# The NAFTA trucking dispute in 2015

I’ve been blogging the NAFTA trucking dispute since 2008. Under NAFTA, Mexican trucks were supposed to be able to operate in Texas, California, New Mexico, and Arizona by December 1995. That never happened, and it took a dozen years for a pilot program to be started, only to be aborted in 2009. Another pilot took place 2011-2014.

Nearly twenty years late, the US government may be close to fulfilling its NAFTA obligations. In January 2015, the US DOT announced “that Mexican motor carriers will soon be able to apply for authority to conduct long-haul, cross-border trucking services in the United States.” I’m not immediately finding confirmation that this has actually started, so I won’t call this case closed quite yet. We’ll see if it hits the 20-year mark this December.

# What the Heckscher-Ohlin theorem is and is not about

In a piece for Bloomberg, Noah Smith wrote:

No. 9. The Heckscher-Ohlin theorem

This is a theory about trade. It says that countries with more capital — industrialized countries such as the U.S. or Japan — will tend to make things that are more capital-intensive. And countries with more labor — such as India — will tend to make things that are more labor-intensive. That’s why the U.S. makes a lot of semiconductors (which require huge fabrication plants), and India makes a lot of clothes.

Tyler Cowen says Noah Smith oversimplified/misrepresented the theorem. He raises four objections, concluding with:

I continue to believe most economists don’t have such a clear sense of the Hechscker-Ohlin theorem. There are so many tricks to HOT I wouldn’t be surprised if I slipped up somewhere myself in this post.

Indeed, I do think Tyler slipped up a bit. He’s right that identifying “effective units” of capital and labor is the relevant exercise and also very difficult (objection #2), and of course the Heckscher-Ohlin theorem is all about ratios, not absolute quantities (objection #3).1

But I want to defend Noah a bit from Tyler’s first complaint, which was:

The HOT proposition is about exports being relatively capital- or labor-intensive, not about production per se. Even for a popular audience, I think that substitution should have been easy enough.

Is that so? Here’s how Ron Jones and Peter Neary stated the theorem in question in their 1984 Handbook chapter, which surely was not aimed at a popular audience:

Heckscher-Ohlin theorem. A country has a production bias towards, and hence tends to export, the commodity which uses intensively the factor with which it is relatively well endowed.

Why does production composition determine net export composition in this model? Well, the factor-abundance theory is a story about economies’ endowments determining the pattern of trade. To talk only about endowments (and thus only about supply-side elements), we have to neuter demand by assuming identical, homothetic preferences.2 Given commodity-price equalization and homothetic preferences, each country has a consumption vector that is proportionate to its share of world income. With no differences in the composition of consumption, differences in the composition of production translate into differences in the composition of net exports, which are simply production minus consumption.

Thus, the prediction about the pattern of trade simply falls out of the prediction about the pattern of production. Here’s how Jones and Neary explained it:

The final core proposition is the Heckscher-Ohlin theorem itself, but this in fact is closely related to the Rybczynski theorem. Consider two countries with different relative factor endowments and the same technology for producing both goods. If both countries face the same commodity prices then, by the Rybczynski theorem, the country with the greater relative endowment of capital will produce relatively more of the capital-intensive good… Provided this production bias is not offset by a demand bias, the relatively capital-abundant country will export the relatively capital-intensive good. When it is expressed in terms of a physical definition of factor abundance, the Heckscher-Ohlin theorem is thus a simple corollary of the Rybczynski theorem…

In terms of the canonical theorem, I think that Noah got that part right. And in a meta sense, Tyler was right as well.

1. When he cites the Leontief paradox, he’s getting into more complicated territory, see Leamer (JPE 1980).
2. In reality, of course, I think that the composition of demand matters!

# When international shipping is cheaper than domestic

This strange consequence of postal law was less significant when the mail was mostly personal correspondence. But as Chinese companies began logging on to Web marketplaces like eBay, Amazon, and Alibaba, they started taking advantage of the shipping deal to sell directly to American consumers. And so it’s never been easier to get something cheap and Chinese delivered to your door for a startlingly low price: $4.64 for a digital alarm clock;$2.50 for a folding knife; $1.88 for an iPhone cable — all with shipping included… Countries used to provide this forwarding service to each other for free, but in 1969 an update to this postal treaty called for small fees (called terminal dues) on each mail piece. Since then the dues have grown, and the payment system has become labyrinthine. In most cases, however, postal services still charge each other less than they would charge their own citizens for moving a package across the country. According to the terms set out in Universal Postal Union treaty, the USPS in 2014 gets paid no more than about$1.50 for delivering a one-pound package from a foreign carrier, which makes it hard to cover costs. [1] The USPS inspector general’s office estimated that the USPS lost \$79 million in fiscal year 2013 delivering this foreign treaty mail. (The Postal Service itself declined to provide specific figures.) …

