I’m not familiar with export promotion agencices, but a recent World Bank note (pdf) says they have an impact:
For each $1 of export promotion, we estimate a $300 increase in exports for the median EPA. However, there is heterogeneity across regions, levels of development and types of instruments. Furthermore, there are strong diminishing returns, suggesting that as far as EPAs are concerned small is
beautiful.
This working paper (pdf) sounds cool:
The poor performance of many African economies has been associated with low growth of exports in general and of manufacturing exports in particular. In this paper we draw on micro evidence of manufacturing firms in five African countries – Kenya, Ghana, Tanzania, South Africa and Nigeria – to investigate the cause of poor exporting performance. We exploit a data set which has a much longer panel dimension than has been used before to assess the relative importance of self-selection based on efficiency and firm size as determinants of export participation. We show that firm size is a robust determinant of the decision to export. It is not a proxy for efficiency, for capital intensity, for sector or for time-invariant unobservables. In contrast the evidence for self-selection into exporting is very weak. Finally our use of a longer run panel than has been available before has allowed us to separate out the roles of ownership and skills as possible determinants of participation in exporting. We find that both foreign ownership and skills are significant determinants of exporting.
Recall the anti-trade bias puzzle, highlighted in Dani Rodrik’s influential 1995 survey of the political economy of trade policy:
Current models treat trade policy as a redistributive tool, but do not explain why it emerges in political equilibrium in preference over more direct policy instruments. Further, existing models do not generate a bias against trade, implying that pro-trade interventions are as likely as trade-restricting interventions.
In a working paper (pdf) on the political economy of multilateral trade agreements, Wilfred Ethier of UPenn writes:
[T]he Anti-Trade-Bias Puzzle has been widely recognized. But it has not been successfully addressed. Papers typically either ignore the problem or eliminate it by arbitrarily constraining the ability of the government to adopt export-promotion policies.
Perhaps many authors “ignore the problem or eliminate it” by assumption, but there has been some interesting scholarship in the last few years that addresses the topic. I’ve seen at least five hypotheses spelled out at length which produce anti-trade bias effects:
(1) The government’s objective function includes a desire to reduce inequality.
(2) Governments are revenue constrained.
(3) Individuals are loss averse.
(4) Prior entrants have sunk costs in a shrinking industry.
(5) General equilibrium models don’t produce the bias.
Inequality (Nuno Limao & Arvind Panagariya):
In this paper, we show that if the government’s objective reflects a concern for inequality then trade policy generally exhibits an anti-trade bias. Importantly, under neutral assumptions, the mechanism that we analyze generates the anti-trade bias independently of whether factors are specific or mobile across sectors.
Revenue constraints (Paul Pecorino):
In this paper, the Grossman and Helpman (1994) “Protection for Sale” model is
extended by adding exogenous government expenditure. This expenditure may be financed via a
combination of tariff revenue and a distorting income tax. In addition to the exogenous
expenditure, export subsidies need to be financed either via tariff revenue or a distorting wage
tax. With this addition to the model, plausible values of the model’s parameters yield import
protection bias.
Loss aversion (Patricia Tovar):
[W]e show that if individual preferences exhibit loss aversion and the coefficient of loss aversion is large enough, there will be an anti-trade bias in trade policy. We also show that, for a sufficiently high coefficient of loss aversion, more import-competing lobbies will form than under the current leading political economy model of trade protection due to Grossman and Helpman (1994), and import-competing sectors will be more likely to form a lobby than export sectors, reinforcing the anti-trade bias result. The predictions for protection that we obtain also imply that, everything else equal, higher protection will be given to those sectors in which profitability is declining. We use a nonlinear regression procedure to directly estimate the parameters of the model and test the empirical validity of its predictions. We find empirical support for the model and, very importantly, we obtain estimates of the parameters that are very close to those estimated by Kahneman and Tversky (1992) using experimental data.
Costs of entry (Richard Baldwin & Frederic Robert-Nicoud):
Governments frequently intervene to support domestic industries, but a surprising amount of this support goes to ailing sectors. We explain this with a lobbying model that allows for entry and sunk costs. Specifically, policy is influenced by pressure groups that incur lobbying expenses to create rents. In expanding industry, entry tends to erode such rents, but in declining industries, sunk costs rule out entry as long as the rents are not too high. This asymmetric appropriablity of rents means losers lobby harder. Thus it is not that government policy picks losers, it is that losers pick government policy.
