Brittan: Are the imbalances on the mend?

The FT‘s Samuel Brittan on whether international imbalances are a problem:

The morals I drew were, first, that the onus of proof was on those who regarded it as a problem, and second, that many of the advocated remedies could be worse than the disease….

Yet such is the perversity of humanity that governments could make the imbalances into a problem where none existed before. If the deficit countries are to reduce their deficits, they have to switch resources from home markets to exports or import saving activities. It would be lovely if this could be done painlessly without impinging on output and activity. But a substantial structural change of this kind does require some sort of domestic slowdown while resources are being switched.

The danger, in a nutshell, is that central banks and governments are so assiduous in promoting domestic growth that they will not tolerate a few quarters of lacklustre GDP performance. In that case, deficits will never be allowed to contract properly and will become a problem which they might not have been to start with. All I can suggest is that, in their regular interest rate decisions, they should err on the side of caution.

US & EU plan bilateral trade talks

FT:

Diplomats from the US and European Union are laying the groundwork for an unprecedented round of bilateral bargaining in which all of the main transatlantic trade disputes would be put on the table and negotiated in one go.

The talks between the world’s two largest trading blocs would link the resolution of billions of dollars-worth of simmering trade disputes and aim to “clear the decks” with one all-encompassing deal, officials said…

Officials concede the drive for a single round of bilateral trade negotiations is ambitious, fraught with drawbacks and could quickly falter.

UPDATE: Oddly, the WSJ announced the demise of such an ambitious agenda the day before this FT story: “U.S. and European officials who meet for talks today on how to cut barriers to trans-Atlantic trade say they have given up dreaming of a sweeping deal that would unlock billions of dollars in new trade.”

2007 farm bill even worse than 2002

The 2002 farm bill reversed a gradual, albeit slow, trend of liberalizing American agriculture. Many analysts, including myself, hoped that that legislation was an aberration born of particular electoral considerations, and that the 2007 farm bill might return to reform. Unfortunately, Kim Elliott says things are only getting worse:

Senators Richard Lugar (R-IN) and Frank Lautenberg (D-NJ) introduced a reform-oriented farm bill that no one thinks has a chance. Perhaps the best that can be hoped for in this case is that continued disagreements over who gets what in the farm bill and who pays for it will continue to stall passage, resulting in a short-term extension of the slightly less bad 2002 farm bill.

Quantum Gravity Trade Equations

by Richard Baldwin, guest blogger

The economy is a lumpy place. Looked at from afar or up close, economic activity is not smoothly spread – a point that the 1000-word picture of the earth at night makes clearly. Most of our economic theories, however, assume that small changes in circumstances lead to small changes in outcomes.

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This theory-practice gap is familiar to amateur readers of theoretical physics. For three centuries, Newtonian mechanics told us that mass and energy were smooth, continuous. And this worked impeccably at the level of aggregation available to empiricists of the time. In reality, however, the physical world – seen at the sub-atomic level – is mostly empty. Even the densest matter is mostly space. All the energy and mass are concentrated in lumps that are tiny relative the structures they constitute. Even more perplexingly, particles have distinct, discrete level energy level and they don’’t switch smooth between them, they jump. At the sub-atomic level the modern theory for this is called quantum mechanics.

Back to economics. International trade in particular. The most empirically successful model in international trade – the so-called gravity equation – is based on “Newtonian” trade theory. The amount of trade between two nations varies with the product of the economic mass of the two nations and inversely with the distance between them. Strange as it may seem to students of Ricardo, Heckscher-Ohlin and the Krugman trade models, these three variables ‘explain’ well over 50% of all variation in bilateral trade flows.[1] No other trade model comes even close. The gravity model, in short, works impeccably at the level of aggregation available to empiricists – until recently.

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“Targets like 0.7 percent are like the Vatican’s tithe or the Islamic zakat.”

Jagdish Bhagwati did a Q&A session with the IHT. Here’s his comment on Jeff Sachs:

My worry is that such a technocratic approach will – if aid flows are increased precipitously (right now, there is no evidence that they will), and aid is seen to be wasted and misused – turn the spring in aid into winter. He will then have done for Africa, in the public eye, what he did for Russia with his technocratic shock therapy: an outcome that every serious Africanist scholar I have talked to fears.

Read the full interview for his thoughts on Africa’s absorptive capacity and other issues.

Preferential trade disappoints Japanese exporters

A story in the WTO Reporter, passed along by Richard Baldwin, says that trade “preferences” aren’t what they used to be:

The Japan-Thailand economic partnership agreement took effect Nov. 1, but in a technical twist, Thai tariffs on more than a quarter, or about 2,500 Japanese export goods, remain unchanged or end up being higher than the general tariffs that Thailand previously charged…

The Japan External Trade Organization is telling exporters to make sure to compare Thai general tariff rates with those under the Japan-Thai EPA and choose the lower ones, Harino said, admitting that it is “very complicated” work…

The two countries commenced EPA talks in 2004, and during the intervening period to date, Bangkok lowered its general tariffs on many industrial products, such as auto engines, auto parts, and tires. Of some 10,000 Japanese export items that would qualify for Japan-Thai EPA tariff cuts, approximately 25 percent would be either unchanged or end up being higher than WTO-based MFN general tariff rates until next March.

The Laffer curve for tariffs

“When tariffs come down, tariff revenue tends to go up.” – EU Commissioner Peter Mandelson urging ACP countries to liberalize.

There does seem to be some evidence supporting this claim, such as this early 1990s paper by Lant Pritchett and Geeta Sethi. Is there anything more to suggest that ACP countries really are to the right of the revenue-maximizing tariff rate?

Speaking of the Laffer curve for tariffs, check out Doug Irwin’s work on the 1880s debate in the United States.

[HT: Singleton]

Greg Mills: "The New Imperialists"

Greg Mills sees Paris Hilton and “white, generally loud” humanitarians in “a shabby-chic uniform of T-shirt, jeans and sandals” heading to Africa and decries them as “the new imperialists“:

It perpetuates perceptions of helplessness and a victim mentality. At a time when many have realized that African development depends on Africans determining their own policies and making those choices, such actions transfer power and emphasis away from the continent’s decision-makers.

[HT: Tom Palmer]

Greg Mills: “The New Imperialists”

Greg Mills sees Paris Hilton and “white, generally loud” humanitarians in “a shabby-chic uniform of T-shirt, jeans and sandals” heading to Africa and decries them as “the new imperialists“:

It perpetuates perceptions of helplessness and a victim mentality. At a time when many have realized that African development depends on Africans determining their own policies and making those choices, such actions transfer power and emphasis away from the continent’s decision-makers.

[HT: Tom Palmer]

Baker on dollar decline

Dean Baker defends President Bush:

So who is to blame for the falling dollar in this story? The answer is simple: Robert Rubin and the people who let it become overvalued in the first place. The high dollar of the second Clinton administration produced beneficial short-term effects (at least for people who did not have to compete against imports), but had inevitable long-term costs. We are now experiencing these long-term costs in the form of the decline of the dollar, which will lead to higher inflation and quite likely higher interest rates.

In this particular case, President Bush and his tax cuts are innocent bystanders. If anything, the expected effect of his tax cuts should be to raise the value of the dollar because the resulting budget deficits lead to higher interest rates in the United States.

In short when looking for people to blame for the falling dollar, the spotlight should be focused on the people who gave us the high dollar. It was a story of short-term gain for long-term pain, just like the Bush tax cuts, except the impact of the overvalued dollar is considerably larger.

UPDATE: knzn defends Rubin, arguing that hot air (the ‘strong dollar’ mantra) doesn’t hold much sway in foreign exchange markets.