Lazear: Very large trade deficits can be benign

I don’t know if Greg Mankiw agrees with Ed Lazear, but this post features the latter saying something interesting about the trade deficit:

I would like to point out the historic record suggests that countries can be in a current-account deficit or a surplus situation for very long periods of time. New Zealand and Australia have had deficits for decades. Australia in particular has been running a current account deficit that has created a level of foreign indebtedness equal to about 72 percent of their GDP, whereas our foreign indebtedness was only about 21 percent of GDP in 2004 (most recent available published data). Yet, the Australian economy has been very strong and growing at robust rates over the past decades. Australia’s real GDP has grown at an average rate of 3.5 percent over the last decade.

Don’t put Lazear in the Don Boudreaux camp, however:

There is no clear correlation between a country’s surplus or deficit and economic growth. Given the lack of obvious correlation, should we still be concerned about a large current account deficit? We should still be concerned. We must constantly monitor our international situation for the reason that abrupt changes could create problems for the U.S. economy.

On the other hand…

In particular, a rapid decline in the U.S. current account deficit would correspondingly imply a rapid decline in the U.S. capital account surplus. Were this to happen, there could be significant adverse consequences to the U. S. economy and to the rest of the world. We do not anticipate abrupt changes like this occurring.

UPDATE: Brad DeLong notes the difference between the current account deficit and the trade deficit, and the implications for sustainability. Read his post. I’d feel bad for making that error, but so did Greg Mankiw.

Neat Idea on Immigration

Richard B. Freeman:

In part because people flows are smaller than trade and capital flows, the dispersion of pay for similarly skilled workers around the world exceeds the dispersion of the prices of goods and cost of capital. This suggests that policies that give workers in developing countries greater access to advanced country labor markets could raise global economic well-being considerably. The economic problem is that immigrants rather than citizens of immigrant-receiving countries benefit most from immigration. The paper considers “radically economic policies” such as auctioning immigration visas or charging sizeable fees and spending the funds on current residents to increase the economic incentive for advanced countries to accept greater immigration.

Interesting…

US Abuse of Anti-Dumping Duties

Last week, the Financial Times opined:

Anti-dumping duties are designed to prevent predatory companies pricing goods lower abroad than at home. But rules defining dumping vary between countries and are hopelessly opaque.

In the EU – as with most members of the World Trade Organisation except the US – anti-dumping actions are a politicised process, and investigators are allowed considerable leeway in deciding how comparisons between export and domestic prices should be made. Thus authorities are susceptible to lobbying, and inefficient businesses in shrinking sectors such as shoe-making spend too much time begging governments to protect them from cheap imports rather than figuring out how to make themselves competitive.

If I were to write the FT a letter, it would say:

Sir,

Anti-dumping policy is a dangerous and frequently abused trade instrument. You were right to criticize the politicized processes that produce anti-dumping actions in most countries but erred in exempting the United States from your criticism (“Down in the dumps,” June 14). Anti-dumping policy in the US, as in other nations, is dominated by special interests and based on suspect calculations.

For a number of years, US law — the Byrd amendment — actively encouraged lobbyists to bring anti-dumping claims by awarding the tariff revenues to the companies that filed a complaint. It was the European Union, along with ten other nations, that brought a successful case against this measure at the WTO dispute settlement panel in 2002.

Despite that ruling, the Byrd amendment was not repealed by the US Congress until February 2006 and will remain in effect until September 2007. Anti-dumping actions are protectionist interventions, whether implemented by Asians, Europeans, or Americans. The United States should not be let off the hook.

Bhagwati & Ikenson on unilateral liberalization

I attended a Cato Center for Trade Policy Studies event on unilateral trade liberalization featuring Jagdish Bhagwati and Dan Ikenson yesterday. It was quite enjoyable, as both speakers were entertaining and offered scholarly insights.

The case for unilateral liberalization is the traditional case for free trade. Imports are not merely “the price we pay for exports,” but an economic gain that boost consumption, increase competition, and lower input costs. If our trading partners decide to drop rocks in their harbors, that is not a reason for us to follow suit. Ikenson’s new CTPS policy analysis (pdf) outlines the potential gains from liberalization in the context of the current US tariff schedule and the global trading environment.

Although, as Ikenson noted, unilateral action constituted two-thirds (pdf) of the liberalization by developing countries in the past twenty years, “going alone” does not have a very strong history in the United States. Should we expect policy makers to adopt that approach now?

I doubt it. Both speakers pressed the case for unilateral liberalization, but neither claimed that such an approach was likely or politically feasible this summer. Bhagwati conceded that the US won’t “go alone,” but argued that we ought to “convey the lessons of unilateral liberalization” so as to educate people about the benefits of free trade and increase the likelihood of success at Doha. Ikenson was less optimistic about the WTO round’s chances, but one will note that his brief defends the economic feasibility of going alone, not its political palatability. He does not make any arguments that unilateral trade liberalization might win support amongst Congress members who don’t already support significant US liberalization via the multilateral approach. Bhagwati did say that the US ought to relax its demands and provide trade leadership, but that’s been true all along.

Though not able to prescribe a magical elixir for the Doha round’s woes, Bhagwati did offer a few political economy insights. First, he argued that the change in USTR from Rob Portman to Susan Schwab likely hurt the round, as Portman was known as an accommodating representative that would accept a more minimal outcome in terms of US demands. Schwab, according to Bhagwati, has shown a tendency towards the maximalist approach in the past. While not subscribing to the bicycle theory of trade, he clearly prefers that the US salvage Doha and accept a minimalist outcome.

Second, Bhagwati noted in the Q&A session that the business communities and export lobbies needed to push a WTO deal through Congress won’t take the position that a minimalist deal is worse than none and will be on-board for an outcome that keeps the multilateral system alive. Apparently Bhagwati believes that a successful Doha round is necessary to renew the president’s trade promotion authority, which is the basis for both PTA and WTO negotiations. So if the business community wants any kind of trade deals, they’ll back any Doha outcome that gives Bush a win. I may have misunderstood his remarks on this topic, but that was my interpretation of the comment.

Bhagwati remains optimistic about the WTO, while Ikenson is less confident. The next few weeks will be very interesting. Check out Ben Muse’s summary of what’s happening.

Foreign Affairs special on India

“In the July/August issue of Foreign Affairs, a special lead package has brought together four top experts to analyze the sources and implications of India’s rise — and the policies necessary for it to continue.”

One snippet that might generate discussion:

Rather than adopting the classic Asian strategy — exporting labor-intensive, low-priced manufactured goods to the West — India has relied on its domestic market more than exports, consumption more than investment, services more than industry, and high-tech more than low-skilled manufacturing. This approach has meant that the Indian economy has been mostly insulated from global downturns, showing a degree of stability that is as impressive as the rate of its expansion. The consumption-driven model is also more people-friendly than other development strategies. [FA]

Arbitrary Development Numbers: 0.7%

Haven’t read this paper by Michael Clemens and Todd Moss yet, but this abstract looks interesting:

When we use essentially the same method used to
arrive at 0.7% in the early 1960s and apply today’s conditions, it yields an aid goal of just
0.01% of rich-country GDP for the poorest countries and negative aid flows to the
developing world as a whole. We do not claim in any way that this is the ‘right’ amount
of aid, but only that this exercise lays bare the folly of the initial method and the
subsequent unreflective commitment to the 0.7% aid goal. Second, we document the fact
that, despite frequent misinterpretation of UN documents, no government ever agreed in a
UN forum to actually reach 0.7%—though many pledged to move toward it. Third, we
argue that aid as a fraction of rich country income does not constitute a meaningful
metric for the adequacy of aid flows.