AGOA: Big gains

More research says AGOA had a strong positive impact:

While imports in the key product categories covered by AGOA (apparel, and a large number of agricultural and manufactured products) increased 94% in the post-AGOA period, we are able to discern that the portion of this increase actually caused by AGOA was much smaller – closer to 34%…

We moreover find that the increase in U.S. imports was not the result of a decrease in European imports. In fact, for manufactured products the Act even appears to have led to an increase in imports into Europe for the AGOA products. While this could be related to a number of factors, it certainly is consistent with the presence of fixed costs to exporting…

Eliminating trade restrictions on apparel products that initially faced a 20-25% tariff caused a four times larger import response than eliminating tariffs in the 10-15% range. It suggests that prior to the Act these tariffs had been quite effective in keeping out imports…

Overall, AGOA resulted in an 8.0% increase in non-oil exports from AGOA countries to the U.S…

the other limitations frequently cited in the African context – poor infrastructure, distorted product and credit markets, high risk, inadequate social capital, and poor public services – did not turn out to be binding constraints to expanding exports under AGOA.

A few thoughts on China

This working paper (pdf) on China’s contribution to global trade imbalances by Wing Thye Woo & Geng Xiao of Brookings is interesting. They are skeptical of calls to revalue the yuan.

I think this calculation is a bit heroic (i.e. not easily derived from available evidence):

Based on a partial review of the literature, my assessment is that the pressure that is preventing US wages (especially wages of unskilled labor) from rising in line of GDP growth can be roughly decomposed among the various factors as follows:

• 70-80 percent of the downward wage pressures is from labor-substituting technological innovations, and wage-weakening institutional changes;

• 5-10 percent of the downward wage pressure is from inward immigration; and

• 15-20 percent of the downward pressure is from import competition and relocation of manufacturing activities abroad.

This story, on the other hand, is plausible:

But this move would only hurt China and not “save” the world. Ceteris paribus, in the aftermath of the 40 percent yuan appreciation, foreign companies producing in China for the G7 markets would move their operations to other Asian economies (e.g. Vietnam and Thailand) and export from there, and G7 importers would start importing the same goods from other Asian countries instead. In the absence of a collective appreciation of all Asian currencies, the yuan appreciation will only re-configure the geographical distribution of the global imbalances and not eliminate them.

Of course, is ceteris paribus appropriate or would the general equilbrium story differ?

[HT: All Roads Lead to China]

Would India benefit from agricultural liberalization?

Emmanuel directs us to an unusual suggestion by TCA Srinivasa-Raghavan, who notes that India will be the world’s largest importer of foodgrains in 2011:

[W]here India’s negotiating stance at the WTO is concerned, it should alter its position. Basically, if it is going to import large amounts of food (grains and other things) it will gain if the others subsidise their agriculture. The same point was made (albeit in respect of Africa) by Joseph Stiglitz at a talk he gave at ICRIER. So I am in good company.

In effect, just as foreign savers with their countries’ huge dollar reserves are subsidising the US consumer, the US taxpayer will subsidise Indian consumers. It is from this perspective that India should alter the analytical framework that determines its food trade policy.

I was initially skeptical of this argument. Africa is different than India. It has preferential access to US and EU markets via AGOA and Everything But Arms, respectively. If the Doha round results in both preference erosion and subsidy reductions, then it would be a terms-of-trade deterioration for the African countries that are net food importers and receive those benefits. This is not the case for India, which does not have preferential access and may not a net food importer.

Moreover, the analysis is very sensitive to which crops make up India’s balance of trade, as some are subsidized by OECD countries much more than others. At first I suspected that the structure of rich country subsidization would mean that India doesn’t substantially benefit from cheaper imports, but a long article by G. Chandrashekhar in the Hindu Business Line says otherwise:

[I]n none of the four major commodities would India stand to benefit substantially if the subsidies were eliminated. It may be politically correct and perhaps expedient for India to make appropriate noises against farm subsidies at global forums such as the WTO. While reduction or elimination of subsidies would impact world commodity prices, consuming and importing nations would be the worst hit. Unlike several countries that are dependent on farm goods export, India is a large consuming country. Subsidy-induced low prices would be in Indian consumers’ interest.

