Canada requests consultations on US ag subsidies

We’re moving towards a test of the WTO’s institutional strength:

Canada has launched a dispute at the World Trade Organisation over the use of “trade-distorting” agricultural subsidies by the US.

The dispute singles out payments to American corn farmers but also challenges the total level of US agricultural subsidies…

The timing of the challenge is aimed at influencing the formation of a new farm bill in the US Congress, where there is resistance to reform from Senators and Representatives from farm states.

The bicycle theory of trade negotiations says that in the absence of momentum towards further trade liberalization, protectionist influences are likely to induce policy backsliding (a bicycle can’t stand still very long – it falls over). The WTO’s rules-based framework could serve as a backstop against retreat from previous liberalization gains, but only if its dispute rulings are respected by members. As the world’s largest economy, the United States is in the best position to defy the WTO if it wishes.

Here’s the best possible outcome: The WTO rules against the US subsidies and the Bush administration complies with the decision. This means that (1) the WTO is institutionally sufficient to preserve the liberal trading system while the Doha negotiations are on pause, and (2) American negotiators may discount the value of holding onto their agricultural subsidy bargaining chips if they risk being struck down in the future and make a greater effort to get something in exchange for them by reinvigorating the Doha round rather than walking away empty-handed.

The world case scenario? That’s left as an exercise for the reader…

NAFTA is nearly completed

The WaPo ran a Sunday cover story on NAFTA’s impact on Mexico as it takes full effect:

As NAFTA’s final provisions take effect next year, tying Mexico’s fortunes more tightly to world markets, how will its economy adjust? And how will the latest wave of trade liberalization alter the calculations for millions of Mexicans wanting to stay home, but constantly feeling the tug of the north?…

NAFTA did bring Mexico foreign investment. Jobs at its maquiladoras — export factories set up in the 1960s, mostly near the border — more than doubled from 540,000 to 1.13 million between 1993 and 2004. But in other factories, employment has slipped and average wages have dropped by 5 percent.

Economists emphasize that any assessment of NAFTA must include the financial crisis that savaged Mexico in 1994 and 1995, sowing unemployment. Some assert that without NAFTA and the exports it fueled, Mexico’s recovery would have been slower. Many also say that Mexico’s government squandered opportunities for growth by failing to improve highways and ports, and by leaving unchecked the monopoly power of the national telephone company, which has kept rates for Internet access and other telecommunication services high, discouraging new ventures…

“For people who can grow huge scale for export, NAFTA has been good,” he said. “For people like us, it’s been a bloodbath.”…

Feed amounts to nearly 60 percent of the cost of raising a chicken. For the American poultry industry, the cost has been held down, historically, by subsidies for corn production. In 2005, American cropland for corn received a range of subsidies worth more than $10 billion, according to a Washington Post analysis of data from the U.S. Department of Agriculture.

Labor, where Mexico has an advantage, makes up only about 5 percent of production costs.

Want $25k?

Know anything about Bangladeshi development?

Propose an innovative and practical idea that would improve the lives of low- and middle- income people of Bangladesh (everyone except the top-third of the population in terms of annual income). Proposals will be judged by four Harvard University faculty members, in consultation with scholars familiar with Bangladesh.

This global contest is open to any individual in the world. Any compelling essay that establishes a way to improve the lives of low- and middle-income people in Bangladesh is acceptable for submission. The essays will be rated giving equal weights to a) innovative nature of the idea; b) clarity and cogency of argument and writing; c) ease and practicality of implementation; and d) the size of impact.

The author of the winning essay will be awarded the Anwarul Quadir Prize, USD $25,000.

Entries due June 30. Full info.

Open thread

It’s a new year – care to suggest a resolution that I should adopt for Trade Diversion? If you’ve got thoughts about topics I should (or shouldn’t cover) or other suggestions for the blog, please leave a comment or email me. Thanks!