At the latest round of negotiations in 2012, countries did agree to raise fees slightly. The United States will get to charge about 13 percent more every year from 2014 to 2017. Under the new terms, the inspector general’s office believes that the USPS will start to lose less money on inbound mail. [3]

All this should be a reminder that any trade deal has winners and losers and unintended consequences. Internet commerce suddenly made the terms of a long-standing mail treaty a competitive advantage for Chinese merchants, and U.S. importers like the McGraths have been feeling the squeeze. But this same system also means that average Americans can get a really sweet deal on an iPhone case shaped like an Absolut bottle.

Hat tip to Corinne Low.

# Shipping costs are endogenous

Cost to transport a 20′ container from major US ports to various foreign ports:

From Jose Asturias and Scott Petty.

It’s already that time of year again, and I’m a little late. Who’s on the job market this year with a paper on international trade?

As in prior years, I focus on trade papers, thereby neglecting international finance and open-economy macro papers. If I’ve missed someone, please contribute to the list in the comments.

Here are folks listing international trade as a field with a JMP in economic geography:

Also, Jon Haveman is making my annual compilation obsolete by offering a full-featured database of trade candidates with candidate-created profiles: Job Candidate Database.

While I’ve fallen behind on blogging, I do a better job of staying active on Twitter. In the last two weeks, @TradeDiversion has tweeted about:

# How not to estimate an elasticity

The Cato Institute’s Randal O’Toole claims to debunk a recent paper suggesting a “fundamental of road congestion”.

In support of the induced-demand claim, Mann cites research by economists Matthew Turner of the University of Toronto and Gilles Duranton of the University of Pennsylvania. “We found that there’s this perfect one-to-one relationship,” Mann quotes Turner as saying. Mann describes this relationship as, “If a city had increased its road capacity by 10 percent between 1980 and 1990, then the amount of driving in that city went up by 10 percent. If the amount of roads in the same city then went up by 11 percent between 1990 and 2000, the total number of miles driven also went up by 11 percent. It’s like the two figures were moving in perfect lockstep, changing at the same exact rate.” If this were true, then building more roads doesn’t make traffic worse, as the Wired headline claims; it just won’t make it any better.

However, this is simply not true. Nor is it what Duranton & Turner’s paper actually said. The paper compared daily kilometers of interstate highway driving with lane kilometers of interstates in the urbanized portions of 228 metropolitan areas. In the average metropolitan area, it found that between 1983 and 1993 lane miles grew by 32 percent while driving grew by 77 percent. Between 1993 and 2003, lane miles grew by 18 percent, and driving grew by 46 percent.

That’s hardly a “perfect one-to-one relationship.”

The paper also calculated the elasticities of driving in relationship to lane kilometers. An elasticity of 2 would mean a 10 percent increase in lane miles would correspond with a 20 percent growth in driving; an elasticity of 1 would mean that lane miles and driving would track closely together. The paper found that elasticities were very close to 1 with standard errors of around 0.05. Even though this is contradicted by the previously cited data showing that driving grew much faster than lane miles, this is the source of Turner’s “perfect one-to-one relationship.”

My prior belief is that results published in the American Economic Review are unlikely to be debunked by a couple of paragraphs in a blog post. In this case, it’s fairly straightforward to explain why the average growth rates of lane kilometers and vehicle-kilometers traveled are not informative about the elasticity.

