Discussing the US trade deficit

This paragraph from the Council on Foreign Relations blog is disappointing:

The yearly U.S. trade deficit peaked at 6.4% of GDP in August 2006. It improved significantly after the financial crisis, bottoming out at 3.6% in January 2010. This swing provided a boost to GDP and nudged the U.S. external balance toward a more sustainable level. The deficit then resumed an upward march, reaching 4.3% by November. A closer look at America’s bilateral trading relationships since the deficit high-point in 2006 reveals a significant improvement with many countries, and only a small deterioration with a few others. China – with which the U.S. has its largest deficit – is the conspicuous exception, as the figure shows. 2011 looks set to be a year of yet further-rising trade tensions between the two countries.

First, the discussion of the relationship between the trade deficit and the business cycle is rather unclear. The second and fourth sentences suggest that the business cycle might be driving the trade deficit (the deficit is smaller when growth is down), but the third sentence says that the shrinking trade deficit boosted GDP.

The third sentence is certainly misleading. While it is true in an accounting sense that a smaller trade deficit raises GDP (Y = C + I + G + NX is an accounting identity), that says nothing about a causal relationship. The trade deficit and national income are part of a general-equilibrium system — it’s folly to describe one as causing the other without a clear exogenous shock or a proper GE model. Accounting identities are not behavioral relationships. One could just as easily write NX = Y – C – I – G.

The claim that the dampening of the trade deficit in January 2010 represented a move towards a more sustainable level seems unlikely. Since the income elasticity of trade is greater than one, the drop in global GDP and associated plunge in global trade did flatten out global imbalances. As soon as growth resumed, the imbalances began growing too. This describes an equilibrium comovement, not a direction of causation, but that’s enough to suggest that the January 2010 “improvement” was business as usual, not a move towards smaller long-run imbalances.

Second, the discussion of bilateral trade deficits is misleading. Bilateral deficits do not matter (economically, though politicians seem to care). The canonical analogy for undergraduates is that the professor will have a bilateral deficit with his/her local grocer for the rest of his/her life without any problems (CEA 2004, pdf). Moreover, trade statistics measure gross flows, so China’s role as an assembler of products made by “Factory Asia” destines it to have a bilateral surplus with countries importing finished products. Value-added measures of China’s surplus are substantially smaller. For these reasons, and many more, the discussion should focus on multilateral imbalances.

Do precedents matter in WTO dispute decisions?

WTO panel:

In our view, there is not a system of precedent within the WTO dispute settlement system and panels are not bound by Appellate Body reasoning. However, we agree with Korea that adopted reports create legitimate expectations among WTO Members and that “following the Appellate Body’s conclusions in earlier disputes is not only appropriate, but is what would be expected from panels, especially where the issues are the same”.

The 2008 US farm bill: Cui bono?

I used to follow ag subsidies more closely than I have in the last two years. Here’s a new NBER working paper on the distribution of ag subsidy benefits:

The U.S. has a long history of providing generous support for the agricultural sector. A recent omnibus package of farm legislation, the 2008 Farm Bill (P.L. 110-246) will provide in excess of $284 billion in financial support to U.S. agriculture over the 2008-2012 period. Commodity program payments account for $43.3 billion of this total. Our paper is concerned with the distribution of these benefits. Farm subsidies make agricultural production more profitable by increasing and stabilizing farm prices and incomes. If these benefits are expected to persist, farm land values should capture the subsidy benefits. We use a large sample of individual farm land values to investigate the extent of this capitalization of benefits. Our results confirm that subsidies have a very significant impact on farm land values and thus suggest that landowners are the real benefactors of farm programs. As land is exchanged, new owners will pay prices that reflect these benefits, leaving the benefits of farm programs in the hands of former owners that may be exiting production. Approximately 45% of U.S. farmland is operated by someone other than the owner. We report evidence that owners benefit not only from capital gains but also from lease rates which incorporate a significant portion of agricultural payments even if the farm legislation mandates that benefits must be allocated to producers.

[HT: Jim]

Best practice in labor mobility

The World Bank’s Manjula Luthria on labor mobility for the poor (pdf):

The Pacific Islands and New Zealand program, known as the Recognised Seasonal Employer (RSE) scheme has been described by the International Labour Organization’s good practices database as a model for other destination countries. The New Zealand Department of Labour (2010) recently concluded that “Overall, the RSE policy has achieved what it set out to do.” The policy provides employers in the horticulture and viticulture industries with access to a reliable and stable workforce, with productivity gains starting to emerge as workers return for another season. The main concerns raised about temporary labor programs have been mitigated: the evaluation finds little displacement of New Zealand workers; almost all workers returned, with overstay rates of about 1 percent in the first season and less than 1 percent in the second; and concerns about worker exploitation have arisen in only a couple of isolated cases. A World Bank evaluation (McKenzie and Gibson 2010) also revealed that the RSE has also lived up to the policy goal of improving development in the Pacific Islands.