Assessing competitive liberalization

Simon Evenett & Michael Meier (pdf):

When the Bush Administration took office in January 2001 the U.S. executive branch had been without trade negotiating authority from Congress for six years. It is unsurprising, therefore, that the newly appointed U.S. trade officials put a high priority on being granted this authority and perhaps felt that they needed a compelling narrative to explain why that authority should be granted and how it would be subsequently used. Competitive Liberalization was adopted as the credo of the Bush Administration’s trade officials…

There is no doubt that U.S. trade negotiators have been very active since 2001… At least 18 Trade and Investment Framework Agreements, a pre-cursor to negotiations for a free trade agreement, have been signed. The Doha Round was launched and U.S. officials have contributed to ongoing regional initiatives such as APEC and the FTAA. Some might argue that these activities have restored the United States’ central role in the world trading system and this is praise enough. However, is this the right metric to judge Competitive Liberalization? After all, has the implementation of this policy fulfilled the goals articulated for it at the beginning of the Bush Administration? This question is all the more important as Competitive Liberalization represented an explicit break from the United States almost exclusive pursuit of multilateralism.

We argued that a number of factors have limited the effectiveness of the policy of Competitive Liberalization often from the start, including: the internal divisions among U.S. legislators and among the executive branch over the priorities for U.S. trade policy; the associated tendency to load more and more conditions on U.S. trading partners before and during negotiations on free trade agreements; the effect of pre-existing U.S. unilateral preference schemes; and the options available to trading partners to bolster foreign direct investment other than signing free trade agreements with the United States. These constraints, plus concerns about the coherence of the logic underlying Competitive Liberalization and the incentives created by some aspects of this policy, lead us to conclude that the current U.S. trade policy is almost certain to fall well short of its stated goals.

Over the longer term, U.S. officials and trade policy experts may want to reflect on the strength of the supposedly mutually reinforcing aspects of negotiations at the bilateral, regional, and multilateral levels. For if multilateralism and leading regional trade initiatives remain stalled, then Competitive Liberalization may amount to little more than bilateral opportunism masquerading as high principle.

How big is China’s trade surplus?

Brad Setser:

Michael Spence has a Nobel prize in economics, a series of very prestigious academic appointments, friends on the Harvard faculty and access to the opinion page of the Wall Street Journal.

I, obviously, don’t have comparable qualifications — or comparable access to the Wall Street Journal’s oped page.

But I do try to follow the data coming out of China closely. I probably shouldn’t say this, but it sure seemed to me that Dr. Spence got a few key facts wrong in his Wall Street Journal oped…

If you just look at China’s trade surplus (BoP basis), it works out to around 5.5% in 2005 and probably 6.5-7% of China’s GDP in 2006 — numbers comparable to the US trade deficit. Spence’s graph shows China’s trade surplus through 2004. That seems a bit misleading to me: China’s trade surplus ballooned in 2005 and 2006, just when the graph ends. Spence’s argument worked through 2004. It no longer does.

Spence’s side of the debate is behind the WSJ‘s firewall.

Fair trade fakers

National Post:

According to a CBC report published this week, TransFair Canada, the most prominent Canadian fair-trade monitor, is joining with fair-trade retailers to raise concerns about unethical rivals who are horning in on the label without, as it were, walking the walk. Anybody can slap a sticker reading “fair trade” onto a bag of coffee, and apparently it happens rather a lot. At least one coffee shop is pressing Ottawa to regulate fair trade certification.

State-Dependent Intellectual Property Rights Policy

Daron Acemoglu & Ufuk Akcigit:

What form of intellectual property rights (IPR) policy contributes to economic growth? Should technological followers be able to license the products of technological leaders? Should a company with a large technological lead receive the same IPR protection as a company with a more limited lead? We develop a general equilibrium framework to investigate these questions… We prove the existence of a steady-state equilibrium and characterize some of its properties. We then quantitatively investigate the implications of different types of IPR policy on the equilibrium growth rate. The two major results of this exercise are as follows. First, the growth rate in the standard models used in the (growth) literature can be improved significantly by introducing a simple form of licensing. Second, we show that full patent protection is not optimal from the viewpoint of maximizing the growth rate of the economy and that the growth-maximizing policy involves state-dependent IPR protection, providing greater protection to technological leaders that are further ahead than those that are close to their followers. This form of the growth-maximizing policy is a result of the “trickle-down” effect, which implies that providing greater protection to firms that are further ahead of their followers than a certain threshold increases the R&D incentives also for all technological leaders that are less advanced than this threshold. [emphasis added]

Given the credentials of the authors, I’m sure the theoretical work is outstanding (non-gated version here). But state-dependent IPR protection strikes me as implausible in practice. How adept are government bureaucrats at identifying technological leaders and the size of their lead? How resistant are they to regulatory capture?