Migrant workers in the crisis

The Financial Times has multimedia coverage of the impact of the crisis on migrant workers:

The economic downturn has inevitably hit migrant workers hard. Here, reporters from the FT’s foreign bureaux investigate the plight of migrants from Poland and the US to Brazil and China, to see which groups are returning home and which are finding innovative ways to survive the downturn abroad.

  • Downturn slows tide of US-bound workers, by Matthew Garrahan
  • Families struggle to survive as flow of dollars dries up by Adam Thomson
  • Downturn hastens Nigeria’s ‘brain gain’, by Matthew Green
  • Thoughts turn to home for white South Africans by Richard Lapper
  • Sun sets on migrants’ Japanese dreams by Lindsay Whipp and Jonathan Wheatley
  • China schools offer parents incentive to stay put by Tom Mitchell
  • Downturn puts paid to Polish mobility by Jan Cienski
  • Ukrainians forced to cross border for work by Jan Cienski

Hat tip: Laurence.

Would any economist defend “Buy American”?

Jagdish Bhagwati, Douglas Irwin, and Susan Schwab are debating the merits of “Buy American” against Leo Gerard (United Steelworkers), John MacArthur (Harper’s Magazine), and Jeff Madrick (New York Review of Books) at NYU on Monday evening. NPR should post the podcast shortly thereafter.

The opposition’s lack of economists is notable, but I have yet to read an economist defend the “Buy American” clause, so you can’t blame the Intelligence Squared event organizers for the unbalanced panel. When Bhagwati and Stiglitz agree that a policy is foolish, you can be pretty confident it is.

Economist: “Barack Obama and free trade: Economic vandalism”

Contra Doug Irwin, the Economist is quite pessimistic about President Obama’s tire tariffs: “A protectionist move that is bad politics, bad economics, bad diplomacy and hurts America. Did we miss anything?”

One might argue that these tariffs don’t matter much. They apply, after all, only to imports worth a couple of billion dollars last year, hardly the stuff of a great trade war… Presidents, after all, sometimes have to throw a bit of red meat to their supporters: Mr Obama needs to keep the unions on side to help his health-reform bill.
That view seems naive. It is not just that workers in all sorts of other industries that have suffered at the hands of Chinese competitors will now be emboldened to seek the same kind of protection from a president who has given in to the unions at the first opportunity. The tyre decision needs to be set into the context of a string of ominously protectionist policies which started within weeks of the inauguration with a nasty set of “Buy America” provisions for public-works contracts. The president watered these down a bit, but was not brave enough to veto. Next, the president stayed silent as Congress shut down a project that was meant to lead to the opening of the border to Mexican trucks, something promised in the NAFTA agreement of 1994. Besides these sins of commission sit the sins of omission: the president has done nothing at all to advance the three free-trade packages that are pending in Congress, with Colombia, Panama and South Korea, three solid American allies who deserve much better. And much more serious than that, because it affects the whole world, is his failure to put anything worthwhile on the table to help revive the moribund Doha round of trade talks. Mr Bush’s tariffs, like the Reagan-era export restraints on Japanese cars and semiconductors, came from a president who was fundamentally committed to free trade. Mr Obama’s, it seems, do not.

One might argue that these tariffs don’t matter much. They apply, after all, only to imports worth a couple of billion dollars last year, hardly the stuff of a great trade war… Presidents, after all, sometimes have to throw a bit of red meat to their supporters: Mr Obama needs to keep the unions on side to help his health-reform bill.

That view seems naive. It is not just that workers in all sorts of other industries that have suffered at the hands of Chinese competitors will now be emboldened to seek the same kind of protection from a president who has given in to the unions at the first opportunity. The tyre decision needs to be set into the context of a string of ominously protectionist policies which started within weeks of the inauguration with a nasty set of “Buy America” provisions for public-works contracts. The president watered these down a bit, but was not brave enough to veto. Next, the president stayed silent as Congress shut down a project that was meant to lead to the opening of the border to Mexican trucks, something promised in the NAFTA agreement of 1994. Besides these sins of commission sit the sins of omission: the president has done nothing at all to advance the three free-trade packages that are pending in Congress, with Colombia, Panama and South Korea, three solid American allies who deserve much better. And much more serious than that, because it affects the whole world, is his failure to put anything worthwhile on the table to help revive the moribund Doha round of trade talks. Mr Bush’s tariffs, like the Reagan-era export restraints on Japanese cars and semiconductors, came from a president who was fundamentally committed to free trade. Mr Obama’s, it seems, do not.

The invisible Smoot-Hawley?

This Vox column makes the surprising claim that trade costs have risen significantly during the crisis, so much that they match the rise of trade costs in 1929:

The measured trade-cost rise is estimated to be similar in the two events, yet tariffs have not risen in today’s crisis in anywhere near the extent to which they did in the 1930s. This seems to indicate that a good fraction of today’s trade drop is due to non-tariff trade policy and other trade frictions – e.g. evaporating trade credit, credit constraints in the market for consumer durables, and other reported changes in policy have been of equal magnitude (see Ferrantino 2009 on the latter).

The best evidence we have on new trade barriers, the Global Trade Alert initiative, does not suggest a rise in measured protectionism anywhere near that observed in the 1930s. There must be something else driving the rise in trade frictions. Perhaps the protection is so murky that even GTA cannot document it? Perhaps the trade credit problem is the culprit and thus more important than many argue (Chauffour and Farole 2009)?

