What should leap to mind? Trade costs.

The biggest price gap (a ratio of 100) is for a good that is completely non-tradable and varies greatly in quality (bus fare is 7 cents in Mumbai and $7 in Oslo). A good of relatively uniform quality that is perishable varies quite a bit (Big Mac, from $2 in Shanhai to $6 in Oslo). A durable good with a high value-to-weight ratio, the iPad 2, exhibits less variation, a ratio of under two ($1058 in Buenos Aires and $548 in Bangkok). So it looks like trade costs are a pretty good explanation for nominal price differences.

That iPad gap may not be as large as it seems. You’ll want to adjust for taxes. The VAT is 21% in Argentina and 7% in Thailand.

How can there still be a ~$350 price difference when one can probably mail an iPad to most countries for less than a hundred bucks? Shouldn’t arbitrage drive price differences for identical products down to the shipping cost? Not so fast. It turns out it’s quite difficult to arbitrage iPads. Apple tracks its customers and doesn’t allow bulk purchases.

Why is gasoline, a very homogeneous and fungible commodity, $2 in Amsterdam but only 42 cents in Dubai? Taxes in the former and subsidies in the latter.

In short, these data are a lesson about trade costs. You’ll notice that Richard Florida didn’t title his post “why you should buy a bus ticket in Mumbai instead of Oslo”!

(Relatedly, price comparisons of personal services, as opposed to goods, suggest a lesson about global labor mobility. A one-hour Thai massage costs $6 in Bangkok and about $100 in New York City!)

But what can the California ports do? Floating cargo from Asia to the east coast by boat will always be cheaper, concedes Christopher Lytle, the executive director of the Port of Long Beach. But unloading in Long Beach and taking the train to New York can be faster by a week, he says. So California’s ports must compete on speed, which is increasingly important for time-sensitive goods such as fashion wear or consumer electronics. Let the lawn chairs go and keep the iPads, he reckons.

A lot must happen to keep that advantage in speed, however. One bottleneck is that short truck ride to the railway yard. Not only do the trucks account for much of the port’s air pollution (even though they are dramatically cleaner than just a decade ago), but they clog up stretches of the I-710 freeway, wasting precious time. One of the port’s plans is therefore to build a new, better and closer railway yard…

David Pettit, a lawyer at the National Resources Defence Council and one of those environmentalists who so frustrate Mr Baker, says that he fully understands the threat posed by the canal. But moving the railway yard to another community, and thus polluting it, is not the answer. Better, he says, to put the railway yard right on the docks. That would take up too much space, replies the port. The combatants have only until 2014 to work out their answer and build it.

[HT: Clayton]

BOX 8.9 Exporting by mail in Peru—connecting small producers to markets

In many countries small enterprises are often excluded from export chains because they operate in villages or small towns or do not have the needed information to export. In Peru a trade-facilitation program called “Easy Export” connects small producers to markets. The key to this program is the most basic of transport networks—the national postal service.

How does it work? An individual or firm takes a package to the nearest post office, which provides free packaging. The sender fills out an export declaration form, and the post office weighs the package and scans the export declaration form. The sender pays the fee for the type of service desired. Goods with values of $2,000 or less can be exported. The main benefit is that the exporter does not need to use a customs agent, logistics agent, or freight forwarder or to consolidate the merchandise; even the packaging is provided. Firms or individuals need only to go to a post office with a scale and a paper scanner and to use the Internet to complete the export declaration for the tax agency.

Has it made a difference? Within six months of inception, more than 300 firms shipped goods totaling more than $300,000. Most users are new exporters—microentrepreneurs and small firms, producing jewelry, alpaca and cotton garments, food supplements (natural products), cosmetics, wood art and crafts, shoes and leather, and processed food. And many of them are in the poorest areas of the country.

Appelbaum writes:

The estimates of the nation’s economic performance last year, released Friday, highlight a striking trend: Exports have never been more important.

Foreign buyers purchased more than $2 trillion in goods and services, the first time exports have topped that threshold. And those exports accounted for almost 14 percent of gross domestic product, the largest share since at least 1929.

We usually talk about exports alongside its opposite number, imports, and since the United States buys much more than it sells – our “trade deficit” — the general impression is that foreign trade is a drag on the economy. But that tends to obscure the importance of exports, which have accounted for about 10 percent of G.D.P. over the last two decades and, since the recession, considerably more…

Much of the rise in exports is a consequence of domestic problems… This is a good thing on the whole. The ability of American companies to make money in foreign markets is helping to offset the pain of those domestic problems.

I found this confusing in three senses:

1. In purely accounting terms, GDP depends on net exports, not gross exports.
2. In compositional terms, the export-GDP ratio doesn’t tell you if international commerce is offsetting domestic problems.
3. The key phrase “exports accounted for X% percent of GDP” is meaningless at best and misleading at worst.