General equilibrium (Nuno Limao & Arvind Panagariya):
We demonstrate that if we replace the almost partial equilibrium model with a general equilibrium model in the Grossman-Helpman political economy model, anti-trade bias may emerge even if we assume symmetric technologies, endowments and preferences across sectors provided that the elasticity of substitution in production exceeds unity. In addition, we show that ceteris paribus, in general equilibrium, increases in the imports-to-GDP ratio lower the endogenously chosen tariff and the production share of the import sector in GDP has an ambiguous effect.
Economists have produced a number of hypotheses to explain anti-trade policies. But I doubt that we will be able to easily test these competing explanations. Are there other hypotheses? Bryan Caplan might suggest public opinion.
Business leaders around the world fear protectionism is on the rise, with an increasing number seeing merger and acquisition deals blocked by local rules, DJ reported from London. A survey of 286 leading global executives carried out by the Economist Intelligence Unit and published yesterday, found just over 50% of those surveyed believe protectionism is rising “significantly or moderately” in developed markets, with just 16% seeing it as falling. One in 5 of those interviewed for the survey said they have seen a proposed investment deal blocked by local trade and investment rules in the past 3 years.
Interesting to see protectionism redefined to include FDI via M&A.
Interesting argument about the current account deficit:
The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the “great moderation”) and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance.
[HT: MR]
Abstracts from last weekend’s IPES conference at Princeton that caught my eye:
Daniel Kono of UC-Davis:
Most research on democracy and trade policy indicates that democracies are more liberal than autocracies. I argue, in contrast, that the effects of democracy on trade policy vary across trading partners. Because the typical median voter has a low capital endowment relative to the national mean, (s)he benefits from trade with relatively capital-abundant countries but is hurt by trade with relatively labor-abundant ones. Democracy, which increases the median voter’s influence, thus leads to trade liberalization with wealthier countries but increased protection against poorer ones. I test and find support for this hypothesis using dyadic trade flows from 1950-2000 and dyadic trade barriers in the 1990s. My results imply that democratization has led and will lead to discrimination in international trade, primarily via nontariff barriers. The spread of democracy thus heightens the need for multilateral trading rules that combat the discriminatory use of such measures.
Nikolaos Zahariadis of Alabama-Birmingham:
Why is there still so much protectionism in light of political rhetoric extolling the virtues of free trade, favorable economic theory and evidence, and legal pressure to dismantle protectionist measures? The answer rests on four factors and their interactions: globalization, asset specificity, political power, and institutional access. I test the argument using data from 14 EU member states during the period 1992-2004. The findings clarify the variable impact of globalization on demands for protection, the impact of institutions on rent-seeking and rent-supplying behavior, and the conditions affecting domestic coalition formation. Politicians face an uncomfortable dilemma. Globalization and democracy appear to be on a collision course: the more globalization undermines democratic politics, the more democratic politics will strive to tame globalization.
[Hat tip: Drezner]
Dr. Chris Dent of Leeds in the FT:
In my recent book, New Free Trade Agreements in the Asia-Pacific
, I note how the current discussions within the Asia-Pacific Economic Co-operation (Apec) forum to establish a Free Trade Area of the Asia-Pacific (FTAAP) was also proposed at Apec’s Santiago summit just two years ago. It failed then as it will probably fail now because of the immense political and technical challenge of harmonising a large number of heterogeneous bilateral FTAs into a unified regional agreement. Most of the region’s technocrats and economists acknowledge this. It is a majority rather than a minority view.
Furthermore, disagreements over agriculture alone will ensure that the FTAAP is not realistically achievable for many years, if not many decades. Japan-South Korea FTA talks are still officially stalled over a disagreement on seaweed, and not just seaweed generally but a particularly type of it (gim seaweed). Agriculture has also unravelled many other recently initiated bilateral FTA projects in the Asia-Pacific.
A growing number of trade and political economists such as myself are becoming increasingly concerned about the proliferation of FTA activity and its impact on the international trade system. It is time to devote all trade diplomacy efforts to securing a WTO Doha round.
Advocates of an FTAAP generally suggest it as a means of pressuring the EU to return to the table at the WTO rather than as an agreement they would like to see actually implemented. But if “the FTAAP is not realistically achievable for many years,” can it be a credible threat?
