

This month, a working group led by EU trade commissioner Karel De Gucht and US trade representative Ron Kirk is likely to suggest starting formal negotiations…

“The stars are almost aligned,” says Greg Slater, director of global trade policy at Intel, the chipmaker. The US and EU “have the opportunity to try to set the gold standard” in areas such as intellectual property protection, he says, which emerging markets like China and India would then have to respect.

Yet the deal faces complex challenges. Trade policy has moved from focusing on simple import tariffs on goods – already low for most transatlantic commerce – to often complicated “behind-the-border” domestic regulation. Technical standards, not tariffs, are the biggest barriers to integrating fast-growing US and European markets such as pharmaceuticals, medical services and advanced electronics…

“The aim in many instances is not to drive immediately for full regulatory convergence but to try to make sure that regulators on both sides of the Atlantic are making decisions with their eyes wide open,” says Sean Heather, vice-president of the [US Chamber of Commerce] chamber’s centre for global regulation. “The idea that negotiators are going to sit down with a big list and say: ‘We’ll give you that if you give us this,’ is probably not going to work for most regulations.”

Yet even agreeing an approach on convergence confronts bureaucratic and philosophical barriers. Regulation in both economies is frequently divided among different agencies, some jealous of their independence and unused to considering international implications.

A U.S.-EU trade deal is essentially a way to ignore countries like Brazil and India while crafting rules that will govern some of the high-tech industries and information-based services that play a growing role in US-EU trade. Once those rules are set, the BRICs will be hard pressed to avoid signing onto them later on down the road.

Two things have changed.  First, the traditional method of multilateral trade liberalization has died.  Second, while both the US and EU are major trading states, they’re not quite as pivotal as they used to be.  Ironically, it’s their declining (though still appreciable) importance in global trade that makes a US-EU agreement feasible now.  The BRIC economies are now sufficiently large that a transatlantic trade deal doesn’t seem like an existential threat.

And here’s Richard Baldwin, “Regulatory Protectionism, Developing Nations, and a Two-Tier World Trade System ,” Brookings Trade Forum: 2000.

# TAFTA?

This blog has a long history of covering preferential trade, as the title suggests. But I don’t follow proposed trade deals very much these days, largely because serious trade proposals haven’t been forthcoming in recent years.

If I had been paying attention, I would have noticed “a slow and steady effort to generate support for a U.S.-EU free trade agreement” “over the past year or so”, as noted by Simon Lester. At the WaPo, David Ignatius reports/opines:

But a big idea is taking shape that could revitalize the U.S.-European partnership for the 21st century. It was the talk of Berlin and Hamburg when I was there a week ago, and there’s a similar buzz in Washington. The idea is free trade — specifically, a trans-Atlantic free-trade agreement — which I’ll optimistically call “TAFTA.”
Secretary of State Hillary Clinton tipped the U.S. hand on Nov. 29 when she said at the Brookings Institution, “We are discussing possible negotiations with the European Union for a comprehensive agreement that would increase trade and spur growth on both sides of the Atlantic.”…
Curious as to whether Clinton’s speech was just window dressing from a departing secretary, I asked the White House this week whether the TAFTA talk is real. The answer was yes: Obama is considering making a trans-Atlantic trade initiative an important part of his second-term agenda. Combined with the North American Free Trade Agreement in Latin America and the ­Trans-Pacific Partnership in Asia, this could create a global trading system that might be an enduring part of Obama’s legacy.

See Simon Lester for one set of reasons to be skeptical.

Given (my uninformed impression of) current trade politics in the US, I see little reason to take TAFTA seriously at this stage. The Trans-Pacific Partnership negotiations have been going for about five years (with 15 rounds of formal negotiations over the last three years), so I’d be shocked if there were any accelerated action on the TAFTA front.

My blogging has taken a back seat to my research recently. Here are some quick links that I wish I had more time to discuss:

# Rose: Protectionism is acyclical

Almost everyone agrees that protectionism is countercyclical; tariffs, quotas, and the like grow during recessions. The abstract of Bagwell and Staiger (2003) begins “Empirical studies have repeatedly documented the countercyclical nature of trade barriers”; for support, they provide citations of eight papers which “all conclude that the average level of protection tends to rise in recessions and fall in booms.” Meanwhile, Costinot (2009) states: “One very robust finding of the empirical literature on trade protection is the positive impact of unemployment on the level of trade barriers. The same pattern can be observed across industries, among countries, and over time.” …

The sample is split into two in the scatter-plots to the right. Above, the data show a positive relationship between 1906 and 1942; high unemployment in the 1930s tends to coincide with high tariffs. This relationship is strikingly reversed in the graph below, which scatters tariffs against unemployment for the period between 1946 and 1982. Since World War Two, high American unemployment seems to coincide with low American tariffs; protectionism seems to be, if anything, cyclical…

The goal of my recent work has been to show that, at least since World War II, protectionism has not been countercyclic. While this runs counter to conventional wisdom, the evidence is reasonably strong; no obvious measure of protectionism seems to be consistently or strongly countercyclic.

