Why would developing countries gain power by unilaterally liberalizing trade?

I don’t follow the logic of Andreas Freytag and Sebastian Voll’s proposal that developing countries capitalize on the current crisis by unilaterally liberalizing their trade policies so as to pressure developed countries.

To get back on track after resolving the financial crisis, we will need new growth and investment opportunities. Economic development driven mainly by exports to the “Western World” will thus no longer be successful. Therefore, maintaining the old export-oriented industry structures and protecting home markets at all costs is not expedient. For future economic growth, another strong and global strategy is needed – impulses like those proposed in the Doha-round negotiations will be necessary.

The crisis offers an ideal window of opportunity. The emerging countries could now, for the first time, take the position in international trade policy to which they are entitled, given their increased economic weight, by putting the industrialised countries’ own reforms and global initiatives under pressure (Dhar et al. 2009). Unilateral reforms could be an alternative to revitalising the Doha round, which admittedly has a highly uncertain outcome. For example, emerging markets could open national services, public procurements, and contracts in infrastructure sectors, as has been frequently advised for South Africa for instance (OECD 2008; Draper and Freytag 2008)…

[W]e see a great opportunity for emerging economies to stand up against protectionism and use their new economic power to increase their political weight in international economic policymaking. By bringing global trade back on the agenda and taking steps to conclude successfully the Doha round, these countries can put pressure on the OECD. The economic and political impetus generated by such efforts to overcome the economic crisis and restore confidence in future growth should not be disregarded.

Perhaps unilateral reforms would spur economic growth, but that would make them a good idea any time, crisis or not. What about the current international policymaking environment means that unilateral reforms will “increase their political weight in international economic policymaking”? And how does unilateral liberalization put pressure on developed countries? Moreover, what does additional pressure produce? There are theories of trade policymaking in which unilateral reform alters foreign political economy considerations so as to spur sequential reciprocity, but they are neither familiar to the casual reader nor necessarily applicable to the current circumstances. Freytag and Voll fail to explain the causal mechanism that is the crux of their argument – how does unilateral reform generate political pressure?

We all want to avoid protectionism during the crisis and would be delighted to see growth-promoting reforms, but that doesn’t mean such liberalization is politically logical.

International economic law blogs

Marylin Johnson Raisch, Associate Law Librarian for International and Foreign Law at Georgetown, annually surveys the web for the Journal of International Economic Law. She included a list of “substantive web logs with postings often relevant to international economic law”:

China attacks the dollar's reserve-currency status

FT:

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

WSJ:

For decades, the dollar has been a convenient medium of exchange for everyone from a central bank seeking to buy U.S. Treasury bonds to a business exporting commodities from Latin America to Asia.

To jump-start a new global reserve currency, economists say, would require someone effectively subsidizing the cost of bringing buyers and sellers together for the time it takes the currency to gain traction.

Large, deep, and highly traded markets involving a particular currency “don’t spring up spontaneously just because the Chinese central bank governor suggests this would be a good idea,” says Barry Eichengreen, an economist at the University of California at Berkeley…

In his essay, China’s Mr. Zhou proposed expanding the role of “Special Drawing Rights,” or SDRs… The SDR is “basically the Esperanto, at best, of international currencies,” says Jeffrey Frankel, an economist at Harvard University, referring to the ill-fated attempt to create a common language. “It’s not at all used.”

Learning-by-exporting in Chinese firms

Does exporting raise productivity? Dean Yang et al. use export demand shocks from the Asian financial crisis to instrument for increased exporting and find a big effect:

Between 1995 and 1998, the Japanese, Thai, and Korean currencies depreciated in real terms against the US dollar by 31%, 32%, and 43%, respectively. At the other extreme, the British pound and the US dollar experienced real appreciations against the yuan, by 14% and 7%. Because the exchange rate changes varied so widely, two observationally equivalent firms faced very different export demand shocks if one happened to export its goods to Korea and the other exported to the UK…

For each firm, we construct an exchange rate shock measure specific to that firm, which is the average exchange rate change of a firm’s export partners weighted by the firm’s export destinations in 1995 (prior to the Asian financial crisis). We focus on changes in exports driven by these exchange rate shocks.

Using this approach, we ask whether and how instrumented changes in exports affect measures of firm performance. We find that increases in exports are associated with improvements in total factor productivity, as well as improvements in other measures of firm performance such as total sales and return on assets. Our estimates indicate that a 10% increase in exports causes productivity improvements of 11% to 13%, nearly one-eighth of the mean productivity improvement from 1995 to 2000 in our sample.

Fixed export costs and international product standards

Empirical evidence that mutual recognition agreements better reduce the fixed cost of exporting associated with product standards than aligning domestic regulations with international standards from Galina An and Keith Maskus:

Complying with global standards and technical norms can be costly, making them potential impediments to trade, but it can also expand export opportunities. Two policies available to governments are alignment of domestic technical regulations with international standards and entry into mutual recognition agreements (MRAs). We study the effects of such decisions on the volume of exports to developed markets by firms in developing countries, using data from a World Bank firm-level survey of awareness of global product norms. Both standards alignment and MRAs are associated with more exports to developed countries, but only MRAs significantly promote exports. This finding is consistent with theoretical predictions that MRAs should reduce the fixed costs of exporting more than standards alignment, permitting more firms to enter export markets in higher volumes. Governments in developing countries hoping to encourage exports may wish to favour the negotiation of mutual recognition of testing and certification procedures with major trading partners as a more affirmative avenue to expanding international sales.

[“The Impacts of Alignment with Global Product Standards on Exports of Firms in Developing Countries,” The World Economy, 32(4): 552-574. DOI: 10.1111/j.1467-9701.2008.01150.x]

Dead Aid

Out this week is Dead Aid by Zambian economist and former World Bank consultant Dambisa Moyo. She’s hawking a tough sell – not merely arguing that aid has had negligible impact on average, Moyo is pressing the case that aid has been “an unmitigated political, economic, and humanitarian disaster“:

The aid money pouring into Africa, she says, underwrites brutal and corrupt regimes; it stifles investment; and it leads to higher rates of poverty — all of which, in turn, creates a demand for yet more aid. Africa, Ms. Moyo notes, seems hopelessly trapped in this spiral, and she wants to see it break free. Over the past 30 years, she says, the most aid-dependent countries in Africa have experienced economic contraction averaging 0.2% a year. [WSJ book review]

The Wall Street Journal published an excerpt (the book’s preface) this morning, but that passage doesn’t even begin to make the anti-aid argument. But Bill Easterly is excited about the book, so it’s probably worth a closer look.

Update: See this (negative) review. Thanks to Luis Enrique in the comments for the pointer.