Monthly Archives: August 2009

Rules of Thumb and Trade Policy

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Although economists have created very elaborate models to evaluate the consequences of changes in trade policy, here is a useful overview by Dani Rodrik of three conditions that lie behind any claims of large gains from trade:

(1) Is the trade distortion big?

(2) Will liberalization aggravate other market imperfections (such as those arising from technological spillovers) in the economy? 

(3) Will liberalization worsen the distribution of income?

 

Try your hand at applying these principles to the case of agricultural trade barriers or visa restrictions before checking Professor Rodrik's assessment. 

Outsourcing – is it likely to get better or worse for the US?

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In the 2004 US Presidential campaign, outsourcing was a contentious issue.  Even though it doesn't dominate the news as much today, economists debate its likely effects in the future.  In this piece Richard Baldwin gives a useful perspective on outsourcing that recognizes two different perspectives on trade that we encounter in Chapter 4 and 5.  If trade in identical products is determined by factor endowments, then the US faces the potential to outsource more service jobs as telecommunications capabilities increase.  From that perspective, maybe labor market adjustment problems will get worse, a position suggested by Princeton Economist Alan Blinder.  Baldwin suggests a contrary interpretation, based on trade in differentiated services.  The US may import more of some services, but at the same time is likely to export more of other services.  From this perspective, the opportunity for more outsourcing and more insourcing may simply continue the trends observed thus far. 

 

 

Source: Author’s manipulation of data from Amiti and Wei (2005), originally from IMF sources on trade in services.

 

EU Enlargement – a five-year assessment

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Gains from joining a preferential trade bloc typically emerge over a long-run time horizon, but even based on an initial five year horizon the European Commission identifies several gains from enlargement to both new and old members.  New members benefited from a reduction in borrowing costs and greater capital formation and from an inflow of foreign direct investment, which facilitated the transfer of more efficient technology.  Old members benefited from faster growth in the new members, which accounted for an important portion of their rising exports.  With the exception of Ireland, immigrant flows to old members represented less than 1 percent of the labor force.   

While the Commissions focus on benefits within the union addresses likely concerns within the EU, what might you predict with respect to the effects on non-members?

 

All in Favor of Corruption, Please Stand

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It's hard to find many economists who do not view corruption as an impediment to growth in the developing world.  Yet, a more nuanced view may show that sometimes corruption is a positive factor.  Consider the case of importers who bribe customs agents in order to avoid onerously high tariffs or stringent quotas.  In that case, actions to nullify the effects of those restrictions may be welcome.  Pushan Dutt and Daniel Traça suggest when tariffs exceed 25 percent, corruption can be beneficial.  Of course, there are distributional consequences from this solution!

 

Figure 1. Control of corruption, 2007

Source: Kaufmann, Kraay, and Mastruzzi (2008).

 

 

Hope for Copenhagen and Climate Change Accords

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Will world leaders who gather in Copenhagen in December 2009 be able to negotiate a successful successor to the Kyoto Protocol of the Climate Change Convention?  Individual countries are starting from very divergent negotiating positions, and success is not assured.  On the other hand, some observers are worried that the US and China, as the two biggest greenhouse gas polluters, will reach some accord outside of this multilateral framework.  Even though there are many scientific and economic unknowns in this area, some of the biggest stumbling blocks appear to be political.  Check out the views of an economist, Jeff Frankel, about the political pieces that must come together for a feasible agreement to be reached.

Another contentious aspect of the debate is recent cap-and-trade legislation in the United States to levy a carbon tariff on imports from countries that do not agree to control their emissions.  Paul Krugman explains why he disagrees with President Obama's opposition to this strategy.  A hard line interpretation of exactly what is meant by failure to control emissions, however, may be a non-starter in reaching concensus internatiionally.  Frankel suggests an approach based on developing nations committing to no increase in their emissions above a business-as-usual trajectory over the next three or four decades, before they reduce their rate of increase.  A snapshot of his analysis is shown below.

 

Emissions

Emissions

 

Possible New Approaches to the CAP

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The Common Agricultural Policy remains a major budget item within the EU.  Although any predictions over the new shape it will assume in 2013 are necessarily imprecise, consider three scenarios that reflect varying degrees of attention to past entitlements, environmental objectives, and organic food production goals.

 

Here are the provocative findings from the analysis of Valentin Zahrnt:

Table 1. Scenarios for the distribution of CAP payments after 2013

Source: ECIPE study; 2015 data for Bulgaria and Romania

The results show that several traditional defenders of the CAP are
indeed likely to lose from reform – France, Greece, Ireland, and
Belgium. Other countries that defend the status quo would –
surprisingly – gain from reform. This is especially striking in the
case of Spain, which would reap the greatest absolute gains of all
member states. Finland would get the third highest increase under all
scenarios just after Sweden and Latvia. For both countries, the
benefits of bolder reform would be greater. To a lesser extent, this
also applies to reform-averse Portugal and Austria.

 

How slippery is the slippery slope of protectionism?

