Trade Diversion

Simon Lester is tracking the carbon tariffs debate closely: FT overview, they may or may not be WTO-compliant, and Waxman-Markey stinks.

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]

“Using a complementary set of policy quasi experiments, I find that farmers who rent the land they cultivate capture 75 percent of the subsidy, leaving just 25 percent for landowners.” – Barrett E. Kirwan

This Reason.tv video is a pretty nicely produced introduction to farm subsidies.

Gordon H. Hanson & Chong Xiang suggest that fixed export costs are multilateral rather than bilateral, meaning that it’s costly for businesses to “go global” but not particularly costly to enter particular countries:

In this paper, we develop a simple empirical method to test two alternative versions of the Melitz (2003) model, one with global fixed export costs and one with bilateral fixed export costs. With global costs, import sales per product variety (relative to domestic sales per variety) are decreasing in variable trade barriers, as a result of adjustment occurring along the intensive margin of trade. With bilateral costs, imports per product variety are increasing in fixed trade costs, due to adjustment occurring along the extensive margin. We apply our approach to data on imports of U.S. motion pictures in 46 countries over 1995-2006. Imports per product variety are decreasing in geographic distance, linguistic distance, and other measures of trade costs, consistent with adjustment to these costs occurring along the intensive margin. There is relatively little variation in the number of U.S. movies that countries import but wide variation in the box-office revenues per movie. The data thus appear to reject the bilateral-fixed-export-cost model in favor of the global-fixed-export-cost model.

On the other hand, motion pictures are not exactly the typical manufacturing product, so I would hesitate to extrapolate from these results to other sectors.

Oil has fallen to close to $60 per barrel, but Marc Levinson, author of The Box, says that transportation costs are likely to slow globalization. He cites:

Ports unable to handle the next generation of massive container ships
• Intranational ground transportation systems, notably highways and rail, that are increasingly congested
• “The cost of international trade has been kept artificially low because shippers do not pay for the environmental harm they inflict. Regulators are finally catching up.”

But how should we interpret Levinson’s concluding paragraph, where he writes that “in retrospect, globalization will likely appear not as an inexorable trend but as a temporary stage in economic development” while also conceding that “slower, costlier, and less certain transportation will not put an end to the growth of international trade”?