Mexican trucks and NAFTA obligations

Trade spat!

The Mexican government said Monday it would slap tariffs on 90 U.S. industrial and agricultural products, in a trade dispute that underscored the difficulties facing President Barack Obama as he tries to assure business and global allies that he favors free trade.

Mexico said the tariffs were in retaliation for the cancellation of a pilot program allowing Mexican trucks to transport cargo throughout the U.S.

Unions have for years fought to keep Mexican trucks off U.S. highways, despite longstanding agreements by the two countries to eventually allow their passage. Legislation killing the pilot program was included in a $410 billion spending bill Mr. Obama signed last week.

Tidbits

  • Language as a trade barrier – “[I]f knowledge of English in all European countries increased by ten percentage points, European trade would rise by up to 15% on average. Bringing all European countries up to the level of English proficiency enjoyed by the Dutch could increase European trade by up to 70%.”
  • The third edition of Doug Irwin‘s Free Trade Under Fire will be out in a few months.
  • Foreign athletes can now play in the US for more than ten years.
  • Robert Baldwin criticizes the botched special safeguard mechanism that caused so much trouble for the Doha negotiations back in July.
  • The benefits of highly skilled immigration: “If immigrants were merely displacing natives, increases in the H-1B quota should not have led to increases in innovation. But Messrs Kerr and Lincoln found that when the federal government increased the number of people allowed in under the programme by 10%, total patenting increased by around 2% in the short run. This was driven mainly by more patenting by immigrant scientists. But even patenting by native scientists increased slightly, rather than decreasing as proponents of crowding out would have predicted.”

Financial crisis and manufacturing exports

Mark Koyama notes that manufacturing-driven economies are being hit pretty hard by the financial crisis:

Countries which retained significant manufacturing industries like Germany and particularly Japan are currently suffering the most – even though their banks were cautiously managed unlike much of the Anglo-American financial sector.  Japan’s GDP shrunk at an annualized rate of 12.7 percent last quarter which more or less wipes out the growth that took place between 2003 and 2007.   Since it is very easy to defer purchasing a new mp3 player or car, while expenditures on services are harder to cut back on, the bulk of the fall in aggregate demand has manifest itself in terms of falling demand for manufactured products. Development economists in the 1960s used to advice developing countries that it was dangerous to specialize in a single cash crop like coffee despite what comparative advantage might say because it would leave the entire economy dependent on movements in global prices. Now it appears that economies that have specialized in exporting manufactured are  peculiarly vulnerable in a world where globalization has meant that economic shocks are tightly correlated across countries.

What drove US trade growth?

Gary Hufbauer and Matthew Adler attribute 25% of US merchandise trade growth since 1980 to policy liberalisation. More surprisingly, they attribute only 3% to falling transportation costs. The rest? “The general expansion of the world economy,” a.k.a. the residual.

Their paper isn’t up on the web yet; I’ll have more comments once I see their methodology.

Protectionism, dictatorship, and war

I am more concerned about economic losses, policy coordination, and other high-probability costs, but Ed Glaeser is making the less-traditional case that protectionism risks increasing the likelihood of war by eroding democracy in developing countries:

Democracy is bolstered by prosperity and damaged by downturns. Since the pioneering work of Martin Lipset 50 years ago, social scientists have tried to understand why democracies and wealth go together. My colleague Robert Barro found that this link exists not because democracies increase prosperity, but because prosperity supports democracy. The appeal of democracy’s enemies increases when democracies, like the Weimar Republic, are unable to deliver economic success.

Trade is crucial for the prosperity of the world’s poorer countries, especially during a downturn. My own research finds little connection between trade and economic growth among rich or middle-income countries, but in the poorest places, where democracies are least stable, a 20 percent drop in the ratio of trade to GDP is associated with per capita incomes growing by 1 percent less per year. Reductions in trade had a devastating impact on Argentina in the 1930s, ending decades of democracy and ushering in a long period of dictatorship and political turmoil.

Free trade brings prosperity to the world’s poorer countries, strengthening their transitions to democracy and making their citizens, and us, safer. But the United States is now contemplating policies that threaten our ability to argue that an economically connected world is stronger and safer.

Ernesto Zedillo wants "aggressive deterrence" of protectionism

Ernesto Zedillo wants to raise the stakes in our efforts to fight protectionism amidst the global crisis:

Of course, pledges to avoid protectionism by leaders or other high-level officials are always welcome, but as recent events have shown, sooner rather than later, those pledges are blown away by the wind of domestic political pressures and there remains little of practical value.

The only thing that will make leaders think twice about whether or not to fall into the temptation of pleasing a particular constituency with protectionism will be the possibility that, as a consequence of such an action, another of its political constituencies will end up being seriously hurt. This possibility will make dubious the net political benefit of walking the protectionist tightrope.

 What I am suggesting is that pledges by countries to use whatever legal means they have at their disposal to retaliate against others for protectionist actions that harm their exports will prove far more effective than their own pledges not to introduce new trade barriers. Interestingly, a credible pledge to legally retaliate for others’ protectionism does not need to be the result of collective action, unlike the case of a pledge to avoid new trade barriers. All you need is one major trade partner to commit to retaliation for others to follow suit.

If a leader of a trading power is convinced that worldwide protectionism will make of this crisis an even worse disaster, then, in addition to resist domestic pressures for higher trade barriers, that leader should firmly declare that any new action restricting access of his country’s exports to any foreign market shall lead to retaliation against the export sectors of the trade transgressor…

 Needless to say, I am not arguing for the convenience of a nasty trade war. What I am submitting is that if you want to prevent one, it’s better to make the potential contestants aware of the full cost of their own folly starting from day one. In other words, let’s use whatever tools the system has in order to make clear to whoever decides to ride the protectionist wagon that there will be no such a thing as a free ride, but rather that there shall be blood. In short, let the WTO’s teeth bite!

That’s from a new book released today, “The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20,” edited by Richard Baldwin and Simon Evenett. It includes contributions from Anne Krueger, Jagdish Bhagwati, Peter Gallagher, and many others. Weighing in at over 100 pages, it has plenty for trade policy wonks to chew on.