India’s own emerging situation — tardy output growth, rising internal demand, supply tightness, firm prices — warrants that we prepare to remain open to imports.

Is this contrarian conclusion true?

See below the fold for analysis of oilseeds, foodgrains, cotton and sugar. It looks like cotton is a weak argument and wheat is a difficult judgment, while Chandrashekhar may have a strong case in oilseeds and sugar.

Continue reading →

But do trade economists oppose protectionist policies?

Commemorating 1,028 economists’ futile opposition to the Smoot-Hawley tariff in 1930, the Club for Growth gathered 1,028 economists’ signatures to oppose Congressional momentum towards imposing punitive tariffs on China:

We, the undersigned, have serious concerns about the recent protectionist sentiments coming from Congress, especially with regards to China…
By the end of this year, China will most likely be the United States’ second largest trading partner… This marvelous growth has led to more affordable goods, higher productivity, strong job growth, and a higher standard of living for both countries. These economic benefits were made possible in large part because both China and the United States embraced freer trade…
We urge Congress to discard any plans for increased protectionism, and instead urge lawmakers to work towards fostering stronger global economic ties through free trade.

Some big names, including award winners like Acemoglu, Kydland, Prescott, Schelling, and (Vernon) Smith, signed up. Here are the signatories that I know are trade economists:

James Anderson, Robert Baldwin, Scott Bradford, Alan Deardorff, Barry Eichengreen, Rob Feenstra, Monty Graham, Giovanni Maggi, Keith Maskus, Arvind Panagariya, Andres Rodriguez-Clare, Andrew Rose, Esteban Rossi-Hansberg, Robert Staiger, Patricia Tovar, Romain Wacziarg.

Now obviously I don’t know that many trade economists, so numerous names on the list likely belong to people working in the field, but nonetheless, there are a number of conspicuous absences. Where are opinion leaders like Bhagwati and Bergsten? Senior trade guys like Srinivasan? Theorists like Eaton, Kortum, Melitz? Empiricists like Bernard, Jensen, Redding & Schott? Did someone forget to call Doug Irwin and Razeen Sally? Did Greg Mankiw fail to pass the pen & paper to Robert Z. Lawrence and Jeffrey A. Frankel?

I don’t know the political leanings or particular policy views of many of those economists, but I expected at least some of them to be on the list. If I’m right that trade economists appear to be underrepresented given that it’s an anti-tariff petition, what might explain it?

Some economists are more comfortable appearing in Econometrica than the WSJ. Perhaps theorists prefer to avoid policy recommendations or don’t want their views reduced to a few paragraphs appearing in a large print ad. Those that excel in model building or statistical analysis may not care for public debate. Moreover, commenting on such an issue is unlikely to aid one’s professional advancement, but it can make enemies.

The Club for Growth’s network exhausted the 1028 places. Perhaps the petition’s signature gatherers were more concerned with finding one thousand signatories than the prestige or research area of the economist. Maybe they started with the Club for Growth’s ideological allies (all of George Mason seems to have signed) and wound up filling the 1028 places before having contacted all notable trade economists. [On this point, obviously there are far more economists alive today than in 1930. Why didn’t the Club for Growth adjust for academic population growth? :)]

Trade economists disagree with Ec 10 lessons about trade. Although the lesson in Econ 101 is that trade is good and protection is bad, perhaps those who actually study the subject learn that protectionism can improve an economy and are less likely to support free trade than the average non-trade economist. [Okay, we know that claim isn’t true. But maybe trade economists are aware of all of the nuances of trade theory and prefer to not boil the subject down to a petition headline.]

Some prefer not to associate with the Club for Growth. The group is activist, not academic, and viewed by some as a bunch of lobbyists wed to Republicans, or at least that’s the vibe from Brad DeLong. That might also explain Paul Krugman’s absence.

Is anyone else surprised at the shortage of trade economists signing a trade petition? If so, can you explain it?

