Is the NAFTA trucking dispute finally over?

A Mexican truck will make a delivery to a Dallas suburb this afternoon, thereby realizing some of the liberalization promised by NAFTA 17 years ago. WaPo:

The first Mexican carrier to deliver goods in the U.S. interior under a long-delayed free-trade provision is scheduled to enter the country at Laredo, Texas, shortly after midday Friday.

The truck owned by Nuevo Leon, Mexico-based Transportes Olympic will make a delivery to the Dallas suburb of Garland. That’s despite continuing opposition from the Teamsters union and some lawmakers who fear the program will make U.S. highways more dangerous and cost American jobs.

The truck will carry a monitoring device. The move complies with a provision of the 1994 North American Free Trade Agreement.

The company was also the first approved under the 2007 pilot program before President Barack Obama’s administration canceled it [in 2009]. Mexico retaliated by placing tariffs on 99 agricultural products worth more than $2 billion annually.

A little over a year ago, I noted that Washington insiders didn’t expect the dispute to be resolved “any time soon”, but in the broader context, 14 months isn’t bad. So what does the program do? It includes a lot of measures to address the safety concerns raised by its opponents:

Supporters say especially strict safeguards have been implemented: Electronic devices will track the routes drivers take, how long they drive and how long they rest. Participating drivers must undergo national security and criminal background checks, and inspectors will administer oral English-proficiency exams.

Does this end the dispute? Not necessarily. Look up the Federal Motor Carrier Safety Administration’s announcement in the Federal Register and you’ll discover that this is a three-year pilot program, a fact not made clear by some press coverage. From the Federal Register (pdf):

The Federal Motor Carrier Safety Administration (FMCSA) announces its intent to proceed with the initiation of a United States-Mexico cross-border long-haul trucking pilot program to test and demonstrate the ability of Mexico-domiciled motor carriers to operate safely in the United States beyond the municipalities in the United States on the United States-Mexico international border or the commercial zones of such municipalities (border commercial zones)…

In a pilot program, DOT typically collects specific data for evaluating alternatives to the regulations or innovative approaches to safety while ensuring that the goals of the regulations are satisfied. A pilot program may not last more than 3 years, and the number of participants in a pilot program must be large enough to ensure statistically valid findings.

Will the pilot program have large effects on international trade? Both sides claim big numbers:

Todd Spencer, the executive vice president of the Independent Drivers Association, which represents small independent trucking businesses, said 100,000 trucking jobs will be lost. Proponents say it will spur economic growth as companies save millions by sending the goods door-to-door.

But I doubt we’ll see any such impacts soon. Tire Business reports:

So far two small Mexico-based motor carriers have been certified for the program. They are Transportes Olympic of Monterrey, with two vehicles, and Grupo Behr de Baja California S.A. de C.V. of Tijuana, with five vehicles.

However, the FMCSA is withholding Grupo Behr’s permit while reviewing objections raised by the Teamsters and others regarding Grupo Behr’s safety record. The Teamsters also question Transportes Olympic’s record on safety.

You can track the approvals online at the FMCSA’s website. That site says that Transportes Olympic has registered one vehicle and two drivers. It looks like the dispute will continue in some form, for the time being.

Does the DSM need support from ongoing negotiations?

Jeff Schott worries that the WTO’s dispute settlement mechanism may be less effective if the dismal prospects for future negotiations cause dispute panels to expand their coverage:

Of course, WTO members will still be bound by existing obligations and the heralded dispute settlement system will continue to function. But past success is not a guarantee of future performance. Disputes undoubtedly will arise over “gray areas” of WTO law. Without the prospect of new negotiations to update and clarify the WTO rulebook, panelists will be tempted to bridge the gaps in their rulings. That is the danger: If the panelists attempt, or appear to be attempting, to usurp the powers of WTO members by interpreting and possibly expanding the scope of WTO obligations, it will likely trigger a political backlash against the WTO and discourage national compliance with such rulings. Members of Congress already think this is a problem with regard to the numerous WTO rulings against US antidumping practices. Over time, the frozen WTO legislative function will erode political support for compliance with the judicial function of the WTO

New US ag subsidies to replace old US ag subsidies

The next five-year agricultural plan farm bill will cover 2013-2017. The NY Times looks at where Congress is headed, in a piece titled “Farmers Facing Loss of Subsidy May Get New One“:

Lawmakers’ reluctance to simply eliminate a subsidy without adding another in its place demonstrates how difficult it is for Washington to trim the federal largess that flows to any powerful interest group. Indeed, the $5 billion program that lawmakers are willing to throw under the tractor, known as the direct payment program, was created in 1996 as a way to wean farmers off all such supports — and instead was made permanent a few years later…

