Japan proposes giant noodle bowl

Here it comes:

The initiative would be to establish a pan-Asian FTA – involving India, Australia, China, Korea, Japan and New Zealand, along with the 10 members of the Association of Southeast Asian Nations. “The participation of democracies like India and Australia would enable the region to forge more open economic partnerships,” Ministry official Hideyasu Tamura said.

Recall that the ASEAN nations negotiate separately, meaning that this pan-Asian FTA will look more like a series of bilaterals than a MFN-friendly APEC deal.

Latest NBER Papers

NBER working papers from July that I ought to read when I have some free time:

Lee Bransetter & Nicholas Lardy: A primer on China for international economists who aren’t specialists.
N. Gregory Mankiw & Phillip Swagel: A review of the political uproar over offshore outsourcing and some recent empirical data.
Jonathan Eaton & Samuel Kortum: A dynamic Ricardian model of research specialization across countries and its consequences for relative wages.

Binding Constraints to Growth

In a couple of recent conversations with people about preferential trade, I’ve said that rich country trade barriers are rarely the binding constraint upon LDC export volume. I’ve argued that preferential trade policies always have costs, and in the cases where developed country protectionism isn’t the binding constraint, zero benefits. It turns out that I’ve been unknowingly implying one of the ideas behind “growth dianogistics,” a “new approach to economic reform” suggested by Ricardo Hausmann, Dani Rodrik, and Andrés Velasco. Here’s a summary from the March issue of F&D:

In this article, we propose a new approach to reform—one that is much more contingent on the economic environment. Countries, we argue, need to figure out the one or two most binding constraints on their economies and then focus on lifting those. Presented with a laundry list of needed reforms, policymakers have either tried to fix all of the problems at once or started with reforms that were not crucial to their country’s growth potential. And, more often than not, reforms have gotten in each other’s way, with reform in one area creating unanticipated distortions in another area. By focusing on the one area that represents the biggest hurdle to growth, countries will be more likely to achieve success from their reform efforts.

Read the full article. Academic version available here as a PDF. Obviously, this ties into Joe Stiglitz’s suggestions about policy sequencing.

I am a bit uncomfortable with this example, however:

Instead of solving these problems for all economic activities—a daunting task—the Dominican Republic managed to provide the appropriate public goods… the maquila sector was given special trade policy treatment. In this sense, the Dominican Republic is a good example of an alternative path to development: one that identifies sectors with high potential and then provides them with the institutions and public goods they need to thrive.

My discomfort stems from the fact that I have less confidence in industrial policy and sectoral targetting than Rodrik does, at least based upon the empirical assessments I’ve read in regards to South Korea.

[Hat tip: Dennis de Tray at CGD]

Helpman: “Trade, FDI, and the Organization of Firms”

A paper (pdf) from Professor Elhanan Helpman surveys an exciting recent strand of international trade theory literature. The new approach models choices by individual firms in monopolistically competitive markets and considers the relationships amongst firm productivity, trade costs, and average productivity levels. A particularly striking aspect is the degree to which traditional Ricardian features emerge from models emphasizing heterogeneity within and across industries.

New developments in the world economy have called for new developments in the theory of international trade and foreign directed investment, designed to better understand the shifts in trade and investment patterns and the reorganization of production across national boarders… [T]heoretical refinements have focused on the individual firm, studying its choices in response to its own characteristics, the nature of the industry in which it operates, and the opportunities afforded by foreign trade and investment. Important among these choices are modes of serving foreign markets
and sourcing strategies.

But the theory went beyond the individual firm, studying the implications of firm behavior for the structure of an industry, and, by implication, structural differences across industries. These variations deliver new explanations for trade structure and patterns of FDI, both within and across industries. For example, they identify new sources of comparative advantage, such as the degree of heterogeneity within industries and the quality of contracting institutions.

Heterogeneity plays a key role in this literature in two ways. First, there is heterogeneity as a result of productivity differences across firms within industries, because some firms happen to be luckier than others. Second, there is heterogeneity in organizational form. The two are related, however, because differences in productivity induce different choices for the organization of production and distribution. In this theory, trade and FDI patterns are jointly determined with organizational structures, such as sourcing and integration strategies.

