Trade Diversion

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”?

While Bill Clinton recently criticized US buy-American food assistance programs and ethanol subsidies, he also promoted food autarky:

Clinton criticized decades of policymaking by the World Bank, the International Monetary Fund and others, encouraged by the U.S., that pressured Africans in particular into dropping government subsidies for fertilizer, improved seed and other farm inputs as a requirement to get aid. Africa’s food self-sufficiency declined and food imports rose…

“Food is not a commodity like others,” Clinton said. “We should go back to a policy of maximum food self-sufficiency. It is crazy for us to think we can develop countries around the world without increasing their ability to feed themselves.”

Paul Collier in Foreign Affairs:

Politicians and policymakers do, in fact, have it in their power to bring food prices down. But so far, their responses have been less than encouraging: beggar-thy-neighbor restrictions, pressure for yet larger farm subsidies, and a retreat into romanticism…

The real challenge is not the technical difficulty of returning the world to cheap food but the political difficulty of confronting the lobbying interests and illusions on which current policies rest. Feeding the world will involve three politically challenging steps. First, contrary to the romantics, the world needs more commercial agriculture, not less. The Brazilian model of high-productivity large farms could readily be extended to areas where land is underused. Second, and again contrary to the romantics, the world needs more science: the European ban and the consequential African ban on genetically modified (GM) crops are slowing the pace of agricultural productivity growth in the face of accelerating growth in demand. Ending such restrictions could be part of a deal, a mutual de-escalation of folly, that would achieve the third step: in return for Europe’s lifting its self-damaging ban on GM products, the United States should lift its self-damaging subsidies supporting domestic biofuel…

Typically, in trying to find a solution to a problem, people look to its causes — or, yet more fatuously, to its “root” cause. But there need be no logical connection between the cause of a problem and appropriate or even just feasible solutions to it. Such is the case with the food crisis. The root cause of high food prices is the spectacular economic growth of Asia. Asia accounts for half the world’s population, and because its people are still poor, they devote much of their budgets to food. As Asian incomes rise, the world demand for food increases… There is nothing to be done about the root cause of the crisis — the increasing demand for food. The solution must come from dramatically increasing world food supply.

Collier’s essay provides many arguments for greater global integration and commercialization of agriculture. Where’s the evidence favoring food autarky as a means of increasing supply?

Tim Harford discusses whether the rising price of oil will slow globalization in the FT; see previous Trade Diversion coverage here.

Reason TV has a primer on ethanol subsidies featuring Ron Bailey. No new facts on the ground, but a good introductory summary of the subject.

Contra Paul Krugman, who says that “higher fuel prices are putting the brakes on globalization,” David Jacks, Christopher Meissner, and Dennis Novy argue in their Vox column on trade costs that oil prices won’t have much impact:

In their survey of trade costs, Anderson and van Wincoop (2004) find that the tariff equivalent of international trade costs is about 74%. Transport costs only make up a third of these trade costs. The rest consists of border-related costs such as informational barriers, tariffs and red tape. Even if oil prices directly feed through to transport costs, the impact on overall trade costs is limited.

Here are Anderson and van Wincoop:

We combine 9-percent time costs and 10.7 percent U.S. average direct transport costs for our representative full transport cost of 21 percent (1.107∗1.09-1).

Both costs are relevant, as higher oil prices have caused container ships to cut their top speed by 20% to save fuel. The 10.7% figure for direct transport costs comes from a paper by David Hummels, in which he estimates an all-commodities trade-weighted average transport cost for freight shipping. The US average is 10.7%.

But Hummels’ estimates are the product of a cross-sectional data set for 1994. Back in those days, oil was about $15 per barrel. There is no reason to believe that freight costs will remain confined to an approximately 10% share when the price of oil increases tenfold!

Jeff Rubin, author of a widely cited CIBC study, says that “the cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel.”

Jacks, Meissner, and Novy may be right that demand for shipping will induce productivity-enhancing technological innovations, but I thought that was the story of The Box. In the short run, at least, high oil prices mean that international trade will shrink – the world is bigger and spikier.

Kim Elliott says that precise estimates aren’t key to the biofuels debate: “Whether biofuels are responsible for 75 percent of the recent food price hikes, as Don Mitchell contends, or 30 percent, or even just 5 percent, tax incentives and subsidies for biofuels make no sense.”