It is unclear how much support a new subsidy would garner, since many lawmakers view farm programs as a likely source of budget savings. Critics say that farm subsidies today have little to do with helping struggling family farmers. Instead, they go predominantly to well-financed operations with large landholdings. All told, the subsidies amount to about $18 billion a year — about half of 1 percent of the federal budget…

Direct payments have come under fire, however, because farmers get them whether markets are high or low. The new subsidy, called shallow-loss protection, would act as a free insurance policy to cover commodity farmers against small drops in revenue. Most commodity farmers already buy crop insurance to protect themselves against major losses caused by large drops in prices or damage to crops. Those policies typically guarantee 75 to 85 percent of a farmer’s revenue, with the federal government spending $6 billion a year to pay more than half the cost of farmers’ premiums.

The proposed new subsidy would add another layer of protection to guarantee 10 to 15 percent of a farmer’s revenue, paying out not only in years of heavy losses, but also when revenue dipped less severely…

It is unclear how much the proposal would cost taxpayers. Dr. Schnitkey said the plan could pay farmers $40 billion over 10 years. That would be $20 billion less than the programs it replaced, including direct payments and some smaller subsidies.

But Dr. Smith, the Montana State economist, said the cost could be much greater because the plan used recent high crop prices as its benchmark.

Creative protectionism: Argentina requires firm-level balanced trade

The Economist describes some very unusual trade policies implemented by Argentina:

Argentine manufacturers have been booming ever since the 2001 crash. Over most of that period, a cheap peso has ensured their competitiveness. But since 2005 inflation has been in double digits. As the trade surplus has dwindled, Cristina Fernández, the president, has beefed up her industrial policy. According to Global Trade Alert, a database of restrictions on international commerce, Argentina now imposes more trade limitations deemed “harmful” than any country save Russia…

On the import side, Argentina cannot raise tariffs on its own because it belongs to the Mercosur customs union. So it is resorting to informal tools. Its main method is “non-automatic licensing”, a tactic recognised by the World Trade Organisation that lets countries delay imports for 60 days.

Argentina has made no pretence of honouring that time period. In January it expanded the list of products requiring licences from 400 to 600. It was a limit on phone imports that led Research in Motion to hire Brightstar to make BlackBerrys in Argentina (tax incentives then led the firm to Tierra del Fuego). Other affected goods include toys, pharmaceutical ingredients, tyres, fabrics, leather and farm machinery. On September 15th Argentina blocked imports of books, and over 1m piled up at the borders. Imports of Harley-Davidson motorcycles are frozen until 2012.

For firms that refuse to (or cannot) move production to Argentina, the government offers another option: deals to export goods worth at least as much as a company’s imports. In January customs officials stopped letting Nordenwagen import Porsches. Its cars languished in port for three months before the firm succumbed to a deal. Since its owners also possess Pulenta Estate, a vineyard, they agreed to launch a new line of mass-market wines for export, erasing the family’s trade deficit. They are also considering canning fruits. “It’s not the same margins as fine wines, but it takes time and investment. We’re trying to make it profitable,” says Eduardo Pulenta, the company’s export manager. “We’ll keep working to import cars. That’s what we know how to do.”

Wow.

The policy was adopted in March. Here’s the Global Trade Alert entry from July, which relies on Spanish-language news stories. Here’s an English-language story from April. Thanks to Bernardo Astarloa, who passed along this Spanish-language story in Argentina’s La Nación. It details the products being exported by various car manufacturers in exchange for importing autos into Argentina:

  • Porsche: wine and olive oil
  • Hyundai: peanuts and soy biofuels
  • BMW: rice and leather upholstery
  • Alfa Romero: biofuel
  • Kia: auto parts, plastics, refrigerators
  • Mitsubishi: mineral water, pet food, peanuts
  • Nissan: biofuels and soy

An Argentinian commenter at the Economist post argues that these policies don’t add up to much, but their novelty is certainly notable!

Freely traded outside goods have non-trivial consequences

Recall that assuming a freely traded, CRS-produced outside good when writing a trade model is non-trivial [Davis (AER, 1998)]:

In the present paper, I show that what previously was regarded as an assumption of convenience – transport costs only for the differentiated goods – matters a great deal. In a focal case in which differentiated and homogeneous goods have identical transport costs, the home-market effect disappears.

In a recently posted paper (pdf), Svetlana Demidova and Andrés Rodriguez-Clare remind us that a curious result lurking in the heterogeneous firms literature – that unilateral trade liberalization decreases a country’s welfare – hinges on exactly that assumption.

