Non-Doha in December

Pascal Lamy has indicated that the WTO’s December ministerial meeting ought to focus on non-Doha issues, given how badly the negotiations are going.

We started this meeting on a sombre note.  I do not think the conclusion looks much better.  What we are seeing today is the paralysis in the negotiating function of the WTO, whether it is on market access or on the rule- making.  What we are facing is the inability of the WTO to adapt and adjust to emerging global trade priorities, those you cannot solve through bilateral deals.

This risks overshadowing the achievements in other parts of the WTO functions, such as monitoring, surveillance, dispute settlement or even Aid for Trade, on which I will report fully tomorrow.  There is, therefore, an urgent need to develop a shared diagnosis over the current impasse and what went wrong as a means to prepare a discussion over possible solutions as well as over emerging issues.

I would urge you to use the summer break to reflect and come prepared to fully engage in an “adult conversation” over “what next”.

The trade blogosphere in 2011

I launched Trade Diversion in July 2005, six years and 1400 blog posts ago. The trade blogosphere has evolved quite a bit since then. Some authors have gone quiet; some domain registrations have lapsed. Some big names started blogging; some trade folks shifted focus to other topics. Some graduated from commenting on others’ posts to regularly producing their own; some are still going strong after all these years. My blogging has admittedly slowed as my research projects have proliferated.

On the whole, it seems that there’s been more exit than entry in the trade blogosphere over the last six years. Yes, Twitter emerged as a way to get trade policy news directly from trade reporters, but my reading list is shorter than it used to be. Have I missed new entrants? Whose blog should I be reading that isn’t already on my blogroll in the right sidebar? Please submit your recommendations in the comments section!

How PTAs may segment regulatory systems

Back in April, I wrote:

One such danger is that FTAs might be a means for the US or EU to try to lock in first-mover advantages in shaping regulatory standards (such as technical barriers to trade). While preferential tariffs can be undone relatively easy by further tariff cuts, plurilateral agreements that promulgate the adoption of a larger economy’s preferred technical standard might serve to determine which standard is later adopted multilaterally. A first mover might gain at the expense of others if its preferred standard is worse for world welfare.

A new WTO report tackles this very issue:

Director-General Pascal Lamy, in launching the World Trade Report 2011 on 20 July 2011, warned that preferential trade agreements (PTAs) “may lock in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement”. “The new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs,” he added…

In fact PTAs of today are less about tariff preferences and more about regulatory measures that were once considered the domain of national rather than international economic policy.  This change is occurring partly because of changes in the way production is being organized internationally with the rise of global production networks.  To prosper, these production networks require an enabling regulatory environment that provides stronger investor protection, better infrastructural services, freedom of movement of corporate personnel, protection to intellectual property rights, and facilitation of trade.   The demand for governance in these policy areas is being met by the supply of deep PTAs…

Another idea would be that we should not ignore the potential difficulties that deep PTAs can give rise to on the regulatory side.  One can observe in the sprawl of agreements what can only be called “families” of PTAs, with each family adopting a particular approach to important policy areas such as technical barriers to trade or competition policy.  The peril here is that PTAs may lock-in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement.

In a nutshell, the new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs. This is not a statement about the legitimacy of these regulatory systems. It is a factual assessment of their impact on economies of scale, which is what the WTO should care about.

The report, titled “The WTO and preferential trade agreements: From co-existence to coherence”, is available online.

“Trade Wars and Trade Talks with Data”

Ralph Ossa:

I propose a flexible framework for the quantitative analysis of unilateral and multilateral trade policy. It is based on a multi-country multi-industry general equilibrium model of international trade featuring inter-industry trade as in Ricardo (1817), intra-industry trade as in Krugman (1980), and special interest politics as in Grossman and Helpman (1994). By combining these elements, it takes a unified view of trade policy which nests traditional, new trade, and political economy motives for protection. Specifically, it features import tariffs which serve to manipulate the terms-of-trade, shift profits away from other countries, and channel profits towards politically influential industries…

