Trade Diversion

Three pieces worth reading in full:

• Simon Lester, refuting Daniel Altman, explains some of the problems with preferential trade deals and why the WTO won’t be made obsolete by the proliferation of PTAs.
• Mike Konczal summarizes a new paper (pdf) by David Autor, David Dorn, and Gordon Hanson that analyzes effect of import competition on U.S. local labor markets that were differentially exposed to the rise of China trade between 1990 through 2007 due to differences in their initial patterns of industry specialization.
• David Warsh discusses Peddling Protectionism: Smoot-Hawley and the Great Depression, Doug Irwin’s new book, in the context of explaining Smoot-Hawley’s role in the Great Depression.

I used to follow ag subsidies more closely than I have in the last two years. Here’s a new NBER working paper on the distribution of ag subsidy benefits:

The U.S. has a long history of providing generous support for the agricultural sector. A recent omnibus package of farm legislation, the 2008 Farm Bill (P.L. 110-246) will provide in excess of $284 billion in financial support to U.S. agriculture over the 2008-2012 period. Commodity program payments account for $43.3 billion of this total. Our paper is concerned with the distribution of these benefits. Farm subsidies make agricultural production more profitable by increasing and stabilizing farm prices and incomes. If these benefits are expected to persist, farm land values should capture the subsidy benefits. We use a large sample of individual farm land values to investigate the extent of this capitalization of benefits. Our results confirm that subsidies have a very significant impact on farm land values and thus suggest that landowners are the real benefactors of farm programs. As land is exchanged, new owners will pay prices that reflect these benefits, leaving the benefits of farm programs in the hands of former owners that may be exiting production. Approximately 45% of U.S. farmland is operated by someone other than the owner. We report evidence that owners benefit not only from capital gains but also from lease rates which incorporate a significant portion of agricultural payments even if the farm legislation mandates that benefits must be allocated to producers.

[HT: Jim]

I’ll be attending the American Economic Association’s annual meetings in Denver this weekend. Be sure to say hello if you spot me.

The (very lengthy) program is online; you can find most of the trade-related sessions by searching for “(F1)”.

Trade economists are very familiar with “most-favored nation” status. The non-discrimination principle lies at heart of the GATT-WTO post-WWII global trading regime, and its history goes back even further. Here’s a 1901 book on MFN clauses in trade treaties.

But trade economists probably aren’t so familiar with the use of “most-favored-nation clauses” in healthcare markets. The term has been appropriated without modification, so “most favored nation” really means “most favored third-party payor” in a contract with a healthcare provider.  And while MFN is largely favored by trade economists, it seems that “MFN” clauses in healthcare contracts may cause lots of trouble.

The NBER’s fall trade meetings are this weekend in San Francisco. The agenda and three-quarters of the papers are online.

Financing trade
Antras & Foley: “Poultry in Motion: A Study of International Trade Finance Practices”
Chor & Manova: “Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis”
Feenstra, Li & Yu: “Exports and Credit Constraints under Incomplete Information: Theory and Evidence from China”
Re-examining trade theory
Handbury & Weinstein: “Is New Economic Geography Right? Evidence from Price Data”
Markusen: “Putting Per-Capita Income Back into Trade Theory”
Firm and sector heterogeneity
Cosar, Guner & Tybout: “Firm Dynamics, Job Turnover and Wage Distributions in an Open Economy”
Simonovska & Waugh: “The Elasticity of Trade: Estimates and Evidence”
Harrigan & Schlychkov: “Export Prices of US Firms”

There are many candidates this year with job-market papers on international trade. I’ve collected some here, focusing on trade and excluding international finance and open-economy macro. Please add more in the comments. (UPDATE: Thanks to those who have provided links and info!)

