David Leonhardt thinks that promoting freer trade to the American public is one of the top responsibilities of Ben Bernanke, the new chairman of the Federal Reserve. Alan Greenspan was a firm defender of globalization in his congressional testimony and other speeches, but why does the independent monetary authority continually field so many questions on this subject?
Where’s your FDI headed?
The U.S. trade deficit is financed by its attractiveness as a destination for foreign investment. It may be losing its relative advantage — IHT
China loves PTAs
In case you haven’t noticed, China has been relentlessly pursuing preferential trade agreements:
The past five years has witnessed China’s readiness to establish free trade areas (FTAs) with various trade partners, according to sources with the Ministry of Commerce. By far, China has been talking with 27 countries and regions on the establishment of nine FTAs, covering one fourth of China’s total trade, sources with the Ministry of Commerce said. [China Daily]
Americans learn to love global trade
British wary of FDI in emerging markets
Britain’s leading companies are less adventurous than their US and continental European counterparts when it comes to making foreign acquisitions – and they are becoming even shyer, according to research by KPMG, the accountancy group.
The study of acquisition trends from 2000 to 2005 shows that continental European companies are five times more active than those in the UK in the so-called Bric economies – the big and fast growing markets of Brazil, Russia, India and China. Continental European companies are also more open to acquiring companies in the “emerging markets” of east and central Europe.
As a result, British companies are in danger of irretrievably sacrificing growth potential to European competitors and depriving shareholders of growth opportunities, the study says…
One explanation for the weak showing appears to be that the types of companies investing most heavily in the Bric countries – typically manufacturing companies in France, Germany and the US – are not well represented in the UK.
But Simon Collins, head of corporate finance for KPMG, said that explanation was losing its force. “The US is quite service-led and there have been a lot of acquisitions by US services companies, particularly in China and India.” He said the idea that these economies were drawing a lot of skittish capital was outdated. “It’s evident now that there is some very well researched corporate investment going into emerging markets.”
The study has tracked 9,808 acquisitions around the world since 2000 with a deal value of $4,230bn (£2,369bn). British companies were on average twice as active as their US counterparts and 40 per cent more active than continental European companies in terms of the numbers of acquisitions. [Financial Times]
Sir John Cowperthwaite passes
Sir John Cowperthwaite, the British colonial administrator primarily responsible for the establishment of Hong Kong’s laissez-faire economic policies, has passed away.
RTAs in the Global Trading System
There’s a brief article in the Hindu Business Line today about the interaction of regional trade agreements and the multilateral trading system. Two key points were made. Mr Kamal Nath, Union Commerce Minister, India, argued that regional trade agreements are here to stay as a feature of the global trading system. Mr Ian Pearson, the UK trade minister, argued that “FTAs can provide the framework to tackle non-tariff barriers in areas such standards and investment, and in encouraging conformity assessment and regulatory co-operation.”
Nath’s observation is disappointing but likely true. The only means to undo the distortions caused by preferential trade regimes is to drive MFN tariffs to zero.
US-Swiss PTA?
Daniella Markheim and James E. Dean of the Heritage Foundation make a case for a bilateral trade agreement between the United States and Switzerland. While it’s possible that a Swiss-US PTA may be preferable to the status quo, I’m not convinced that the benefits outweigh the opportunity costs, which include the potential for unilateral or multilateral non-discriminatory liberalization. Swiss-US trade is already relatively liberalized, and I think that President Bush’s limited political capital on trade would be best expended on efforts that will have a greater impact.
Economic Freedom & Bar Graphs
I apologize for nit-picking, but I think advocates of liberalization hurt their cause when they overstate their case. Johan Norberg writes:
I still meet anti-capitalists who claim that liberalisation and market reform destroy economies and increase poverty. Why don´t they take a look at this graph from the new Index of Economic Freedom 2006. Per capita growth in the countries that liberalised the most since 1995 has been almost three times higher than in those where economic freedom declined.
Let’s stop pretending that trade liberalization skeptics are ridiculous for not hailing the truth of this and similar bar graphs. Anyone that took AP Statistics in high school can produce a sufficient number of objections to render this evidence inconclusive: correlation isn’t causation, the causal relation may be bidirectional or run the other way, lurking variables may be omitted, etc.
In Norberg’s defense, in spite of titling his post “freer and richer,” he actual formulates a weaker claim — liberalization does not destroy economies and increase poverty. It appears true that improvements in a country’s economic freedom score do not negatively affect growth so much as to overwhelm other engines of growth. But “liberalization isn’t harmful” is a far cry from “liberalization is helpful.” Moreover, the bar graph describes per capita GDP growth, not poverty reduction. There is plenty of evidence that economic growth reduces poverty, but I think it’s a bit sloppy to conflate the two.
SAFTA & Trade Diversion
The most relevant academic paper in the wake of SAFTA’s creation is “South Asia: Does Preferential Trade Liberalization Make Sense?” by Arvind Panagariya. In short:
The move towards preferential trading is a mistake, at least from the viewpoint of India. India continues to have very high trade barriers so that the scope for trade diversion and the losses accompanying it are likely to be considerable. Business lobbies being relatively powerful in most of the countries in the region, they are likely to exploit the rules of origin and sectoral exceptions in these arrangements in ways that will maximize trade diversion and minimize trade creation. In as much as the rules of origin give bureaucrats power, employment and opportunities to share in the rents created by tariff preferences, they too will become active parties to the diversionary tactics of business lobbies. Therefore, the member countries are better advised to proceed along nondiscriminatory lines in achieving further liberalization.
The PDF is here.
Trade Diversion 