National accounts

To the extent that gross domestic product is our measure of economic performance, should we think about net exports or gross exports? Recall the expenditure definition of GDP:

Y = C + I + G + X – M

If you want to talk about — in accounting terms, not causal terms — what’s happening to US GDP, then net exports are informative. They appear on the right-hand side. When you talk about gross exports while holding gross imports constant, you are losing information. If X and M both increased by the same amount, then GDP would not increase, but X/GDP would rise.

Suppose that I were describing a firm’s economic performance to you. If we had an accounting definition of our performance that said

corporate profits = revenues – costs,

would the following claim seem reasonable? “We usually talk about revenues alongside their opposite numbers, costs, and since the company buys much more than it sells — our ‘negative profits’ — the general impression is that doing business is a drag on the firm. But that tends to obscure the importance of revenues, which have accounted for 110 percent of (the absolute value of) net profits…”

If you care about the international component of GDP, you are losing information when you switch from looking at net exports to solely considering exports. If you look at the BEA press release, you learn that real exports grew 4.7% and real imports grew 4.4%. But recall that we run a trade deficit, so real imports are growing from a larger base. If we go to table 3 of the full BEA announcement (pdf), my reading is that net exports moved from -$562b in the third quarter to -$582b in the fourth quarter. If I’m reading the table correctly, then net exports actually fell. That means that the way we usually talk about trade, which looks at net exports, tells you something different than what is implied by looking at gross exports (implicitly holding imports constant).

Are exports offsetting domestic problems?

Exports as a share of GDP is a ratio. If exports stay the same while GDP shrinks, the exports-to-GDP ratio will rise. Is that a sign of exports offsetting domestic problems? I suppose that it is if the counterfactual is that exports would shrink at the same rate of GDP. But if net exports actually fell, then the increase in the trade deficit “reduced” US GDP (in accounting, not causal, terms), so exports/GDP seems like the wrong statistic to study.

What do exports “account for”?

Applebaum writes that “exports accounted for almost 14 percent of gross domestic product” and that we’ve negleted “the importance of exports, which have accounted for about 10 percent of G.D.P. over the last two decades.” I do not know what the phrase “accounts for” means in these statements.

It’s true that Y = C + I + G + X – M, so exports are a component of GDP. But when I read “accounts for”, I imagine a decomposition of GDP into pieces that sum to 100%. That’s not true when you talk about gross exports. We’re back to the distinction between gross values and value-added measures that I have repeatedly emphasized. What would it mean to say that “exports account for 223% of Hong Kong’s GDP“?

I would suggest that exports/GDP is meaningless as a measure of how international commerce has benefited the US economy during the last quarter. At worst, the “accounts for” language might cause readers to interpret the measure as representing a decomposition of GDP’s components.

Conclusions

Be careful with economic statistics! There are important differences between gross exports and net exports and between gross value and value added.

I’ve tried to be careful here, but I may have read Applebaum’s post or written my post too quickly, so if I’ve made an error in handling statistical definitions or the BEA data, please point it out in the comments. Thanks!

Caveats

I’ve tried to write carefully, but there’s a danger that readers might think I’m treating “net exports” as a scorecard for US economic performance. I am certainly not saying that exports are good and imports are bad. Remember that the current account deficit is the amount by which domestic investment exceeds domestic savings. These outcomes are jointly determined in general equilibrium. My story about “net profits” was an accounting analogy, not an economic analogy.

Addendum (28 Jan, 12pm): Here’s my Twitter exchange with Appelbaum. It doesn’t change anything I said above.

Yesterday, the Atlantic’s Richard Florida had a post titled “Which Countries Pay Blue Collar Workers the Most?” It featured this BLS table:

What does this table mean? Florida writes:

A quick look at the table above suggests that the level of compensation provided to manufacturing workers reflects a nation’s overall level of economic, social, and human development. And that is indeed the case, according to a simple statistical analysis by my colleague Charlotta Mellander.

Manufacturing compensation is closely related to productivity (measured as economic output per capita), global economic competitiveness and overall human development as well as my own Global Creativity Index. This is all in line with basic economics. And manufacturing compensation and wages are higher in nations with higher levels of education and where greater shares of the workforce are employed in knowledge, professional and creative jobs. In other words, manufacturing compensation and wages rise as nations become more post-industrial. Higher manufacturing compensation is also related to lower levels of inequality and higher levels of happiness.

Manufacturing workers are paid the best in the most advanced nations, places that boast advanced safety nets, generous benefit systems and high productivity. Post-industrial economies might not have the most manufacturing jobs, but their workers are the best paid. Instead of adopting a low-road strategy of trying to reduce manufacturing costs and wages in order to compete with China or other emerging economies, the U.S. would be better off with a high-road one, promoting policies that improve innovation, skills and productivity.

I think that we learn a lot about cross-country wage comparisons by thinking about what this table does not mean.