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The sharp downturn in economic activity and world trade has caused many economists to frame analogies with the descending spiral of trade and protectionism in the 1930s.  Under the WTO countries do have flexibility to impose safeguard restrictions, as well as duties to offset unfair trade practices.  Reliance on these policies does seem to rise during economic declines, as shown by the following table presented by Roberta Roberta Piermartini of the WTO.  Nevertheless, the existence of such flexibility may make countries more willing to accept greater liberalization in WTO negotiations.

 

Figure 1. Anti-dumping measures and business cycle

Read her discussion of these measures,  and compare that analysis to the commentary by Chad Bown, who cautions against the long lives of such intervention. Also, consider the prescription for additional steps to avoid a downward spiral suggested by Simon J Evenett and Bernard Hoekman.

Did China’s entry into world trade de-industrialize others?

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The opening of China to the rest of the world that started under the reforms of Deng Xiaoping has been characterized by some as the awakening of the sleeping giant.  Indeed, China is a big country, and the addition of its abundant endowment of unskilled labor to world factor supplies might easily have had a negative effect on other providers of unskilled-labor intensive goods.  Nevertheless, the effects on individual countries may be complex, because China not only created a greater supply of labor intensive goods but also created greater demand for many commodities produced by other developing countries.  A study by Jörg Mayer and Adrian Wood calculate that as big as China is, the balance of these effect on others was not substantial. 

What factors can you suggest that would explain the regional pattern of effects that they report?

Table 1. Changes in logged ratios of
labour-intensive manufacturing to primary output and exports,
1980-2000, unweighted regional averages

  Output (33 countries) Exports (differences)
  1980-1990 1990-2000 Difference For 33 countries For 70 countries
All developing countries 0.14 0.08 -0.06 -0.21 0.07
East Asia (except China)  0.43  0.24  -0.19  -0.45  -0.34
South Asia  0.00  0.29  0.29  0.04  -0.05
Latin America and Caribb  0.10  -0.07  -0.17  0.69  0.39
Middle East and N. Africa  0.21  0.07  -0.14  -1.00  -1.19
Sub-Saharan Africa  -0.08  0.08  016  -0.59  0.45

Source: Wood and Mayer (2009), Table 5.

 

Liberalizing trade in services – how might it happen?

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The claim of mutual benefits from trade liberalization has been particularly difficult to achieve in the case of trade in services. A recent contribution by Patrick Messerlin and Erik van der Marel suggests that if the US and the EU were to initiate negoatiations in this area, that would provide a useful catalyst to broader plurilateral negotiations with a manageable group of eight other major market participants.  Their table below indicates which services might be most amenable to this approach.  Given the large share of the market accounted for by the eight leading countries, the likelihood of inefficient diversion of service trade away from more efficient sources is less likely to occur.  

 Figure 1. Going plurilateral: How many countries make a critical mass?

 

Source: Messerlin and van der Marel (2009).

Cash for Clunkers and the Environment

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Various countries have adopted incentive programs for automobile owners to trade in their old, fuel inefficient vehicles for more environmentally friendly models.  At the same time, these programs may shift consumption into the current year, when demand is depressed, and thereby help stimulate an economic recovery.  As with any policy initiative, however, there may be unexpected side effects.  In this case, we might wonder what would have been done with those vehicles that are being taken out of service.  Two authors at UCLA and Berkeley suggest that trade in used cars will decline.  If these used cars previously were exported to Mexico, and if they were more fuel efficient that those being driven in Mexico, then US emissions may decline, but Mexican emissions may rise.  When the relevant externality is global, both effects need to be considered.

Immigration – benign or problematic?

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The worldwide economic downturn has caused a backlash against immigration in many countries.  The UK has proposed a new citizenship law, that would require prospective citizens to earn points based on their integration into the community.  Yet, the immediate concerns over the burdens imposed by immigrants often is ill founded.  A recent study by economists at University College London finds that immigration to Britain from the Central and Eastern European accession countries are net contributors to the budget!  Even though their wages on average are lower than native workers, their higher labor force participation and lower propensity to claim benefits results in this positive balance. 

Eurozone Contraction

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Here is a nice application of the Mundell Fleming Model with Flexible Prices 

Falling Prices, Rising Unemployment Buffet Euro Zone

by Nicholas Winning and Christopher Emsden, Wall Street Journal, Aug 01, 2009
From The Wall Street Journal Economics:Macro Weekly Review 
 
SUMMARY: The annual contraction in euro-zone consumer prices accelerated in July. Meanwhile,
the unemployment rate rose to 9.4%, the highest level for a decade in June.
CLASSROOM APPLICATION: There are several interesting topics raised in this article:
deflation versus inflation, the contrast between U.S. and euro-zone economic conditions, and the likely
impact of U.S. economic conditions on the euro-zone through the export channel.
QUESTIONS:
1. (Introductory) What does the latest data indicate about unemployment and inflation in the
euro-zone economies?
2. (Advanced) What are the adverse consequences of deflation? Can you conjecture what the impact on the Euro might be?
4. (Advanced) If inflation is undesirable, shouldn't deflation be desirable? What is the flaw in that logic?
5. (Advanced) How do economic conditions in the United States affect the euro-zone
economies?
Reviewed By: Edward Gamber, Lafayette College