An interesting question occurs: why is protectionism no longer countercyclic? Before World War I (and in contrast to more recent times), tariffs contributed greatly to the national treasury, there was no GATT, and the Gold Standard ruled. But it turns out that protectionist policies of countries with large and small budget deficits seem to react similarly to business cycles, as do those of countries inside and outside the GATT/WTO, those with fixed and floating exchange rates, small and large countries, and open and closed countries. If there has been a shift in the cyclicality of protectionism since WWII, it’s hard to be sure why.

Perhaps, just perhaps, the switch in the cyclicality of protectionism – if there has indeed been one – is a triumph of modern economics. After all, there is considerable and strong consensus among economists that protectionism is generally bad for welfare. And there is no doubt that economists are aware and actively involved in combating countercyclic protectionism; this was especially visible during the Great Recession, which saw the successful launch of Global Trade Alert in June 2009. If – and it’s a big if – the efforts of the economic profession are part of the reason that protectionism is no longer countercyclic, then the profession deserves a collective pat on the back. But in that case the profession should also consider setting its sights higher. If economists have helped reduce the cyclicality of protectionism, then perhaps they should focus on actually reducing protectionism.

# Can the US apply CVDs to imports from China?

The answer seems obvious, because the US does apply CVDs to Chinese goods, but here’s what Scott Lincicome calls a “bombshell“:

the US Court of Appeals for the Federal Circuit (CAFC) affirmed a decision from the lower US Court of International Trade (CIT) that the Commerce Department’s current method of applying countervailing and anti-dumping duties on imports from China and other “non-market economies” (NMEs) like Vietnam was invalid because it led to “double counting.” I’ve previously commented on the CIT decision – GPX Int’l Tire Corp. v. United States – and it was a pretty big deal. But it was somewhat limited because it applied to only Commerce’s methodology for applying anti-dumping and countervailing duties simultaneously on the same NME-origin product.

The CAFC, on the other hand, went a whole lot further than the CIT, finding that, under current US law, “government payments cannot be characterized as ‘subsidies’ in a non-market economy context, and thus that countervailing duty law does not apply to NME countries.” So instead of ruling on the discrete “double counting” issue, the CAFC essentially said that the entire CVD law doesn’t apply to Chinese and other NME imports.

That’s an even bigger deal.

His long post has details.

# Pakistan grants India MFN status

Pakistan has granted MFN status to India (with a list of excepted products). This accelerates liberalization between the two countries that had made some progress with the South Asian FTA (SAFTA). India granted Pakistan MFN status back in 1995. Here’s a State Bank of Pakistan research bulletin arguing for granting India MFN. Here’s a World Bank book on The Challenges and Potential of Pakistan-India Trade, which includes this paragraph:

In fact, the evidence on informal trade indicates that Pakistan has already granted something close to de facto MFN status to India. Traders exploit market arbitrage and the poor enforcement of antismuggling measures to import banned Indian products into Pakistan, hence with the change in the trade regime there could be additional revenues for the government for items that are likely to switch from the informal trade to formal trade.

How did Pakistan not grant India MFN status while being a WTO member since its inception in 1995? While MFN status has been relegated to “least favored nation” status in many circumstances, it seems that it still means something in this part of the world.

# Is the NAFTA trucking dispute finally over?

A Mexican truck will make a delivery to a Dallas suburb this afternoon, thereby realizing some of the liberalization promised by NAFTA 17 years ago. WaPo:

The first Mexican carrier to deliver goods in the U.S. interior under a long-delayed free-trade provision is scheduled to enter the country at Laredo, Texas, shortly after midday Friday.

The truck owned by Nuevo Leon, Mexico-based Transportes Olympic will make a delivery to the Dallas suburb of Garland. That’s despite continuing opposition from the Teamsters union and some lawmakers who fear the program will make U.S. highways more dangerous and cost American jobs.