With regard to multilateral trade policy, I find that the world trade war tariffs vary widely across industries, countries, and trading partners and average 63 percent. This is roughly in line with the noncooperative tariffs observed following the Smoot-Hawley Tariff Act of 1930. They would substantially decrease real income in all countries with the average loss amounting to 4.1 percent. I also find that tariff changes which correspond to the GATT/WTO principle of reciprocity can be characterized by a simple formula which is easy to implement in practice. While this formula identifies a number of industries in which there is still scope for future reciprocal trade negotiations, it also suggests that the overall gains from such negotiations would be quite small…

I believe that this is the first quantitative framework which nests traditional, new trade, and political economy motives for protection. I also believe that this is the first study which provides estimates of optimal and noncooperative tariffs at the industry level for the major players in recent GATT/WTO negotiations…

My application focuses on 7 regions and 26 manufacturing industries in the year 2005. The regions are Brazil, China, the EU, India, Japan, the US, and a residual Rest of the World and are chosen to comprise the main players in recent GATT/WTO negotiations.

Revenue-neutral tariff cuts are tricky business

Sallie James:

[B]ecause implementing the FTAs (which will lower tariff revenue) and paying for the billion-dollar-plus TAA extension “requires” offsets, the draft language specifies in Sec. 601 that revenue should be raised by increasing customs user fees.

Scott Lincicome:

But “customs fees” are simply hidden taxes on import consumers.  A quick review of the US Customs website on “customs users fees” makes this clear.  They’re paid (mainly) by commercial transporters bringing goods (imports) into the United States, thus raising the costs of importation…

[A]ssuming that the agreement would raise US customs users fees (or implement new ones) in order to generate revenue for the federal government, it would probably violate GATT Article VIII, which governs WTO Members’ imposition of “Fees and Formalities connected with Importation and Exportation” (in other words, customs fees).  The key provision of Article VIII reads:

1.(a) All fees and charges of whatever character (other than import and export duties and other than taxes within the purview of Article III) imposed by contracting parties on or in connection with importation or exportation shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.

Growing visa costs for Indian IT firms

Mint reports that Indian IT companies are classifying workers servicing US clients as traveling for “knowledge transfer” in order to the circumvent the increased costs of H-1B and L-1 visas:

A report published on Monday by CLSA Asia-Pacific Markets showed that a firm’s ability to send workers to the US on visas directly affects its profitability. The report estimates that if a firm sends an Indian employee, its profit margin is 39.1%, while if it hires a local, it is 25.3% (considering that the utilization level is at 75%)…

[T]he US immigration framework lacks a visa category to allow firms to send workers to do “gainful” work on urgent, short-term assignments, according to Poorvi Chothani, founder of Mumbai-based corporate immigration law firm LawQuest.

“When visa caps have been met and companies need to send someone urgently, the inability to immediately engage them in the US is a huge impediment,” she said. According to her, in such cases “some companies may have made an ill-advised choice to send workers on business visas”.

Herman added that one of the top consular office’s concerns was a rise in the misuse of business visas, and “making sure we communicate adequately with businesses to make sure they know what they are allowed to do”. He claims that one of the reason most cited by employees of IT firms travelling to the US is “knowledge transfer” (which is permitted under the B1/B2 visas). “We refuse more of those types of cases these days because most of the time they cannot explain to us what that means,” he said. “So, that’s a very common issue—of going for knowledge transfer, when really what they’re doing is going to work on a project.”

US cotton subsidies causing turmoil

The US House has passed legislation that threatens its WTO-approved agreement with Brazil on cotton subsidies:

Questions are being raised about the future of the hard-won US-Brazil cotton agreement, thanks to last week’s vote in the US House of Representatives to end payments to the Brazil Cotton Institute. In a 223-197 vote, members passed an amendment to the Agricultural Appropriations bill for fiscal year 2012 that, if enacted into law, would violate the terms of the 2010 WTO US-Upland Cotton agreement between the two countries (see Bridges Weekly, 8 June 2011).

