Cesar Conda and Brian Reardon say America’s tax code is punishing US corporations for producing at home:

In 2005, 137 nations accounting for 94 per cent of trade with the US had some form of border-adjusted taxes on manufactured goods and services. By contrast, the US has direct taxes, such as the corporate income tax, which is precluded from being refunded on US exports or assessed on imports under World Trade Organisation rules.

The net effect is an unfair disadvantage for US companies and their staff, as the goods they produce and export are hit with taxes abroad, while foreign goods coming into the country are not. The additional embedded tax burden for US companies exporting goods is at least $100bn annually.

We must fix the US tax code so that American manufacturers can export more goods and services, not more jobs. The challenges of moving the US corporate income tax toward a border-adjustable system are sizable, but they can be overcome. Two stand out: WTO rules prohibit border adjustments of direct taxes and America’s corporate income tax is not readily border adjustable. These challenges suggest a two-front attack. First, the US must aggressively engage the Europeans to repeal the distinction between direct and indirect taxes… Second, Congress should move our corporate code towards a consumption-based tax…

For free-trade politicians, promoting tax-relief for American-made goods will help stem the growing tide against free trade and globalisation among voters. Without a proactive trade agenda, we are in grave danger of enacting protectionist policies proven in the past to hurt workers and industry alike. On the other hand, promoting a border-adjustable corporate tax allows pro-trade candidates to offer a workable, proactive and populist response to the ongoing decline in US manufacturing jobs.

Echoing the Fisman and Wei results for Chinese trade with Hong Kong, Beata Javorcik and Gaia Narciso find that people misclassify products to avoid tariffs. Moreover, it’s easier to do so with differentiated products:

Emerging literature has demonstrated some unique characteristics of trade in differentiated products. This paper contributes to the literature by postulating that differentiated products may be subject to greater tariff evasion due to the difficulties associated with assessing their quality and price. Using product-level data on trade between Germany and 10 Eastern European countries during 1992-2003, the authors find empirical support for this hypothesis. They show that the trade gap, defined as the discrepancy between the value of exports reported by Germany and the value of imports from Germany reported by the importing country, is positively related to the level of tariff in 8 out of 10 countries. Further, the authors show that the responsiveness of the trade gap to the tariff level is greater for differentiated products than for homogeneous goods. A one-percentage-point increase in the tariff rate is associated with a 0.6 percent increase in the trade gap in the case of homogeneous products and a 2.1 percent increase in the case of differentiated products. Finally, the data indicate that greater tariff evasion observed for differentiated products tends to take place through misrepresentation of the import prices.

World Bank working paper 4123.

Bruce Blonigen & Alyson C. Ma have a very interesting piece up at VoxEU:

The allegation: China extracts rents and technology from foreign competitors, thus allowing it to grow even faster and longer than most would have imagined possible. The evidence: China’s industrial policies have been successful in attracting foreign investment, but not necessarily in increasing the sophistication of its own firms through technology transfer…

First, while China’s range of exported products overlaps more with OECD countries than other less-developed countries, China sells these more-sophisticated products at a very large discount relative to competitors. This suggests that they are breaking into these “sophisticated” categories with relatively low-quality offerings. Interestingly, the Chinese discount in these products relative to OECD countries has been growing over time, not diminishing.

Second, if one looks at firm-level productivity data, foreign-owned firms in China are currently nine times more productive than their Chinese-owned counterparts!…

There are also a few other pieces of evidence from the analysis of Chinese trade data that argue against any effective role for Chinese industrial policy in these areas. First, price/quality gaps do not close at all for sectors targeted by the Chinese government for foreign investment encouragement or for ones where foreign firms are restricted to have a domestic partner. Second, price/quality gaps do not close more in high-technology sectors that are supposedly being targeted by the Chinese government.

Though I have yet to read Dani Rodrik’s new book (it’s certainly on my Christmas list!), I’m keen to read Crooked Timber’s seminar on the text.

FT:

Diplomats from the US and European Union are laying the groundwork for an unprecedented round of bilateral bargaining in which all of the main transatlantic trade disputes would be put on the table and negotiated in one go.

The talks between the world’s two largest trading blocs would link the resolution of billions of dollars-worth of simmering trade disputes and aim to “clear the decks” with one all-encompassing deal, officials said…

Officials concede the drive for a single round of bilateral trade negotiations is ambitious, fraught with drawbacks and could quickly falter.

