Category Archives: Preferential Trade

The US-Colombia PTA is not about economics

If you approach the subject as an economist, the US-Colombia PTA’s political deadlock is tough to understand. As I noted repeatedly 30 months ago (1, 2, 3, 4) when the PTA was in the news, Colombia’s only meaningful benefit would be making its regularly renewed tariff preferences permanent. US exporters would face lower tariffs in a few areas. Thus, the deal won’t cause substantial change in the economic environment. The PTA’s significance lies in its foreign-policy role, not its economic content.

Nonetheless, writing in the WSJ, Mary O’Grady tries to make the trade deal about economics:

But to make sense of the Obama administration’s opposition to a Colombia FTA—when the U.S. is already open to Colombian exports under the Andean Trade Preference Act (ATPA)—takes real mind-bending.

The advantage for Colombia of the trade agreement is that it will codify ATPA, so it doesn’t have to be renewed every few years. In exchange, Colombia commits to opening to U.S. foreign investment and exports. Consumers, producers and investors in both countries come out winners.

There are also geopolitical gains for the U.S., which benefits from the institutionalization of open markets…

Next year, Ottawa’s Colombia free trade agreement will enter into force, and Canadian producers will join the list of competitors who have an advantage over Americans in the Colombian market. The European Union and South Korea have also signed FTAs with Colombia and will have advantages on the industrial production front.

It’s hard to understand what Mr. Obama is thinking about besides his loyalty to the AFL-CIO. But Colombia’s plans are clear. It wants to trade with the U.S. But if it is rejected, it will simply buy and sell with the rest of the world.

The economics are clear. But I think O’Grady has missed part of the politics. News coverage suggests that Democrats are worried about human rights issue in Colombia, American unions are concerned about violence against Colombian union leaders, and Colombia is arguing that its labor conditions have improved. No one seems to be worried about a flood of Colombian imports hurting US jobs. If that’s the case, then it’s likely fruitless to talk about the economics rather than the politics of the trade deal.

Is the FTAAP any more likely than it was three years ago?

At their meeting last week, APEC leaders announced intentions to negotiate a Free Trade Area of the Asia-Pacific (FTAAP) by 2020. Emmanuel lists reasons to think it’s empty rhetoric:

Again, there is much reason for scepticism. How can the US complete a deal with nine participants when it cannot even complete a bilateral arrangement with South Koreaafter three years, for example? Recall, too, that the Bogor Goals are well off track. The text of the 1994 Leaders’ Declaration says APEC’s achievements should include “the industrialized economies achieving the goal of free and open trade and investment no later than the year 2010 and developing economies no later than the year 2020.” 2010 is about to end, yet agricultural protectionism remains rife in the likes of the US and Japan. As for the Doha Development Round, forget about it since most of the rest of the world already has.

Importantly, remember that this is not the first time the US has tabled the FTAAP idea. Alike the Free Trade Area of the Americas (FTAA), FTAAP has singularly failed to find adherents. Ah well, hope always springs eternal for some.

I don’t see how the FTAAP’s prospects have improved since 2007, which is the last time I discussed the proposal, echoing the skepticism of Chris Dent and Jagdish Bhagwati. That year, Vinod Aggarwal laid out the skeptical case (pdf) at length in a chapter titled “The Political Economy of a Free Trade Area of the Asia-Pacific: A U.S. Perspective” in An APEC Trade Agenda?.

Maintaining the status quo in trade policy

The trade policy agenda has been relatively quiet since President Obama took office (notwithstanding a few murmurs about the Korea-US trade deal triggered by last week’s G20 meeting). The administration has been content to let the WTO system maintain the status quo and address disputes, as it has invested its political capital elsewhere. But trade does need to show up on the Congressional agenda occasionally, if only to maintain status-quo policy. “Congress needs to act during the lame duck session on renewal of the Generalized System of Preferences (GSP) program and the Andean Trade Preference Act (ATPA), both of which expire at the end of 2010.”

What tariff lines do US PTAs liberalize?