It is interesting to compare this result to that in Demidova (2008) for the setting with CES preferences and Melitz and Ottaviano (2008) for the setting with linear demand, where lowering trade barriers for foreign firms reduces welfare at Home. The reason for this result is that such liberalization in country 1 makes country 2 a better export base, which results in the additional entry of firms there. This entry intensifies competition, which results in less entry and lower welfare in country 1. Our model shows that this result no longer holds when there is no outside good pinning down the wage in both countries.

Chaney (AER, 2008) also assumes a freely traded homogeneous good, so I presume that the same conclusion applies in his environment.

The Demidova & Rodriguez-Clare paper introduces a small open economy version of Melitz (2003), which lets them analyze asymmetric trade policies with endogenous wages very nicely in a (relatively) simple setting. Check it out.

Is the US going to impose tariffs on China?

The Currency Exchange Rate Oversight Reform Act of 2011 is headed to a full Senate vote on Tuesday. You can track its congressional actions here.

The legislation, in summary,

  • directs the US Treasury Secretary to report on currency market developments and prevailing real effective exchange rates and to identify countries that manipulate exchange rates
  • requires the US Treasury Secretary to oppose increased “chairs or shares” at any international financial institution for a designated currency manipulator
  • amends antidumping calculations and countervailing duty investigations to include currency undervaluation when looking at exports from a designated manipulator

If you look at the text of the act (PDF), you’ll realize that this bill does not impose any tariffs on China. It changes the criteria that the US Treasury Secretary will consider in choosing whether to designate a country a currency manipulator, and it makes that designation have bite in AD/CVD actions, government procurement, some multilateral financing, and IMF actions.

PIIE’s Nicholas Lardy describes the legislation in an interview, characterizing the inclusion of currency undervaluation in the countervailing duty calculation as the primary thrust of the act.

This legislation changes the trade-policy process; it doesn’t impose tariffs. Of course, the fundamental misalignment criteria may have been chosen with particular outcomes in mind, but the US Treasury has opted to not designate China a manipulator many times before. Will this legislation bind so tightly that the designation is inevitable?

Will the US Congress pass three PTAs this year?

Doug Palmer:

A congressional committee on Wednesday strongly backed deals with South Korea, Colombia and Panama, setting them on course for expected final approval and ending years of trade policy paralysis…

The panel’s chairman, Representative Dave Camp, said approval of the deals could not come at a better time for the struggling U.S. economy…

The three pacts must be approved by the full House and the Senate to become law. The panel backed the pacts on the following bipartisan votes: Colombia, 24-12; Panama, 32-3; and South Korea, 31-5.

Camp said he expected the full House to approve the trade deals next week. The Senate also could move quickly enough for the pacts to be approved in time for South Korean President Lee Myung-Bak’s visit to the White House on Oct 13.

Subramanian proposes a “China round”

Arvind Subramanian (pdf):

China has become too economically dominant for the United States to engage with China on its own. That is one of the major changes that has occurred in the world economy over the last decade. Fortunately, the desire and concern to ensure that China’s rise will remain a force for good is widely shared amongst other industrial and developing countries. This provides an opportunity for the United States to lead a collective effort—muscular multilateralism—to engage with China on trade issues. Moreover, because China’s economic development has benefited enormously from an
open trade system, it will have a stake in preserving it.

A concrete way to realize this is to move beyond the Doha Round to start a new round of multilateral trade negotiations — a possible “China Round” — that would focus on the issues — exchange rates, government procurement, services, technology policy, commodities, and climate change — which are particularly crucial for China’s trade relations with the US and with other large trading nations.

Previously:

In your book, you talk about the importance of tethering China to a multilateral system. Why should China be interested if it’s inevitably number one?

We need to bind China today to the multilateral system so a kind of habit and incentive builds up. Then repudiation of the system would be more difficult. We need to do this before China becomes a hegemon

Everyone has to come together to do this well. If every country tries to make its own deal with China, no one will have any leverage.

Think about exchange rates. If the world came together now and said let’s do a deal on exchange rates, China would be more likely to participate. It doesn’t want to be seen as deviant from international system. The opprobrium of the world is the biggest carrot and stick to use with China.

One of your main policy recommendations is to start a China round of trade negotiations. What could that accomplish?

When China joined World Trade Organization in 2001, people said we tied China to the global economic system (because of the commitments it made to open its markets and follow international rules). But through its exchange rate policy, China has unraveled parts of its commitments. What that signifies is that Chinese leaders at the time were overreaching in terms of domestic political support. Evidently, WTO accession wasn’t politically sustainable internally.

Over time, China will move away from mercantilism. They would then have an incentive to make a deal. A deal could involve government procurement – other countries opening their bidding for China—as well as commitments by China involving control of natural resources and the exchange rate.

Now in Econometrica

A couple of trade papers that have been circulating for a long time are now finally in published form in this month’s issue of Econometrica: