Dominick Salvatore – “Economic Effects of NAFTA on Mexico”

[M]easuring the economic effects of NAFTA on Mexico based on the net number of jobs created or destroyed or by comparing Mexican growth before and after NAFTA is not appropriate… The correct way to measure the effects of a FTA on member nations, instead, is by counterfactual simulation of its effect on intra-FTA trade and growth. That is, by how much intra-FTA trade and growth is higher with the FTA as compared with the situation without the FTA. Performing valid counterfactual simulations are fraught with difficulties, however…

I will begin, however, with a more down-to-earth and less elegant but still legitimate method of estimating the economic effects of NAFTA on Mexico by comparing (1) the growth of intra-Mexico-US trade, on the one hand, to the growth of total Mexican trade, on the other, during the past dozen years of NAFTA’s operation and (2) by comparing the flow foreign direct investment (FDI) from the United States to Mexico to total FDI to Mexico. I will then present the results of a counterfactual simulation of the effect of NAFTA on trade, FDI, growth, inflation, and other economic and financial variables…

[T]he benefits flowing to Mexico seem to have resulted more from the general liberalization of trade and investments than directly from NAFTA, as such. That is, the general liberalization of trade and investments that accompanied NAFTA led to a general increase in Mexican exports and inflows of FDI, which increased specialization, competition, productivity and efficiency in Mexico. But the increase in total Mexican exports and FDI inflows from the rest of the world was as large or larger than that from the United States. Furthermore, most of the (indirect) benefits that Mexico received from NAFTA occurred in the years immediately preceding the creation of NAFTA rather than in the years soon after its creation.

Gerard Greenfield, Core Labor Standards in the WTO, Working USA, Summer 2001:

The U.S. government has signed only one of the five core labor standards proposed under the social clause. It signed the Abolition of Forced Labor Convention in 1991 (thirty-four years after the convention was introduced) and has still not signed the ILO conventions on freedom of association, the right to organize and bargain collectively, equal pay for equal work, and minimum wages.

Even this core ILO convention on forced labor is constantly violated in the United States. The U.S. prison system has been privatized and commercialized so that prisoners are a cheap source of labor, making products for the consumer market, and a growing source of corporate profit. But since these prison-made goods are not exported, this practice will never be challenged by a social clause in the WTO. The clause is concerned only with goods that are traded internationally.

Since core labor standards haven’t been incorporated into the WTO and are unlikely to be any time soon, why does this matter? Democrats’ demands in renewing trade promotion authority raise the same thorny issues, write Gary Hufbauer and Theodore Moran in the FT:

An inconvenient truth poses a huge obstacle to the proposed “bargain”: US labour laws are either openly inconsistent with core ILO standards, or they could be challenged by lawyers if ILO standards trumped established statutes and long-standing interpretations. A trade agreement that enthroned ILO standards would not only alter federal labour law, it would also override state laws – triggering a constitutional howl from Sacramento to Albany. The practical effect would be to stop US trade negotiations. Few legislators would want to subordinate huge swaths of labour law to broad principles enunciated in trade agreements.

Joel Trachtman seems to agree, while Henry Farrell isn’t impressed.

Fredrik Erixon asks: Why are trade and child labor tied together in the public mind?

China’s export profile is a fascinating topic – hence the frequent debate and discussion. The latest contribution is by the FT‘s Guy de Jonquieres:

Now China’s manufacturing miracle is entering a second phase, as producers start to drive aggressively up-market. Exports of aircraft parts, ships, microchips and cars all grew by about 70 per cent last year, more than four times faster than traditional exports such as shoes and clothing. At the same time, it is set on becoming more than a processing economy that just screws together components made elsewhere. With official backing, industries such as steel, vehicles and electronics are steadily raising the value added locally by performing more advanced processes and making more parts in China.

That description echoes the message the FT‘s Richard McGregor has pushed repeatedly, but how much does the growth rate of sophisticated exports tell us about China’s development? China exports a lot of labor-intensive manufactures, so we would be shocked if their growth rate was anywhere near 70 percent. Reporting the level as well as the growth rate would substantially aid our understanding of China’s move up the value-added chain.

Newspapers are unlikely to print stories proclaiming “China’s exports not as sophisticated as some claim,” so we have to turn to the academic literature for contrary assessments. In a working paper titled “Measuring the Technology Content of China’s Exports,” Bin Xu argues that China’s export profile has not been so remarkable:

First, we reexamine the finding of Rodrik (2006) that China is an outlier in terms of technology sophistication of exports. Without adjusting product quality in the measurement, our data confirms Rodrik’s finding: China is an outlier in every year from 1989 to 2000. However, using our quality-adjusted measure of TCE [technology content of exports], China disappeared to be an outlier after the mid 1990s. This result highlights the importance of considering the product quality dimension in evaluating the technology content of China’s exports. By ignoring the low quality nature of Chinese exports, Rodrik (2006) overestimated the technology sophistication of Chinese exports.