Marco Fugazza & Frédéric Robert-Nicoud look at the swiftness of US PTA tariff cuts:

This paper investigates the empirical relationship between cuts in MFN bound rates negotiated during the Uruguay Round of the GATT (1986-1994) and the depth and breadth of Preferential Trade Agreements signed in the aftermath of its completion. Our empirical investigation focuses on the United States using official tariff line level data. To the best of our knowledge, our paper is unique in looking at the causal relationship from multilateralism to regionalism. The existing empirical literature is exclusively looking at the relationship running the other way…

[T]he imports of goods that the US liberalises swiftly the most frequently on a preferential basis are also the goods for which it granted the boldest tariff cuts during the Uruguay Round…

In the US, resistance to preferential trade liberalisation (conditional on it taking place) cannot take the form of positive preferential tariffs for institutional reasons, as we explain in the data section of the paper. It can only take the form of delayed liberalisation. Therefore, our measure of the intensity of post-Uruguay Round preferential trade liberalisation (or ‘PTL’) for each good is the frequency at which the US grants immediate duty-free access to its market to its FTA trading partners…

We find that an increase in the tariff CUT of one percentage point is associated with an increase in the probability of the US granting immediate duty-free access to its market to all trade partners by about twenty-five percent at the sample mean. Given that the standard error for CUT in the sample is 4.34 percentage points, this is a large effect…

[W]e introduce the Uruguay Round MFN tariff rate as a control in all our regressions. The estimated coefficient is negative, implying that the US disproportionately grants duty free access to its market on a preferential basis for goods that have a low MFN tariff rate already.

The authors interpret their findings as showing a complementarity between multilateral and preferential trade negotiations.

Disaster-driven trade liberalization

EU members are thinking about helping Pakistan’s economy by liberalizing tariffs on some of its imports:

The most realistic option, according to some diplomats, would be for the EU to identify a list of products beneficial to Pakistan and then unilaterally reduce the so-called “most-favoured nation” tariffs it charges trading partners. Depending on the products and the tariff reductions, such a move could result in €100m to €150m in additional annual exports for Pakistan, according to preliminary calculations.

One challenge in devising a list, say people familiar with the matter, would be to help Pakistani exporters without providing unintended benefits to their Chinese rivals.

It’d be nice to see “preferential” liberalization come via MFN tariff reductions.

[HT: Seb]

PTAs and the incidence of antidumping actions

Preferential trade agreements spur discriminatory anti-dumping practices:

“In this paper we empirically explore the possibility of additional discrimination via PTAs by focusing on the extent to which PTAs alter the pattern of antidumping (AD) activity… AD provisions in PTAs have decreased the number of intra-PTA AD cases by 33-55% and increased the number of AD actions against non-PTA members by 10-30%… PTAs without AD language do not experience any change in AD activity whereas PTAs with AD rules are characterized by protection reduction and protection diversion.”

Just as it’s difficult to assess the net benefits of trade creation minus trade diversion, it’s likely tough to discern the net benefit of PTAs’ AD clauses in terms of protection reduction minus protection diversion.

Did AGOA work? Identification and export incentives

The former USTR-Africa who designed the African Growth and Opportunity Act (AGOA) preferential trade scheme declares it a “phenomenal success“:

Rosa Whitaker: I think it’s been a phenomenal success. Has it been a panacea for everything in Africa? No, it wasn’t designed to do that. But if you look at the return on the investment, it’s been amazing. It costs the American taxpayer very little – about $2 million a year. In under a decade, exports from AGOA-eligible countries grew over 300% from $21.5 billion in 2000 to $86.1 billion in 2008…

AGOA helped develop an automobile industry in South Africa. In 2000, that industry was exporting about $148 million; it has increased to $1.9 billion in 2008. Car parts exported to the U.S. had an 18-25% tariff. When those tariffs came off for Africa, the assembly part of that manufacturing process moved to South Africa. There are plenty of other examples. Lesotho was exporting $139 million in apparel in 2000; now it’s over $340 million: a 143% increase. Kenya’s cut flower industry expanded from $34 million in 2001 and to exports over $240 million now. Swaziland was exporting $85,000 in jams and jellies in 2000; today it’s $1.6 million. For a small country like Swaziland, that’s important. Then you have Tanzanian coffee and other products. I could go on and on.