UPDATE: Oddly, the WSJ announced the demise of such an ambitious agenda the day before this FT story: “U.S. and European officials who meet for talks today on how to cut barriers to trans-Atlantic trade say they have given up dreaming of a sweeping deal that would unlock billions of dollars in new trade.”

by Richard Baldwin, guest blogger

The economy is a lumpy place. Looked at from afar or up close, economic activity is not smoothly spread – a point that the 1000-word picture of the earth at night makes clearly. Most of our economic theories, however, assume that small changes in circumstances lead to small changes in outcomes.

This theory-practice gap is familiar to amateur readers of theoretical physics. For three centuries, Newtonian mechanics told us that mass and energy were smooth, continuous. And this worked impeccably at the level of aggregation available to empiricists of the time. In reality, however, the physical world – seen at the sub-atomic level – is mostly empty. Even the densest matter is mostly space. All the energy and mass are concentrated in lumps that are tiny relative the structures they constitute. Even more perplexingly, particles have distinct, discrete level energy level and they don’’t switch smooth between them, they jump. At the sub-atomic level the modern theory for this is called quantum mechanics.

Back to economics. International trade in particular. The most empirically successful model in international trade – the so-called gravity equation – is based on “Newtonian” trade theory. The amount of trade between two nations varies with the product of the economic mass of the two nations and inversely with the distance between them. Strange as it may seem to students of Ricardo, Heckscher-Ohlin and the Krugman trade models, these three variables ‘explain’ well over 50% of all variation in bilateral trade flows.[1] No other trade model comes even close. The gravity model, in short, works impeccably at the level of aggregation available to empiricists – until recently.

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“When tariffs come down, tariff revenue tends to go up.” – EU Commissioner Peter Mandelson urging ACP countries to liberalize.

There does seem to be some evidence supporting this claim, such as this early 1990s paper by Lant Pritchett and Geeta Sethi. Is there anything more to suggest that ACP countries really are to the right of the revenue-maximizing tariff rate?

Speaking of the Laffer curve for tariffs, check out Doug Irwin’s work on the 1880s debate in the United States.

[HT: Singleton]

William Easterly did not like Paul Collier’s The Bottom Billion (pdf):

The image of the trap is reinforced by Collier’s alarming statement that the bottom billion are falling further behind the rest of us. So is there a poverty trap—ie, the poorest countries are condemned to the worst growth? No, this is yet another statistical misunderstanding.
If you pick out who are in the poorest 1 billion today, naturally they would be disproportionately likely to be those that had the worst growth of incomes over the previous decades…

So if you want to test whether there is a poverty trap, you need to look at whether those who were poor at the beginning of any period you want to look at were more likely to have poor economic growth than the rest afterwards. The answer is no.

Easterly is rather harsh in his review, but ends with a great quip: “Economists should not be allowed to play games with statistics, much less with guns.”

If you’re in Brussels, you might want to attend the Wednesday launch of a report by CEPR and Bruegel on firms in international trade.

The Happy Few: The Internationalisation of European Firms

New Facts Based on Firm-level Evidence


Report Launch, Hotel Silken Berlaymont, 11-19 Boulevard Charlemagne, Brussels

November 7th, 2007, 13:30 – 15:00

The panel includes report authors Gianmarco Ottaviano and Thierry Mayer, plus Stefano Scarpetta (OECD) and Gert-Jan Koopman (DG Enterprise, European Commission).

UPDATE: Ottaviano and Mayer briefly summarize the report over at VoxEU.

Reviving the debate started by Andrew Rose, Xuepeng Liu says the WTO promotes trade strongly (pdf):

Abstract: Some recent research papers challenge the conventional view on the impact of the GATT/WTO on trade. This paper investigates the sample selection bias and the gravity model specification issues in the existing studies and provides strong evidence that the GATT/WTO has been very effective in trade creation. First, the GATT/WTO not only makes existing trading partners trade more (intensive margin), but also creates new trading relationships (extensive margin). Some existing
studies exclude zero trade observations from their analyses and hence ignore the extensive margin. Secondly, the violation of some maintained assumptions in the traditional log-linear gravity regression accounts for the failure to uncover the role of the GATT/WTO even at the intensive margin. Using a large bilateral panel dataset including zero trade flows and a more appropriate econometric method, this paper finds that the GATT/WTO has been very effective in promoting the world trade at both the intensive and the extensive margins.