The lane-kilometer elasticity of VKT describes how changes in VKT relate to changes in lane kilometers. O’Toole tries to say something about this relationship by noting the average value of each. But describing the average growth rates does not say whether cities that experienced faster growth in lane kilometers also experienced faster growth in vehicle-kilometers traveled. It’s entirely possible for both averages to be positive and the elasticity relating them to be negative! Here are a few lines of Stata code to generate an example in which the averages are 32% and 77%, while the elasticity is -1.

clear
set obs 228
gen delta_lane = .32 + rnormal(0,.2)
gen delta_VKT = (.77 +.32) - delta_lane + rnormal(0,.2)
twoway (scatter delta_VKT delta_lane) (lfit delta_VKT delta_lane), graphregion(color(white))


That yields a figure like this:

Having made this econometric point, one can grab the data used in the Duranton and Turner paper to  note the average values and appropriately estimate the elasticity, revealing no contradiction whatsoever between these two moments.

use "Duranton_Turner_AER_2010.dta", clear
gen delta_VKT = log(vmt_IHU_93) - log(vmt_IHU_83)
gen delta_lane = log(ln_km_IHU_93) - log(ln_km_IHU_83)
summ delta*
reg delta_VKT delta_lane
twoway (scatter delta_VKT delta_lane) (lfit delta_VKT delta_lane), graphregion(color(white))


Across MSAs, the average VKT change was a 61 log-point increase, while the average lane kilometers change was a 25 log-point increase. That’s a ratio greater than two, but the estimated elasticity is 0.955. Hence Matt saying that he and Gilles found a one-to-one relationship. Their paper deals with various types of roads and instrumenting to infer the causal relationship, but I don’t need to describe those issues here. I’ve written enough to demonstrate why O’Toole’s blog post does not debunk the Duranton-Turner findings.

# Chicago Booth

I’m happy to say that I will become an assistant professor at Chicago Booth in July.

# Look what I found…

In the course of researching my job market paper, I read a lot of old or obscure literature related to the Linder hypothesis. It yielded some real gems. Unfortunately, I also unearthed some big disappointments. You’ll see what I mean in a moment.

For the moment, here’s the abstract of McPherson, Redfearn and Tieslau – “International trade and developing countries: an empirical investigation of the Linder hypothesis” in Applied Economics (2001), an article with 44 citations in Google Scholar:

This paper presents empirical evidence in support of the Linder hypothesis for five of the six East African developing countries studied here: Ethiopia, Kenya, Rwanda, Sudan and Uganda. This finding implies that these countries trade more intensively with others who have similar per capita income levels, as predicted by Linder. The contributions of this research are three-fold. First, new information is provided on the Linder hypothesis by focusing on developing countries. Second, this is one of very few analyses to capture both time-series and cross-section elements of the trade relationship by employing a panel data set. Third, the empirical methodology used in the analysis corrects a major shortcoming in the existing literature by using a censored dependent variable in estimation.

Now, here’s the abstract of Bukhari, Ahmad, Alam, Bukhari, and Butt – “An Empirical Analysis of the Linder Theory of International Trade for South Asian Countries” in The Pakistan Development Review (2005), with zero citations in Google Scholar:

This paper presents empirical evidence in support of the Linder theory of international trade for three of the South Asian countries, Bangladesh, India, and Pakistan. This finding implies that these countries trade more intensively with countries of other regions, which may have similar per capita income levels, as predicted by Linder in his hypothesis. The contribution of this research is threefold: first, there is new information on the Linder hypothesis by focusing on South Asian countries; second, this is one of very few analyses to capture both time-series and cross-section elements of the trade relationship by employing a panel data set; third, the empirical methodology used in this analysis corrects a major shortcoming in the existing literature by using a censored dependent variable in estimation.

It continues like this, paragraph for paragraph. Finally, we arrive at Table 2 of each paper. Here’s McPherson, Redfearn and Tieslau:

And here’s Bukhari, Ahmad, Alam, Bukhari, and Butt:

That’s Bangladesh-Kenya, India-Ethiopia, and Pakistan-Uganda with identical rows. The same thing occurs in Table 3. It continues, all the way through the concluding paragraphs.

# “Ricardian Productivity Differences and the Gains from Trade”

You’ll recall that Ralph Ossa emphasized sectoral heterogeneity in trade elasticities as one reason the ACR formula might understate the gains from trade. I haven’t read it yet, but this new NBER WP by Andrei Levchenko and Jing Zhang also emphasizes the importance of sectoral heterogeneity in thinking about this topic:

[T]he simpler formulas that do not use information on sectoral trade volumes understate the true gains from trade dramatically, often by more than two-thirds. The error in the formulas across countries is strongly negatively correlated to the strength of Ricardian comparative advantage: the one-sector formula-implied gains understate the true gains from trade by more in countries with greater dispersion in sectoral productivity. The model-based exercise thus reinforces the main result of the paper that accounting for sectoral heterogeneity in productivity is essential for a reliable assessment of the gains from trade.