"An economic declaration of war"

Willem Buiter condemns the Buy American provision of the spending package as dramatically as possible:

There is little doubt that if the Buy American provisions of the Economic Stimulus Package were to become law, this would amount to an economic declaration of war on the rest of the world. The response of the assembled non-US finance ministers in Davos made this clear. Retaliation from the EU countries and the rest of the world would follow swiftly…

The questionable value of the fiscal stimulus is overwhelmed by the unquestionable domestic and global harm caused by the Buy American clause. If president Obama fails to veto a protectionism-laced bill, it will be clear that we have a wuss in the White House. If such is the case, God help us all.

The latest gravity model

Oxford’s Alberto Behar and Ben Nelson are working to build a really rigorous trade gravity model. They combine Anderson and van Wincoop’s general equilibrium multilateral resistance approach with Helpman, Melitz, and Rubinstein’s emphasis on firm heterogeneity and the extensive margin.

We argue that one needs to take both AvW and HMR’s findings into account, otherwise interpretation of the effects of trade frictions will be misleading. We therefore unite these two strands of the literature. We derive a theoretically grounded gravity equation and then extend a method of approximating MR [multilateral resistance] terms, developed by Baier and Bergstrand (2009), to the case of firm heterogeneity…

For all our observations, traditional linear estimates bias downwards the effect of observable trade barriers on country-level trade flows. This difference, rather than the firm-level bias in the opposite direction highlighted by HMR, is arguably more relevant for policy…

Consistent with AvW’s “Implication 1”, larger countries have larger firm-level elasticities of bilateral trade in response to multilateral changes in trade costs. However we show that, once firm entry into trade is accounted for, this is no longer unambiguously true in theory for overall elasticities at the country level. Moreover, on balance we find a negative correlation in the data between country size and bilateral trade elasticities once changes in the extensive margin are accounted for.

Broda and Weinstein on international price differences

The NBER Digest summarizes Christian Broda and David Weinstein’s work on international price differences:

Broda and Weinstein find that the law of one price and purchasing power parity, in their absolute forms, hold about as well across borders as within countries. The researchers confirm that the LOP is violated flagrantly in international data, but also across cities within the same country. Thus, for example, the observation that an identical can of soda sells at different prices in different countries is not very informative about border barriers, because prices vary substantially even within borders.

Susan Schwab's farewell

I never found enough time during the holidays to write a retrospective on the Bush administration’s trade policy woes, but its parting shot – a 300% duty on Roquefort – seems like an apt summary. The USTR’s new tariffs on French truffles, Irish oatmeal, Italian sparkling water, and foie gras abide by the rules (WTO-sanctioned retaliation for the EU’s ban on imports of US beef), but they look more like the last gasp of opportunistic protectionists than a strategic move by free traders. Can Susan Schwab seriously say that “the goal of these modifications is to reach a resolution of the dispute” when she imposed the duties five days before leaving office?