I blogged previously that the EU might liberalize its MFN tariffs to assist Pakistan in the wake of its massive flooding. Now it looks that the tariffs cut will be temporary and discriminatory. The EU has pledged to adopt WTO-consistent measures, but it also promises “exclusively to Pakistan increased market access to the EU”. How it can do both is not clear.
Trade vs aid: Gross value vs value added
Bono and Ali Hewson: If Africa increased its share of world trade by one percentage point, that gain would dwarf all the aid it receives.
Shorter Owen Barder: We care about value added, but trade flows are measured in gross terms. The net benefit of exports is not equal to export revenue; it’s the value added that is some fraction (say, 10%) of the export revenue. The sum of development assistance to Africa will dwarf that number.
Me: Development assistance flows, as reported by their donors, are measured at gross value as well, so we’d need to estimate the value added of development aid before we really made any comparisons.
Trade theory and the Nobel Prize
Trade theory won another Nobel Prize this week… on The Simpsons. On Sunday’s season premiere, Jagdish Bhagwati picked up the prize, while the betting pool also included Avinash Dixit and Elhanan Helpman.
I suspect this is the first time that a trade theorist has appeared in prime-time cartoon form. It’s the opening scene:
http://www.hulu.com/embed/dun6KAqX7rnSIEzbaRb5QQ
You’ll have to wait until October 11 for the real thing.
House votes 348-79 to authorize punishing renminbi undervaluation
WSJ:
The measure would allow, but not require, the U.S. to levy tariffs on countries that undervalue their currencies. The bipartisan support highlights lawmakers’ long-simmering frustration with Chinese trade practices as well as their sensitivity to the faltering economic recovery with elections looming. It’s the strongest trade measure aimed at China to make it through a body of Congress after more than a decade of legislative threats by U.S. lawmakers…
Under the measure, the U.S. Department of Commerce would be directed to consider whether Chinese currency practices amount to an unfair subsidy in cases brought by industries competing with Beijing. If Commerce made such a determination, it could assess levies on goods imported from China or other countries with undervalued currencies.
But the measure, which was revised in a Ways and Means committee vote earlier this month, doesn’t require Commerce to make such a determination. The change in language, said Scott Lincicome, a trade lawyer at White & Case, gives the administration “a way to say no” to U.S. industries and could signal to China that the U.S. isn’t looking to declare a trade war over currency practices…
Despite the wide support the currency bill received in the House, it will be difficult for the measure to become law this year. China critics in the Senate plan to press for legislation when lawmakers return to Washington after the elections, but that would involve a separate proposal and the window for legislation to move before year-end is expected to be narrow.
Business Insider profiles the 10 states that export the most to China (“The 10 States About To Get Crushed In A US-China Trade War”), but because they use exports rather than exports per worker, California is #1, unsurprisingly.
The distribution of Chinese city sizes
The Economist‘s Economics Focus column looks at Chinese cities and manages to discuss the distribution of city sizes while avoiding the phrase “Zipf’s law”.
China makes a habit of bending the rules of economics. Do its cities obey the rank-size rule? The fit is not perfect. China’s small cities are too dispersed and its big cities are too even in size…
Messrs Xu and Zhu show that China’s cities became more equal during the 1990s, especially in the first half of the decade…
China’s small cities exploded in number. But its biggest metropolises conspicuously failed to explode in size. As BCG notes, only 27m Chinese live in cities of more than 10m, compared with 58m Indians and 32m Brazilians. Shanghai may have sprouted dozens of skyscrapers and Beijing may boast half a dozen ring roads, but China’s big cities are still surprisingly small.
This partly reflects a conscious policy. Although China’s rulers have embraced urbanisation, they still seem wary of mega-cities…
China’s economy would benefit from a stretching out of the distribution of its cities, argue Ting Jiang of Hong Kong University of Science and Technology and co-authors. But how might such a divergence come about? It might, they speculate, happen as an unintended consequence of the government’s push to expand higher education. Since the bigger cities have the most universities, their expansion will draw youngsters from the hinterland to the metropolis. And with a degree (and a job), their graduates should win permission to stay.
Xu and Zhu, “Urban Growth Determinants in China“, Chinese Economy, 2008.
[HT: Alejo]
Do IPAs improve export sophistication?
Torfinn Harding and Beata Javorcik on FDI and export unit values:
This study presents evidence suggesting that attracting inflows of FDI offers potential for upgrading a country’s export basket. The empirical analysis relates unit values of exports measured at the 4-digit SITC level to data on sectors treated by investment promotion agencies as priority in their efforts to attract FDI. The sample covers 116 countries over the period 1984-2000. The findings are consistent with a positive effect of FDI on unit values of exports in developing countries. However, such a relationship is less evident in developed countries. These results suggest that FDI can help bridge gaps in production and marketing techniques between developing and high income economies.