The truck will carry a monitoring device. The move complies with a provision of the 1994 North American Free Trade Agreement.

The company was also the first approved under the 2007 pilot program before President Barack Obama’s administration canceled it [in 2009]. Mexico retaliated by placing tariffs on 99 agricultural products worth more than \$2 billion annually.

A little over a year ago, I noted that Washington insiders didn’t expect the dispute to be resolved “any time soon”, but in the broader context, 14 months isn’t bad. So what does the program do? It includes a lot of measures to address the safety concerns raised by its opponents:

Supporters say especially strict safeguards have been implemented: Electronic devices will track the routes drivers take, how long they drive and how long they rest. Participating drivers must undergo national security and criminal background checks, and inspectors will administer oral English-proficiency exams.

Does this end the dispute? Not necessarily. Look up the Federal Motor Carrier Safety Administration’s announcement in the Federal Register and you’ll discover that this is a three-year pilot program, a fact not made clear by some press coverage. From the Federal Register (pdf):

The Federal Motor Carrier Safety Administration (FMCSA) announces its intent to proceed with the initiation of a United States-Mexico cross-border long-haul trucking pilot program to test and demonstrate the ability of Mexico-domiciled motor carriers to operate safely in the United States beyond the municipalities in the United States on the United States-Mexico international border or the commercial zones of such municipalities (border commercial zones)…

In a pilot program, DOT typically collects specific data for evaluating alternatives to the regulations or innovative approaches to safety while ensuring that the goals of the regulations are satisfied. A pilot program may not last more than 3 years, and the number of participants in a pilot program must be large enough to ensure statistically valid findings.

Will the pilot program have large effects on international trade? Both sides claim big numbers:

Todd Spencer, the executive vice president of the Independent Drivers Association, which represents small independent trucking businesses, said 100,000 trucking jobs will be lost. Proponents say it will spur economic growth as companies save millions by sending the goods door-to-door.

But I doubt we’ll see any such impacts soon. Tire Business reports:

So far two small Mexico-based motor carriers have been certified for the program. They are Transportes Olympic of Monterrey, with two vehicles, and Grupo Behr de Baja California S.A. de C.V. of Tijuana, with five vehicles.

However, the FMCSA is withholding Grupo Behr’s permit while reviewing objections raised by the Teamsters and others regarding Grupo Behr’s safety record. The Teamsters also question Transportes Olympic’s record on safety.

You can track the approvals online at the FMCSA’s website. That site says that Transportes Olympic has registered one vehicle and two drivers. It looks like the dispute will continue in some form, for the time being.

# Is the US going to impose tariffs on China?

The Currency Exchange Rate Oversight Reform Act of 2011 is headed to a full Senate vote on Tuesday. You can track its congressional actions here.

The legislation, in summary,

• directs the US Treasury Secretary to report on currency market developments and prevailing real effective exchange rates and to identify countries that manipulate exchange rates
• requires the US Treasury Secretary to oppose increased “chairs or shares” at any international financial institution for a designated currency manipulator
• amends antidumping calculations and countervailing duty investigations to include currency undervaluation when looking at exports from a designated manipulator

If you look at the text of the act (PDF), you’ll realize that this bill does not impose any tariffs on China. It changes the criteria that the US Treasury Secretary will consider in choosing whether to designate a country a currency manipulator, and it makes that designation have bite in AD/CVD actions, government procurement, some multilateral financing, and IMF actions.

PIIE’s Nicholas Lardy describes the legislation in an interview, characterizing the inclusion of currency undervaluation in the countervailing duty calculation as the primary thrust of the act.

This legislation changes the trade-policy process; it doesn’t impose tariffs. Of course, the fundamental misalignment criteria may have been chosen with particular outcomes in mind, but the US Treasury has opted to not designate China a manipulator many times before. Will this legislation bind so tightly that the designation is inevitable?

# Will the US Congress pass three PTAs this year?

A congressional committee on Wednesday strongly backed deals with South Korea, Colombia and Panama, setting them on course for expected final approval and ending years of trade policy paralysis…

The panel’s chairman, Representative Dave Camp, said approval of the deals could not come at a better time for the struggling U.S. economy…

The three pacts must be approved by the full House and the Senate to become law. The panel backed the pacts on the following bipartisan votes: Colombia, 24-12; Panama, 32-3; and South Korea, 31-5.

Camp said he expected the full House to approve the trade deals next week. The Senate also could move quickly enough for the pacts to be approved in time for South Korean President Lee Myung-Bak’s visit to the White House on Oct 13.