Key WTO reps to meet in January

AP:

Ministers from the WTO’s most influential powers will meet early next year to make their first joint attempt at reviving global trade talks since their collapse last summer, officials said Monday.

Top representatives of the United States, the European Union, Japan, Australia, India and Brazil are among those expected to gather on the sidelines at the World Economic Forum’s annual four-day meeting of global leaders in Davos, Switzerland. Pascal Lamy, director-general of the World Trade Organization, also has been invited to attend the meeting at the end of January, officials said.

Stephen Meardon: A Tale of Two Tariff Commissions

If you enjoy learning about the history of trade theory and the history of trade policy, then you’ll likely enjoy reading “A Tale of Two Tariff Commissions and One Dubious ‘Globalization Backlash'” (PDF) by Stephen Meardon.

The article presents a history of the American tariff controversies after the Civil War. Meardon focuses on the roles of two important free traders: Arthur Latham Perry and David Wells, who are largely unknown to modern students of international economics. He argues that those who believe that “that the previous globalization sowed the seeds of its own destruction” by its impact on income distribution have the history backwards, and that “[t]he arguments relating to income class, distribution and power belonged to free traders,” not protectionists. These ideas matter: “What we include or omit in history signals the ideas that capture our attention and will likely shape the policies to come.”

Excerpts below the fold (and hat tip to Richard Baldwin for the link).

Continue reading →

The impact of export promotion agencies

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.

African manufacturing exports

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.

Anti-trade bias

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.

“Protectionism”

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.

Business Cycle Volatility & The Current Account Deficit

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]

Globalization & Democracy

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]

Is a FTAAP feasible?

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?