House schedules vote on renminbi bill
If you want some humorous updates regarding world trade, you should follow Alan Beattie on Twitter. In a single update, you get a Doug Palmer story and a comedy video.
U.S. lawmakers may vote next week on legislation that would penalize China for keeping its currency artificially low, a touchy issue that has gained broader political support as congressional elections approach.
The decision to move a bill to pressure China to let its yuan currency appreciate against the U.S. dollar comes a day before President Barack Obama is due to meet with Chinese Premier Wen Jiabao in New York.
A House of Representatives committee scheduled a vote for Friday on a China currency bill, and a Democratic aide said the full House was expected to vote on the measure next week.
How big are the gains from trade?
From an interview of Ed Prescott: “People can quantify what gains there are from it [trade]. If you calibrate the models… most people want to get a big number, but a small number comes out.”
Ed explained that the importance of the difference between openness and free trade lies in explaining the big gains that “trade” generates. Empirically we know that periods of openness coincide with periods of strong economic growth and periods of protectionism coincide with recession. Yet the traditional models of trade don’t bear those big-gains results.
There are three theories traditionally used to explain trade, Ed explained:
The first is the Heckscher-Ohlin factor endowments model. China has a lot of low-skill workers so they produce goods that are labor-intensive, and since the U.S. has a lot of skilled workers, we produce goods that are skill-intensive. But the gains according to that model turn out to be small.
The second model is David Ricardo’s comparative advantage. It’s the textbook example: England had a comparative advantage in wool and Portugal had a comparative advantage producing wine, so England produces wool and trades for wine and Portugal produces win and trades for wool. But that model also yields small gains from trade.
Then there is the increasing returns to scale model from Paul Krugman, who use the Dixit-Stiglitz monopolistic competition model to explore the potential gains from increasing returns. Yet that, too, turned out small gains.
So clearly there’s got to be some other reason that trade yields big gains for the economies that engage in it. The answer is that “trade” is about much more than the exchange of goods. With openness, there is diffusion of knowledge.
[This isn’t a transcript, but it’s an accurate paraphrasing of the original audio.]
For two examples of such calculations, I’d look at Bernhofen & Brown (AER, 2005) and Broda & Weinstein (QJE, 2006). The former uses the minimal framework of putting an upper bound on the equivalent variation by looking at autarky prices and a counterfactual import vector. The latter impose more structure by using a CES demand system and look at the gains from new imported varieties.
Now, I won’t dispute that technological spillovers and knowledge diffusion are additional channels offering more gains from economic exchange. But how does Prescott know that the gains from trade are bigger than those estimated using the theories above? What is his benchmark? How could one quantify the gains from trade without using some theory?
Rich-country trade preferences
CGD’s Kim Elliott posts this handy summary of developed countries’ trade-preferences programs:
What tariff lines do US PTAs liberalize?
Marco Fugazza & Frédéric Robert-Nicoud look at the swiftness of US PTA tariff cuts:
This paper investigates the empirical relationship between cuts in MFN bound rates negotiated during the Uruguay Round of the GATT (1986-1994) and the depth and breadth of Preferential Trade Agreements signed in the aftermath of its completion. Our empirical investigation focuses on the United States using official tariff line level data. To the best of our knowledge, our paper is unique in looking at the causal relationship from multilateralism to regionalism. The existing empirical literature is exclusively looking at the relationship running the other way…
[T]he imports of goods that the US liberalises swiftly the most frequently on a preferential basis are also the goods for which it granted the boldest tariff cuts during the Uruguay Round…
In the US, resistance to preferential trade liberalisation (conditional on it taking place) cannot take the form of positive preferential tariffs for institutional reasons, as we explain in the data section of the paper. It can only take the form of delayed liberalisation. Therefore, our measure of the intensity of post-Uruguay Round preferential trade liberalisation (or ‘PTL’) for each good is the frequency at which the US grants immediate duty-free access to its market to its FTA trading partners…
We find that an increase in the tariff CUT of one percentage point is associated with an increase in the probability of the US granting immediate duty-free access to its market to all trade partners by about twenty-five percent at the sample mean. Given that the standard error for CUT in the sample is 4.34 percentage points, this is a large effect…
[W]e introduce the Uruguay Round MFN tariff rate as a control in all our regressions. The estimated coefficient is negative, implying that the US disproportionately grants duty free access to its market on a preferential basis for goods that have a low MFN tariff rate already.
The authors interpret their findings as showing a complementarity between multilateral and preferential trade negotiations.
Trade Diversion 