Anson Soderbery (UC Davis): “The Competitive Effects of Heterogeneous Firms Facing Capacity Constraints Under International Trade”

Arnab Nayak (Purdue): “Does Variety Fit the Quality Bill? Factor Endowments Driven Differences in Trade, Export Margins, Prices and Production Techniques”

Ben Li (Colorado): “Cross-Border Production, Technology Transfer, and the Choice of Partner”

Dan Lu (Chicago): “Exceptional Exporter Performance? Evidence from Chinese Manufacturing Firms”

Danielken Molina (UC San Diego): “Exporting and Access to Finance: The Colombian Case”

Eduardo Morales (Harvard): “Gravity and Extended Gravity: Estimating a Structural Model of Export Entry”

Ferdinando Monte (Chicago): “Skill Bias, Trade and Wage Dispersion”

Fernando Parro (Chicago): “Capital-Skill Complementarity and the Skill Premium in a Quantitative Model of Trade”

Greg Wright (UC Davis): “Revisiting the Employment Impact of Offshoring”

JaeBin Ahn (Columbia): “A Theory of Domestic and International Trade Finance”

Kamran Bilir (Stanford): “Patent Laws, Product Lifecycle Lengths, and the Global Sourcing Decisions of U.S. Multinationals”

Kyle Handley (Maryland): “Exporting Under Trade Policy Uncertainty: Theory and Evidence”

Logan Lewis (Michigan): “Exports versus Multinational Production under Nominal Uncertainty”

Matthias Lux (NYU): “Defying Gravity: The Substitutability of Transportation in International Trade”

Maya Cohen-Median (Stanford): “Exchange Rate Fluctuations, Consumer Demand, and Advertising: The Case of Internet Search”

Monika Mrázová (LSE): “Trade Agreements when Profits Matter”

Morten Graugaard Olsen (Harvard): “Banks in International Trade: Incomplete International Contract Enforcement and Reputational Concerns”

Oana Hirakawa (UC San Diego): “The Home Market Effect and the International Arms Trade”

Pablo Fajgelbaum (Princeton): “Labor Market Frictions, Firm Growth and International Trade”

Pierre-Louis Vézina (Graduate Institute, Geneva): “Race-to-the-bottom tariff cutting”

Pu Chen (Minnesota): “Trade Volatility and Intermediate Goods”

Rafael Dix-Carneiro (Princeton): “Trade Liberalization and Labor Market Dynamics”

Rodrigo Wagner (Harvard): “New Exports from Emerging Markets: Do Followers benefit from Pioneers?”

Seema Sangita (UC Davis): “The Effect of Diasporic Business Networks on International Trade and Investment Flows”

Shushanik Hakobyan (Virginia): “Accounting for Underutilization of Trade Preference Programs: U.S. Generalized System of Preferences”

Thomas Sampson (Harvard): “Assignment Reversals”

Zhanar Akhmetova (Princeton) “Firm Experimentation in New Markets”

At Econbrowser, Willem Thorbecke argues that renminbi appreciation alone wouldn’t make much sense: “if policymakers are concerned about China’s surplus, they need to consider exchange rates throughout East Asia rather than the Chinese exchange rate alone.” The reason is the “Factory Asia” phenomenon. Check out the composition of China’s surplus:

Doug Irwin in the WSJ on the Great Depression, Smoot-Hawley, Ben Stein, the gold standard, and currency wars. Read the whole thing.

Unilateral trade liberalization is quite underdiscussed, perhaps for both institutional and political reasons. There is little reason for multilateral institutions like the WTO to discuss unilateral liberalization, since it is outside their purview and does little to hurt their missions, and policymakers pursuing trade agreements for political reasons have little interest in lowering their own trade barriers.

But unilateral liberalization is big. The World Bank attributes two-thirds of developing-country liberalization during 1983-2003 to unilateral actions.

In a recent working paper, Pierre-Louis Vezina analyses the case of East Asia, where he says countries unilaterally cut tariffs to attract Japanese FDI, as Japanese firms sought to establish affiliates that would process imported components.

Focusing my analysis on seven Asian emerging economies, and using tools from spatial econometrics, I show that tariffs on parts and components followed those of competing countries if the latter were lower, if FDI jealousy was high, and if competing countries were at a similar level of development, hence competing more intensively at the tariff level… I show that these results do not hold when using tariffs on finished products nor when estimating the model for countries that are not part of the sliced-up supply chain, such as Australia.

The one tome devoted to the topic that I know is Going Alone, edited by Jagdish Bhagwati.

I blogged previously that the EU might liberalize its MFN tariffs to assist Pakistan in the wake of its massive flooding. Now it looks that the tariffs cut will be temporary and discriminatory. The EU has pledged to adopt WTO-consistent measures, but it also promises “exclusively to Pakistan increased market access to the EU”. How it can do both is not clear.