Based on this positive record, this note provides general lessons for policy makers who wish to institute similar TMP programs for the poor. These lessons could have wide portability due to the fact that the Pacific–New Zealand program is sizeable by international standards—already reaching one-third the size of Canada’s Seasonal Agricultural Worker Program, which is in its 44th year of operation and considered global best practice thus far. Three broad areas emerge as a priority for policy and operational focus: design, management, and capacity building.

Matched transaction-level trade data

An interesting line of ongoing research pairs transaction-level trade data across countries to provide detailed descriptions of importers, exporters, and their transactional relations. Eaton, Eslava, Krizan, Kugler, and Tybout (in a project titled “A Search and Learning Model of Export Dynamics”, there are various versions, here’s May 2010) have combined 13 years of Colombian export data with US import data, generating many new interesting findings about buyer-seller matches (e.g. “Roughly 80 percent of matches are monogamous in the sense that the buyer deals with only one Colombian exporter and the exporter ships to only one buyer in the United States”). Blum, Claro, and Horstmann have used the other side of the Colombian trade data, studying Chilean-exporter-Colombian-importer pairs. There are also theoretical predictions about international transactional matching that could be tested using such paired data.

In short, this is an exciting new avenue in trade empirics.

2011 AEA meetings

I’ll be attending the American Economic Association’s annual meetings in Denver this weekend. Be sure to say hello if you spot me.

The (very lengthy) program is online; you can find most of the trade-related sessions by searching for “(F1)”.

More on the US-Korea PTA revisions

Timely analysis of the modifications to the US-Korea trade deal (pdf) from the Peterson Institute’s Jeff Schott:

In economic terms, the overall impact of the new deal differs little from the old deal. Changes in the tariff schedules reduce the overall benefits of the trade pact but not by very much. Immediate tariff cuts on autos and light trucks have been deferred a few years, but changes in Korea’s regulatory policies and procedures on autos should help mitigate existing problems and preclude the introduction of new nontariff barriers to US exports to Korea…

Under the new agreement the US car tariff, currently 2.5 percent, will be maintained for four years (i.e., until January 2016) and then eliminated. In turn, Korea slowed its own tariff reform… In addition, the US tariff on light trucks, which has been 25 percent since the infamous 1963 US-Europe chicken war, will be maintained for seven years (until 2019) and then phased out over the next three years. Originally, the light truck tariff was to be phased out in 10 equal annual increments…

Do these changes in tariff reforms make much of a difference? Probably not—and definitely not if the Doha Round agreement concludes and begins to cut most-favored nation (MFN) tariffs starting in January 2013, the likely start date if a WTO deal is reached by early 2012… US light truck tariffs would be phased down from 25 percent to 6.1 percent in 2019. So for light trucks, the US MFN tariff would be lower than the KORUS preferential tariff beginning in January 2014.

Russian WTO accession update

Russian recently struck a deal with the EU that makes the former’s accession to the WTO likely to occur in 2011. Russia is hoping to do so before July. Robert Amsterdam describes what may lie ahead:

The benefits of Russian entry, on one hand, are very positive. Moscow has agreed to phase out most of its export tariffs, including timber, which will certainly benefit the European community as a whole. Russia has also agreed to waive flyover royalties that it has imposed on international airlines for passing through Siberia en route to East Asia. Although this is a minor concession, it will still put an additional $400 million back in the hands of European carriers instead of the archaic Russian national airline Aeroflot.

On the other hand, Russia will eventually have to face other WTO members’ geopolitical concerns before accession. First off, Georgia will demand Russian withdrawal and cessation of support for breakaway provinces South Ossetia and Abkhazia. The 2008 War and Russia’s ongoing occupation of the territories in question will inevitably be a major topic of debate.

Another concern, in addition to Russia’s forceful reassertion over its traditional sphere of influence in Eastern Europe and Central Asia, is Russia’s ability or willingness to counter corruption in its government and business community. If China’s integration into the WTO since 2001 has been of any guidance, Russia’s entry should build anti-corruption measures and promote the international system’s benefits and openness to the Russian people. WTO membership is surely opposed by the more nefarious economic powers within Russia – admission to the organization will lead to more oversight and honest competition for services and products.

Here’s a 2006 post mentioning “Russia’s long-sought entry into the World Trade Organization”. Could we see both the Doha round and Russia’s membership finally conclude in 2011?

[HT: LWS]

Are iPhones “made in China”? Measuring value added in trade flows

If you found the Wall Street Journal‘s Wednesday story on gross value vs value added in trade statistics intriguing…

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China’s contribution is the last step—assembling and shipping the phones.
So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month…

Mr. Lamy said if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures—would be cut in half.

To correct for that bias is difficult because it requires detailed knowledge of how products are put together.

… then you might enjoy Robert Johnson and Guillermo Noguera’s “Accounting for Intermediates: Production Sharing and Trade in Value Added“:

These adjustments imply that bilateral trade imbalances often differ in value added and gross terms. For example, the U.S.-China imbalance is approximately 30-40% smaller when measured on a value added basis, while the U.S.-Japan imbalance is approximately 33% higher. These adjustments point to the importance of triangular production chains within Asia.