Stiglitz & Rashid on AGOA & EBA

Joe Stiglitz and Hamid Rashid indict unilateral preferences for LDCS:

The US has already had some success in pitting the poor against each other. Preferential access for African countries, under the African Growth and Opportunity Act (AGOA) and more recent initiatives, seems to be largely a matter of trade diversion – taking trade from some poor countries and giving it to others. For example, Bangladesh’s share in US clothing markets declined from 4.6% in 2001 to 3.9% in 2004. During the same period, AGOA countries’ market share in the US clothing sector increased from 1.6% to 2.6%, and it is likely to increase further when AGOA countries start to take full advantage of duty-free access. [Project Syndicate]

I am less enthusiastic about their criticism of the EU, however:

A year ago, the leaders of the world’s richest countries committed themselves to alleviating the plight of the poorest. At Doha in November 2001, they pledged to give something more valuable than money: the opportunity for poor countries to sell their goods and earn their way out of poverty. With great fanfare, developed countries seemed for a while to be making good on their promise, as Europe extended the “Everything but Arms” initiative (EBA), under which it was unilaterally to open its markets to the poorest countries of the world.

The opening was less than it seemed. The devil is in the details, as many less developed countries discovered that EBA’s complicated rules of origin, together with supply-side constraints, meant that there was little chance for poor countries to export their newly liberalized products. [Project Syndicate]

First, rules of origin are a necessary feature of preferential trade. If the EU is to impose lower trade barriers upon LDCs than its richer trading partners, then ROOs will be part of the package. And it seems that all ROOs wind up being complicated.

Second, the devilish detail that LDCs face supply-side factors that constrain their exports means that preferential trade programs are unlikely to help. Rather than indicting the EU’s policy, this fact reduces their degree of guilt.

On the other hand, their argument against the US is damning:

The US ostensibly agreed to a 97% opening of its markets to the poorest countries. The developing countries were disappointed with the results of Europe’s EBA initiative, and Europe has responded by committing itself to dealing with at least part of the problem that arises from the rules of origin tests. America’s intention was, to the contrary, to seem to be opening up its markets, while doing nothing of the sort, for it appears to allow the US to select a different 3% for each country. The result is what is mockingly coming to be called the EBP initiative: developing countries will be allowed freely to export everything but what they produce. They can export jet engines, supercomputers, airplanes, computer chips of all kinds—just not textiles, agricultural products, or processed foods, the goods they can and do produce.[Project Syndicate]

Can South-South trade liberalisation stimulate North-South trade?

That’s the title of a recent working paper by Frederic Robert-Nicoud and Marco Fugazza. The abstract:

This paper uses a combination of Ethier (1982) and Melitz (2003) models to show that liberalizing trade among developing countries, so-called South-South trade, could contribute to improve the access to international markets of would-be exporters of developing countries. Lower trade barriers among developing countries has the effect of lowering the price of intermediate inputs and eventually allows exporters in those countries to serve international markets. We also compare unilateral and multilateral South-South trade liberalization and find that the latter unambiguously reduces the price of intermediates in all participating countries, whereas the former has ambiguous effects.

The argument is only theoretical at this point, as the authors are in the process of gathering data to test their model.

No “development package” at WTO

I ask, the AFP answers:

The Philippines, on behalf of a core group of 21 developing countries, as well as other states, rejected the EU’s proposal to continue with negotiations on trade facilitation during a WTO negotiating group meeting, the source added.

They said that the group dealing with the issue could not progress independently of the other areas of the Doha Round, invoking a World Trade Organisation undertaking by which all the negotiations are linked, he added.

Dukakis on immigration

This strikes me as a terrible argument:

If we are really serious about turning back the tide of illegal immigration, we should start by raising the minimum wage from $5.15 per hour to something closer to $8. The Massachusetts legislature recently voted to raise the state minimum to $8 and California may soon set its minimum even higher. Once the minimum wage has been significantly increased, we can begin vigorously enforcing the wage law and other basic labor standards.

Millions of illegal immigrants work for minimum and even sub-minimum wages in workplaces that don’t come close to meeting health and safety standards. It is nonsense to say, as President Bush did recently, that these jobs are filled by illegal immigrants because Americans won’t do them. Before we had mass illegal immigration in this country, hotel beds were made, office floors were cleaned, restaurant dishes were washed and crops were picked — by Americans…

However, Americans won’t work for peanuts, and these days the national minimum wage is less than peanuts. For full-time work, it doesn’t even come close to the poverty line for an individual, let alone provide a family with a living wage. It hasn’t been raised since 1997 and isn’t enforced even at its currently ridiculous level.

Yet enforcing the minimum wage doesn’t require walling off a porous border or trying to distinguish yesterday’s illegal immigrant from tomorrow’s “guest worker.” All it takes is a willingness by the federal government to inspect workplaces to determine which employers obey the law.

I’ll outsource the fisking to other folks.