[HT: Drezner, Kling, and Mankiw, who all signed.]

Worst. Farm Bill. Ever.

CGD’s Kimberly Elliott attacks the farm bill that passed the House on Friday:

From an international perspective, the majority in the House did not just miss an opportunity for reform, they thumbed their nose at our trading partners, especially the poorest. The House farm bill provides increased support to cotton and sugar, two products of particular interest to African exporters, and it blithely ignores a World Trade Organization ruling that certain subsidies violate U.S. commitments. Such cavalier treatment of legally binding international obligations undermines the already dim prospect for completing the Doha Round. It also invites new challenges to U.S. policies in the WTO, which could result in retaliation against U.S. exporters. Brazil and Canada have already filed new WTO complaints against U.S. farm policies and final passage of the House would invite even more, while making the U.S. case even harder to defend. It is now up to the Senate to salvage both common sense for American farmers and taxpayers, and what is left of America’s reputation in the world.

Losses from anything

UNC’s Karl Smith has posted an argument for protectionist policies (pdf) and invites us to tear it apart. In brief, he reiterates the well-known point that risk-averse agents will forego gambles with positive expected payoff if the gains are sufficiently small. He then applies this behavior to trade:

If the distribution of the gains and losses to trade are uncertain then this imposes a cost on the agents. If the net total gains from trade do not exceed the losses from uncertainty everyone can be worse off.

The document is titled “Losses from Trade,” but if you read the six pages offered by Smith, you’ll realize that this paper is not about trade. His “objections” and “conclusions” sections (the last two pages) don’t even discuss international trade! Smith’s argument applies to all aspects of life – risk aversion simiarly implies that stasis may be preferable to technological advances or institutional shifts that cause small net gains with distributional uncertainty. This line of reasoning is valid as a general argument against dynamism, not trade in particular.

Nonetheless, let’s consider the application. Is trade that uncertain? As Dean Baker has complained, we know that typical US trade liberalization will tend to displace workers in labor-intensive manufacturing, while protecting radiologists and other white collar workers. Globally, French farmers oppose Doha, West African cotton growers favor it, and American doctors have nothing to worry about. The political economy story to investigate is how one interest group defeats another.

Perhaps trade liberalization implies more uncertainty generally. Is there a link to labor market churn? The (Ricardian) gains from trade are a result of reallocating resources across productive opportunities, but such sectoral shifts may be predictable. Do we have reason to believe (from theory or empirics) that lower trade barriers increase the separation rate for all workers?

And does protection imply greater certainty? Perhaps, but I’d have to reflect upon that topic for a while before feeling confident about my answer.

Nonetheless, suppose for now that the government has the ability to preserve the status quo. Risk aversion only rules out trade liberalization that produces small net gains. The implication would then be that we ought to have large spurts of bundled liberalization (WTO rounds, anyone?).

In sum, Dr. Smith has highlighted a potentially promising area of research, but I don’t find his initial sketch very compelling. I’d need to see compelling empirical evidence on the relationships between trade and uncertainty before thinking we needed new theory to explain them.

A Doha Eulogy

The August issue of The World Economy has a special feature on the (foregone) potential benefits of the Doha Round. From a trio of simulation-intensive articles, we learn that the December 2005 proposals from which countries have retreated did offer real gains, cotton subsidies are indeed the most damaging agricultural protection, and countries’ own liberalization drives their predicated national income gains.

International monetary economics

Two apparently contrasting claims:

“Since lowering import barriers typically exerts a downward pressure on prices, evolving trade liberalisation represents a structural break from the inflation forecasting perspective.” – Aron & Muellbauer

“Inflation isn’t transmitted via spores in the air. It’s a monetary phenomenon, and as such, starts and ends on native shores.” – Caroline Baum

I believe Mark Thoma succeeds in reconciling them:

[W]hether or not the movement of prices from one level to another in response to shocks should be called inflation is a matter of definition, some monetary economists reserve the term inflation for a continual run-up in the price level, not a one-time change to a new level, but whatever such movements in prices are called there’s still a role for central banks to play in response to shocks that cause short-run movements in the price level.