Policymakers frequently evaluate programs using this approach — they compare circumstances before and after legislation passed and judge the program based on the difference in outcomes over time. But of course, correlations aren’t very informative about causal relationships.

Economists are interested in the counterfactual — what impact did the program make relative to what would have happened without the program? The most obvious problem with a before-and-after comparison is that steady growth creates improvements over time, regardless of policy changes. For example, Singapore’s Business Times touted that US-Singapore trade had grown nearly 20% since the US-Singapore preferential trade agreement took effect, but US-Malaysia trade grew the very same amount during that period without any US-Malaysia PTA.

Similarly, telling us that African export volumes grew from 2000 to 2008 isn’t very informative, because we naturally expect exports to grow over time as economies grow. (If one wants to suggest that AGOA encouraged greater African openness, the appropriate measure would be the exports-to-GDP ratio.) Identifying the causal impact of AGOA requires a method that distinguishes the increase in exports due to the trade preferences from the counterfactual scenario. (A 300% increase in exports is big, so I’m not suggesting that AGOA necessarily had zero impact. The question is: what share of the increase was due to AGOA?)

In such circumstances, economists often turn to an identification strategy known as “differences in differences“. This involves comparing differences across countries in their differences across time. For example, only some African nations are AGOA-eligible. If African economies receiving preferential tariff treatment from the United States experienced export volume growth that was faster than export volume growth in ineligible economies, we might think that this suggests that AGOA spurred greater exports. However, such a comparison doesn’t constitute valid causal inference in the case of AGOA, because AGOA eligibility was determined according to governance and policy criteria that likely make a difference in economic and export growth. Countries with characteristics making them AGOA-eligible may grow faster than their neighbors due to those characteristics, even without any preferential market access.

Paul Collier and Tony Venables tackled this by taking what is akin to a differences-in-differences-in-differences approach: they looked at the value of a country’s apparel exports to the US relative to its apparel exports to the EU (World Economy, 2007). The thrust of their story is captured by their Figure 1:

Collier & Venables (2007) Figure 1.

Collier & Venables (2007) Figure 1.

African apparel exports to the US increased dramatically faster than such exports to the EU in the early 2000s (even though the EU’s Everything But Arms initiative, which is similar to AGOA, launched in 2001). Collier and Venables also present econometric results in which AGOA apparel eligibility is associated with significantly greater relative exports to the US. A glance at the data on South African automobile exports also suggests that Rosa Whitaker’s story is meaningful in comparative terms: auto exports to the US jumped while exports to the UK and Germany fell slightly.

Period Trade Flow Reporter Partner Code Trade Value
2000 Export South Africa Germany 87
$538,728,295
1
2000 Export South Africa USA 87
$190,767,522
1
2000 Export South Africa United Kingdom 87
$158,073,103
1
2008 Export South Africa USA 87
$1,867,615,402
1
2008 Export South Africa Germany 87
$485,841,841
1
2008 Export South Africa United Kingdom 87
$139,980,048
1

Yet such evidence need not imply that AGOA caused a significant increase in exports by eligible countries. The AGOA trade preferences raised both the incentive to export and the relative incentive to export to the US. It is possible that AGOA-eligible countries would have experienced significant export increases even in the absence of the preferential program and the tariff advantages of AGOA only induced them to direct their sales to the US instead of the EU. Such a claim is compatible with the two pieces of evidence discussed thus far: (1) African exports to the US increased significantly after AGOA came into force and (2) AGOA-eligible economies export more to the US relative to the EU.

Collier and Venables (2007) and Frazer and Van Biesebroeck (2007) address such concerns to some degree. For example, the latter show that:

The impact of AGOA on E.U. imports is in column (6). The effects for most product categories are not significantly different from zero. Perhaps surprisingly, where the effect is significant, it is positive. For example, E.U. imports of GSP-Manufactured products, are found to increase by 4%. A potential explanation (among many) could involve spillover effects from the increased U.S. imports.

