In Italy, offshoring boosts domestic productivity, and in Japan, offshoring firms expand domestic employment (pdf).

Inexplicably, Reason repeatedly prints bad arguments in defense of NAFTA. This time it’s the Chicago Tribune‘s Steve Chapman saying that NAFTA boosted workers’ earnings:

Ordinary workers, contrary to myth, benefited from NAFTA. In the decade before it took effect, according to the Bureau of Labor Statistics, average hourly earnings (adjusted for inflation) fell by 5 percent. In the decade after, they rose by 10 percent.

Nonsense. You’d have to control for other factors to make such a comparison meaningful. Such as 1990s labor productivity growth, which was “the defining economic event of the past decade” (pdf).

While Chapman’s piece does contain some respectable economic reasoning, the inclusion of such a glaringly bad argument undermines its credibility. Why are the folks at Reason so eager to defend NAFTA?

Brad Setser suggests that the dollar may have bottomed out.

Philip Stephens says that, despite the unending coverage, globalisation is the big story:

Suddenly it seems as if it belongs to Asia. Globalisation was something the rich countries did to the rest of the world – for the good of all, of course. Now it is beginning to feel like something someone else is doing to them… It would take a crash to stop it.

The world isn’t flat.

CGD’s Nancy Birdsall is taking questions at the IHT.

Here’s a classic worth rereading: Krugman, Paul R. (1993). The Narrow and Broad Arguments for Free Trade, American Economic Review, Papers and Proceedings, 83(2):362-366. pdf.

Giulia Faggio, Kjell G. Salvanes & John Van Reenen turn to heterogeneity in firm productivity to explain wage inequality:

[M]uch of the increase in individual wage inequality in the UK occurred between firms within the same industry (between-firm component) instead of within firms (within-firm component). This is an important finding when looking for ‘culprits’ of wage inequality. It says that little of extra inequality has come from a change in the way firms treat their own workers. The main source is the change in firm-level productivity. This implies that understanding the evolution of productivity distribution between firms may be critical in understanding the evolution of wage distribution (we also show that the correlation between wages and productivity has become more important over time)…

In terms of policy, this suggests that the causes of rising inequality are primarily structural and related to new technology rather than to trade or institutions. Thus greater trade protectionism or the re-energising of unions may do relatively little to reverse the increase in inequality.

But is trade orthogonal to the distribution of firm productivity? If one thinks of the Melitz (2003) model, then a decrease in trade costs eliminates the least productive firms and truncates the range of support for firms that survive. However, due to the fractal-like property of the Pareto distribution, the truncated distribution will still have same skewness as the initial distribution of productivity levels. For at least some measures of inequality, therefore, the distribution of productivity is independent of trade policy, even if trade costs determine the aggregate level of productivity through selection effects.

But that’s just a one-minute sketch using the most popular model of firm heterogeneity (and firms all pay the same wage in Melitz (2003)!). If the distribution of productivity is critical to wage inequality, then economists have renewed reason to investigate the relationship between trade and firm-level productivity.

The Economist argues against a US carbon border tax:

[T]he costs of a border tax could be huge, not just because of the massive bureaucracy needed to certify the carbon content of different goods imported from different factories in different countries, but also because such a tax would be a dangerous weapon in the hands of America’s growing gang of protectionists.

The people who worry most about the costs of trying to constrain carbon emissions are the very ones demanding protectionist measures. But if those measures are passed, America risks something far costlier than a switch to cleaner energy: a global trade war.

Philippe Martin, Thierry Mayer & Mathias Thoenig on trade and war (pdf), forthcoming in the Review of Economic Studies:

This paper analyzes theoretically and empirically the relationship between military conflicts and trade. We show that the conventional wisdom that trade promotes peace is only partially true even in a model where trade is economically beneficial, military conflicts reduce trade and leaders are rational. When war can occur because of the presence of asymmetric information, the probability of escalation is lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains. However, countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country and the cost of a bilateral conflict. We test our predictions on a large data set of military conflicts on the 1950-2000 period. Using different strategies to solve the endogeneity issues, including instrumental variables, we find robust evidence for the contrasting effects of bilateral and multilateral trade openness. For proximate countries, we find that trade has had a surprisingly large effect on their probability of military conflict.