Dr. Menzie Chinn of Wisconsin-Madison hypothesizes that Democrats may have opposed FTAs not because they have protectionist sentiments, but because they prefer multilateralism:
In the wake of the midterm elections, and the failure to renew Vietnamese PNTR, there has been a lot of talk about how more protectionist Democratic lawmakers are…While the rhetoric from some quarters of the Democratic Party is more protectionist than from the Republican Party, I think the story is a little more complicated than initially appears to be the case, although I will not claim to have the answer to the question…
[I]t’s wrong to equate all FTAs with freer trade. Indeed, the proliferation of FTAs poses a number of well-known problems for the global economy…
So, just because American business interests favor these pacts, while labor often opposes, it’s not clear free trade is enhanced by such initiatives; in other words, one should not confuse export-oriented mercantilism with support for free trade…
In this context, it’s of interest to note a paper by Evenett and Meier; they document that many of the pro-bilateral trade agreement incumbents that lost their seats were replaced by skeptics of such agreements. However, interestingly, such skeptics were not similarly skeptical of multilateral trade agreements, such as the Doha Round.
So, the question comes down to [1. trade creation vs diversion 2. stumbling vs building blocs]…
It’s not enough to promote the trade agreements in order to be pro-free trade. One has to implement measures that will sustain an interest-group coalition that will continue to support globalization into the future. Such coalitions must be more durable than the ephemeral political coalition constructed, say, by trading off (steel) protection for TPA; rather, it needs to be one where support for globalization is built upon a recognition of gains — and a safety net that reduces the risk to labor of losses — arising from increasing trade.
So do Democrats favor multilateral trade liberalization to FTAs because they’ve learned a lot from Jagdish Bhagwati? I doubt it.
First, Evenett and Meier use votes on PTAs as their measure of trade skepticism because there hasn’t been a WTO pact on the table since 1994. Democrats haven’t had a chance to vocally oppose multilateral negotiations. Who would waste energy attacking a trade round that isn’t going to be completed for a number of years?
Second, the last time a Democrat attempted to bring up labor standards at the WTO, it basically ended the negotiations. Repeating that error would be silly. Democrats are able to include labor and environmental standards in PTAs because the United States has significantly more bargaining power in a bilateral setting. Bhagwati:
[T]he popularity of the PTAs in the United States… is largely due to the fact that all sorts of lobbies, whether intellectual-property rights or financial sector or labor groups or environmental groups, see the bilateral framework where the United States, a gigantic power, can face down a small power like Chile or Morocco as an ideal framework of trade negotiations where, in exchange for preferential entry into the big United States market, they extract all kinds trade-unrelated concessions desired by these lobbies. And nearly all of these concessions are harmful to the trading system and to the smaller countries!
Senator Chuck Grassley may understand and appreciate the negative impacts of bilateral PTAs upon the multilateral trading system, but I don’t think that Professor Chinn’s line of reasoning matches the motivations of the typical Democratic opponent of PTAs.
Sebastian Mallaby, abridged:
The two parties have opposing attitudes on the subject of trade: Republicans see it as a source of growth, Democrats as a source of inequality. This split is undermining the U.S. ability to play its traditional postwar role in driving global trade liberalization. And if anti-trade Democrats can win elections when unemployment stands at 4.4 percent, they may do even better next time…
[T]he real reason Democrats oppose trade has little to do with foreigners’ stance on union rights or endangered species and a lot to do with the fact that trade harms some U.S. workers… So labor and environmental clauses will never reconcile Democrats to trade. To forge a bipartisan consensus, we need a different approach. Here is a three-part formula.
First, Democrats need to be honest about development in the poor world. It’s wrong to pretend that labor regulations, whether inserted in trade agreements or adopted by governments, are a powerful engine of rising living standards in developing countries…
Republicans need to get serious about the fact that, since 1980 or so, real incomes for the majority of Americans have stagnated. Republicans cannot expect support for trade unless they do more to compensate workers who get hit by globalization. They should be working with Democrats to improve the social safety net, linking progress on that front to continued trade liberalization.
Finally, both parties should cooperate on overhauling the nation’s farm program, which comes up for renewal next year…
Of course, it’s a long shot…
[B]uilding a coalition of support for open international markets is a great political challenge. The truth is, this administration has never so much as tried. It has scored dismally low marks on trade policy, frequently caving to protectionist interests on demand. The president’s standing is so low that if he were to reverse himself now and try to support liberal trade, he might actually set the cause back even more. In all, the outlook for open markets has rarely seemed so bleak.
Under what scenario would increased efforts by the President to support trade liberalization result in damage to the cause?
Trade Diversion 