I’ll have to take a look at the underlying methodology that disaggregates the trade collapse into demand-driven and trade-cost-driven elements before I comment further.

Disaggregated production and the big drop in trade flows

Alan Beattie:

A host of economists have pointed at the disaggregation of supply chains as one of the key reasons. A combination of just-in-time logistics and the digitisation of information has helped fracture supply chains… But as Prof O’Rourke notes, this theory shows why trade volume is higher relative to output; it does not necessarily explain why it falls faster in percentage terms. He has another explanation based on outsourcing: that manufactured goods comprise a bigger proportion of trade today than in the 1930s, when basic commodities had a larger share. Commerce in manufactured goods is more volatile and subject to shifts in demand than commodities, and trade in turn becomes more variable.

David Atkin's "Trade, Tastes and Nutrition in India"

In “Trade, Tastes and Nutrition in India“, David Atkin introduces habits in consumption into a specific factors model of agricultural trade. If a country starts in autarky, then people become habituated to consuming the food produced by their abundant factors. This correlation of tastes and endowments means that when the economy opens to trade, the relative price of that good (for which autarkic consumers developed a habit) will rise. This reduces the consumption of food nutrients in the short-run compared to the habit-free case, as consumers don’t shift over to newly cheap imported foods as quickly as assumed.

Atkin doesn’t focus much on welfare comparisons, which are difficult in such a dynamic, habit-formation context; rather, he’s concerned with nutritional intake. He argues that nutrition matters – policymakers do care, nutrition impacts growth potential, and childhood malnutrition can have persistent long-run effects.

Atkin’s empirical testing ground is India, which has internal agricultural markets that are not very integrated. There are high transport costs, poor infrastructure, and state governments set agricultural policy, including production subsidies and tariffs on agricultural imports from other states.

I examine the predictions of this model of trade with habit formation using household survey data from India, where internal agricultural trade remains highly restricted. I identify tastes with the unexplained regional variation in household demand for agricultural products and find that regional tastes favor food crops that are well-suited to local agro-climatic conditions. I predict that the liberalization of internal agriculture trade in India will generate short-run caloric losses unless income gains from trade are relatively large, and that there would be no such losses if tastes were identical across the country. I also examine the consumption patterns of inter-state migrants, and find that they consume fewer calories for a given level of food spending than otherwise similar consumers. This effect only disappears two generations after migration, as tastes adjust to local prices. These findings, which reflect the higher prices of preferred origin-state goods in the migrant’s destination state, further corroborate the assumptions of my model.

Firms can't answer the questions we have about PTAs

Masahiro Kawai and Ganeshan Wignaraja try to use an ADB survey of Asian firms to assess the Asian “noodle bowl” of preferential trade agreements:

Properly designed FTAs keep trade and FDI flowing, even when crisis strikes. Yet, the plethora of overlapping and complex FTAs in East Asia carries the risk of becoming unwieldy and making business cumbersome. Influenced by Jagdish Bhagwati’s famous remark about a spaghetti bowl of FTAs, critics argue that the explosion of deals, with complex rules and variable tariffs, has increased transaction costs, particularly for small- and medium-sized enterprises (SMEs) – those that can least afford them (see Bhagwati, 2008 for an excellent synthesis). They also argue that the multiplicity of bilateral and plurilateral deals hinders the broader push toward a global trade agreements. The spaghetti bowl phenomenon is popularly known as the “noodle bowl” effect in Asia and has led Richard Baldwin and Philip Thornton (2008) to propose a “WTO Action Plan on Regionalism” that includes deepening of the transparency mechanism for FTAs.

For the first time, the ADB study on FTAs sought the views of those most directly affected – the region’s export-oriented firms. The results showed that these businesses view FTAs as a benefit rather than a burden and use them to expand trade to a far greater degree than had been previously thought. The benefits of FTAs include wider market access and preferential tariffs that make it easier to import intermediate materials needed for finished goods. Multiple country rules of origin (ROOs), which determine where goods originate from for a variety of purposes, including quotas and labelling, may add some administrative and transaction costs. But the large majority of exporters do not view ROOs as a significant hindrance to business activity. In addition, bilateral and plurilateral FTAs counter protectionist tendencies amid the current economic uncertainty. They provide a valuable stepping stone toward broader trade liberalisation in support of economic recovery.

Unfortunately, this is not compelling evidence. Surveying firms is simply not a persuasive means of assessing the costs and dangers identified by skeptics of preferential trade. Questions about exporters’ preference utilization and perceived trouble with rules of origin cannot answer questions like:

  • Do PTAs dampen protectionist pressures or just shift them onto less-preferred trading partners?
  • Do PTAs divert political energy away from multilateral negotiations – are they building blocks or stumbling blocks?
  • Do these PTAs create more trade than they divert?
  • Will latecomers in the PTA race find themselves forced to join agreements that favor the first movers, through mechanisms such as decisions on technical barriers to trade?

It’s good to collect evidence on preference utilization (28% of firms utilize some preferences, though that’s not as meaningful as evidence on the percentage of trade flows that utilize preference), but this survey doesn’t answer any of the big questions about Asia’s noodle bowl.