Note that though this evidence makes the alternative story about export diversion suggested in my previous paragraph rather unlikely, it cannot completely rule it out (perhaps the relative magnitudes aligned so that the size of the total export increase offset the change in relative shares, leaving exports to the EU constant). This demonstrates one of the difficulties of doing causal inference in a non-experimental setting. We have highly suggestive evidence, but, with enough effort, one can conceive of an alternative explanation.

So was AGOA a success? Probably. Economists have both theoretical reasons to expect it would improve African exports and empirical evidence that suggests that it did. Policymakers and other commentators would be more persuasive if they cited comparisons (in the spirit of Figure 1 from Collier and Venables) rather than just presenting the time series of US imports from Africa – say something like “AGOA-eligible countries’ exports to the US  grew 300% in the last eight years, substantially more than their exports to Europe”. Better (if imperfect) efforts at identifying the counterfactual distinguish the studies analyzing AGOA from meaningless statistics cited in support of other trade policies.

[I’ve tried to informally convey some ideas about empirical identification issues in the context of AGOA. For a proper introduction to the topic, start with a paper or book that mentions the Rubin causal model, such as Angrist and Pischke’s Mostly Harmless Econometrics or Imbens and Wooldridge (JEL, 2009).]

Whither US trade policy?

Bernard Gordon:

From a US government perspective, the Trans Pacific Partnership is the only game in town. Three main reasons explain why: the state of the WTO’s Doha Round; China’s role in Asia; and America’s self-image of its place in the Pacific. A possible fourth reason is that Washington regards the TPP is the only doable multilateral trade initiative…

For a United States that almost singlehandedly launched both the global GATT and then the WTO, a ‘Trans-Pacific Partnership’ is quite a comedown. All the more so when, if the WTO’s Doha Round were completed, its ‘most favoured nation’ clause would render moot most of the preferential trade agreements now cluttering world trade, and simultaneously kick-start global trade growth. And yet only the unlikely goal of a TPP, so 20th century, will be pressed by the US because that’s all the President is prepared to undertake at this point.

Read the whole thing. (HT: Larry.)

Nsour: Establish an agreement on PTAs

Mohammad Nsour, who was involved in McGill Law’s PTAs database that I’ve mentioned before, has published his doctoral thesis as Rethinking the World Trade Order: Towards a Better Legal Understanding of the Role of Regionalism in the Multilateral Trade Regime. The publisher’s summary:

Regional Trade Agreements (RTAs) have proliferated at an unprecedented pace since the creation of the World Trade Organization (WTO). Although the WTO legally recognizes countries’ entitlement to form RTAs, neither the WTO nor parties to RTAs have an unequivocal understanding of the relationship between the WTO and RTAs. In other words, the legal controversies, the result of uncertainty regarding the application of the WTO/GATT laws, risk undermining the objectives of the multilateral trade system. This research tackles a phenomenon that is widely believed to be heavily economic and political. It highlights the economic and political aspects of regionalism, but largely concentrates on the legal dimension of regionalism. The main argument of the book is that the first step to achieving harmony between multilateralism and regionalism is the identification of the legal uncertainties that regionalism produces when countries form RTAs without taking into account the substantive and procedural aspect of the applicable WTO/ GATT laws. The book calls for the creation of a legal instrument (i.e. agreement on RTAs) that combines all of the applicable laws on RTAs, and simultaneously clarifies the legal language used therein. Likewise, the WTO should have a proactive role, not merely as a coordinator of RTAs, but as a watchdog for the multilateral system that has the power to prosecute violating RTAs. The author is aware that political concerns are top priorities for governments and policy makers when dealing with regionalism. Hence, legal solutions or proposals are not sufficient to create a better international trade system without the good will of the WTO Members who are, in fact, the players who are striving to craft more regional trade arrangements.