Second, we find that the product-level TCE of China is significantly lower than that of a country at the same development level in every year from 1991 to 2001. Moreover, the gap had been widening steadily during the period. Low TCE at the product level is driven by low product quality. This result is a mirror image of Schott’s (2006) finding of increasing price discounts of Chinese exports.

In the paper we identify several new features that help to explain the pattern and trend of the technology content of Chinese exports. First, at both the industry and product levels, we find a positive correlation between the growth rate of an industry/product’s export share (in China’s total exports) and its TCE level. On average, industries/products with higher TCE levels expanded more in exports.

Tragically, econometric analyses will always lag behind anecdotes – Xu’s work covers 1989-2001. So the recent FT reports may be right, but it’d be nice if their coverage were more informative — please describe not only the trend but also the current state of play! Similarly, Brad Setser casts his assessment in terms such as China “increasingly has the export and industrial production profile of a middle income country” and “China no longer just imports parts… for final assembly” rather than commenting on the levels.

When will China actually have the export profile of a middle-income country? When will less than X percent of China’s exports be labor-intensive low-quality manufactures? Obviously it is difficult to construct, measure, and obtain data needed to answer such questions. That’s one reason why the discussion often centers upon more easily accessed numbers, such as those used by the FT reporters. But we would learn a lot by contextualizing them with a few more pieces of information.

[Update: Emmanuel of IPE Zone points to this World Bank update. It also describes the increased importance of non-processing exports without reference to level.]

Andrew Leonard: “And there you have it. More free trade is the answer to all of Latin America’s problems, says Bush. But actual free trade: ‘not under negotiation.'”

Eoin Callan and Alan Beattie report on the Bush administration’s difficulties in garnering votes for its PTAs with Colombia, Panama and Peru:

The Bush administration may have to advance its trade agenda with narrow bipartisan support if there is no breakthrough in ongoing talks with the Democratic-controlled Congress.

This scenario would see the White House force votes on pending trade deals in the hope of forging a majority with backing from Republicans and a handful of Democrats in the House of Representatives.

The votes are likely to be divisive and would further strain political support for free trade in the US. It could also slow efforts to reach a successful conclusion of the Doha round of world trade talks and hamper US efforts to initiate new agreements.

Perhaps the efforts to conclude Doha are moving so slowly that that tradeoff is not a real concern.

Here’s an odd anti-FTA argument:

A negative fallout of the South Asian Free Trade Area (SAFTA) agreement could be an increase in the narcotic traffic in the region, said Dr MM Bhatnagar, member of the International Narcotic Control Board (INCB). Releasing the annual report of the INCB [pdf], Dr Bhatnagar said that past experiences of free trade zones around the world had shown that they at times had become free zones for narcotic trade as well.

I know of good reasons to oppose SAFTA, but the belief that lower import duties will increase the smuggling of illicit goods is not one of them. The experience in other free trade zones has been that increased trade flows provide more shipments within which to hide drugs. But that is an argument against trade flows, not preferential trade agreements.

Jeff Sachs on the need for predictable aid flows:

Following the G8 pledge in 2005 there have been no proper timetables set out for African countries explaining to them how their aid levels will rise to meet the 2010 pledge. In country after country, African leaders and finance ministers are told by local representatives of the donor agencies that there is no information as to how or when aid levels will increase to meet the commitment. In some countries, recipients of US development aid have been advised that aid, other than that for HIV/Aids and malaria, is being cut as budgets are shifted to Iraq.

It is understandable that G8 finance ministers would like to leave themselves maximum flexibility in the timing and direction of aid, but this approach to development assistance ends up being self-defeating.

Instead of a rational process of raising critical investments, we have a guessing game. Will the aid be doubled or not? Will it be doubled as an accounting trick (for example, by cancelling unpayable debts and labelling each dollar of debt cancellation as a dollar of aid), or will it be an actual flow of commodities and cash? Will the aid come as fees for high-priced consultants or as funds for practical investment? Will the G8 wait until 2010 to increase actual cash flows, or will the aid increase step-by-step between now and then?

This is interesting:

Our analysis of the data suggests that foreign lobbying activity has significant impact on trade policy – and in the predicted direction: Tariffs and non-tariff barriers (NTBs) are both found to be negatively related with foreign lobbying activity. We consider also extended specifications in which we include a large number of additional explanatory variables that have been suggested in the literature as determinants of trade policy (but that emerge from outside of the theoretical structure described above) and confirm the robustness of our findings in this setting.

That’s Kishore Gawande, Pravin Krishna & Michael J. Robbins on “Foreign Lobbies and US Trade Policy.”

Trade and development enthusiasts will find plenty of reading material in the NBER’s latest batch of working papers. David Hummels, Volodymyr Lugovskyy & Alexandre Skiba argue that price discrimination in the shipping industry reduces developing country trade flows. Elhanan Helpman, Marc Melitz & Yona Rubinstein present a model of heterogeneous firms that results in a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes (older version here). Eric V. Edmonds summarizes empirical work on child labor (ungated pdf here).