The US$147.3 million annual payments were part of an agreement between the two countries that meant to hold Brazil back from imposing US$830 million in WTO-authorised countermeasures. The agreement came after a protracted WTO dispute that deemed various aspects of the US cotton subsidy regime as illegal.

The bill’s sponsor would like to see cuts to US agricultural subsidies, but those aren’t in the legislation:

“I’m pleased that a bipartisan group of Members agreed with me that supporting Brazil’s cotton industry with taxpayer dollars is wasteful and unnecessary. But the bill as a whole still irresponsibly overlooks other commonsense cuts such as the billions of dollars in outdated farm subsidies going to very few large agribusinesses. We cannot afford to continue spending carelessly and cutting recklessly, especially in this tough economy.”

In ongoing discussions about a mini-package for the WTO’s December ministerial meeting, the US ambassador to the WTO is pointing fingers at China for its cotton subsidies.

Harvesting early is tough when harvesters disagree

ICTSD: “Doha “Plan B” Hits Early Roadblock”

It is already proving complicated. On Tuesday afternoon, WTO Director-General Pascal Lamy postponed a meeting of the Doha Round’s supervisory Trade Negotiations Committee (TNC) that had been scheduled for 9 June, after his consultations with member governments determined that they were not yet in a position to provide the hoped-for direction on how to proceed. No new date was announced.

Whither Ricardian comparative advantage?

In his Nobel lecture, Paul Krugman suggested the new trade theory’s relevance might be fading in some dimensions, as trade between countries with vastly different incomes and capacities rose rapidly in recent decades:

And nobody doubts that trade between the United States and Mexico, where wages are only 13 percent of the U.S. level, or China, where they are only about 4 percent, reflects comparative advantage rather than arbitrary, scale-based specialization. The old trade theory has regained relevance.

But a couple of recent pieces of evidence supposedly point towards the decline of traditional Ricardian forces for trade. In a recent NBER working paper, Andrei Levchenko and Jing Zhang calibrate a multi-sector Eaton-Kortum model along the lines of Costinot, Donaldson, and Komunjer and claim:

First, we find strong evidence that comparative advantage has become weaker. Controlling for the average productivity growth of all sectors in a country, sectors that were at the greater initial comparative disadvantage grew systematically faster. This effect is present in all time periods, and is similar in magnitude in both developed and developing countries. The speed of convergence in sectoral productivities implied by the estimates is about 25% per decade.

This morning, Dani Rodrik posted a graph that shows convergence in labor productivity in manufacturing industries since the 1980s. I believe Rodrik’s graph comes from directly estimating labor productivity using UNIDO data, rather than a model-derived measure of productivity. (Rodrik blogged the results without mentioning the underlying/forthcoming paper from which they’re excerpted, so not all the details are clear.)

So two different measures of cross-country productivity differences suggest that Ricardian comparative advantage may be declining as a force for international trade volumes. It’ll be interesting to see how, both theoretically and empirically, we can resolve the contrasting claims of Krugman and Levchenko, Zhang, and Rodrik.

Further: A commenter suggests looking to Heckscher-Ohlin-Vanek rather than Ricardo. Indeed, some of Krugman’s Nobel lecture comments are referring to factor-driven comparative advantage rather than Ricardian comparative advantage. That resolution gives one interesting answer to the question I posed in the post’s title.

A non-linear revisiting of Rose (2004)

Pao-Li Chang and Myoung-Jae Lee look at the WTO’s impact on trade flows without assuming linear functional forms for trade frictions. This is forthcoming in the JIE:

This paper re-examines the GATT/WTO membership effect on bilateral trade flows, using nonparametric methods including pair-matching, permutation tests, and a Rosenbaum (2002) sensitivity analysis. Together, these methods provide an estimation framework that is robust to misspecification bias, allows general forms of heterogeneous membership effects, and addresses potential hidden selection bias. This is in contrast to most conventional parametric studies on this issue. Our results suggest large GATT/WTO trade-promoting effects that are robust to various restricted matching criteria, alternative GATT/WTO indicators, non-random incidence of positive trade flows, inclusion of multilateral resistance terms, and different matching methodologies.

>