Does this table rank countries by the welfare of their blue-collar workers? No. Welfare depends on real consumer wages, not nominal wages, so a welfare comparison would necessitate deflating these nominal wages by local prices. For example, Switzerland is a notoriously expensive place to live; its price level is about 1.5 times that of the US. Those interpreting the table as saying that a US-to-Switzerland migration would raise their wages by 50% would be disappointed when they discovered the accompanying 50% price increase. So this table isn’t about workers’ welfare.

Does this table rank countries by their manufacturing TFP? No, for many (potential) reasons. For example, worker quality may differ considerably across countries. Suppose that all these countries are producing the same goods using the same technology, but different countries’ workers embody different numbers of efficiency units of labor. You’ll then observe substantial wage variation even if the unit cost of labor and manufacturing TFP are identical across countries.

Does this table rank countries by their labor productivity in manufacturing? It would if you believe we’re in a world of factor price equalization so that differences in wage rates must reflect differences in workers’ labor productivity. But are these workers making the same product using the same technology? Are enough factors of production sufficiently mobile to put us in the FPE set? Can large trade costs support differences in unit costs? And so forth.

[By the way, manufacturing employees aren't all "blue-collar workers". There is cross-country variation in the white-collar-blue-collar ratio of manufacturing, which will move the average hourly compensation measure.]

The BLS measure “hourly compensation costs in manufacturing” is a straightforward number, but cross-country wage comparisons are not a straightforward economic concept. Richard Florida suggests that we understand something about it by looking at its correlates. I would suggest that teaching students what this table does not mean may convey even more economic lessons.

I’ll be attending; please do say hello if you spot me. It was a pleasure to meet a couple of Trade Diversion readers last year in Denver.

The AEA meetings are a massive affair; if you search the program, you’ll find 17 sessions on international trade (JEL code F1) occupying a mere nine time slots. You might also catch me at sessions on F3, F4, P5, or R1. But listing all those would make this post far too long. See you in Chicago!

• Jan 06, 2012 10:15 am, Hyatt Regency, Regency D
  New Directions in Trade Policy (F1)
• Jan 06, 2012 10:15 am, Hyatt Regency, Columbian
  Offshoring Theories and Evidence (F1)
• Jan 06, 2012 10:15 am, Hyatt Regency, Regency D
  New Directions in Trade Policy (F1)
• Jan 06, 2012 12:30 pm, Hyatt Regency, Stetson Suite FG
  International Trade and Finance (F1)
• Jan 06, 2012 2:30 pm, Hyatt Regency, Stetson Suite FG
  Round Table on Trade and Development (F1)
• Jan 07, 2012 8:00 am, Hyatt Regency, Columbus CD
  Correct Measurement of International Financial and Trade Flows (F1)
• Jan 07, 2012 8:00 am, Hyatt Regency, Crystal A
  Trade and Labor Markets: Evidence from Matched Employer-Employee Data (F1)
• Jan 07, 2012 10:15 am, Hyatt Regency, Field
  Intermediation and Transport Costs in International Trade (F1)
• Jan 07, 2012 2:30 pm, Hyatt Regency, Toronto
  Estimating Trade Elasticities (F1)
• Jan 07, 2012 2:30 pm, Hyatt Regency, Columbus G
  International Trade (F1)
• Jan 07, 2012 2:30 pm, Hyatt Regency, Water Tower
  International Trade and Trade Policy: In Memory of Robert E. Baldwin (F1)
• Jan 07, 2012 2:30 pm, Hyatt Regency, Regency C
  New Directions in Trade and Geography (F1)
• Jan 08, 2012 8:00 am, Hyatt Regency, Dusable
  Advances in International Trade (F1)
• Jan 08, 2012 10:15 am, Hyatt Regency, Regency C
  International Trade Agreements (F1)
• Jan 08, 2012 10:15 am, Hyatt Regency, Columbus H
  Multi-Product Firms and Product Quality in International Trade (F1)
• Jan 08, 2012 1:00 pm, Hyatt Regency, Grand Suite 5
  Global Production Chains (F1)
• Jan 08, 2012 1:00 pm, Hyatt Regency, Gold Coast
  Labor Market Impacts of Trade (F1)

• RT @normative How Trade Policy Cost The X-Men Their Humanity http://www.slate.com/blogs/moneybox/2011/12/29/are_mutants_human.html
• No Surprises and No Momentum out of WTO Meeting — Kimberly Elliott |http://blogs.cgdev.org/globaldevelopment/2011/12/no-surprises-and-no-momentum-out-of-wto-meeting.php via @CGDev
• Norway slashes its $4.28 per kilo specific tariff in effort to alleviate massive butter shortage http://www.irishtimes.com/newspaper/world/2011/1220/1224309294257.html

You can follow @TradeDiversion on Twitter or see the tweets in the column on the right of the blog’s frontpage, www.tradediversion.net.

the US Court of Appeals for the Federal Circuit (CAFC) affirmed a decision from the lower US Court of International Trade (CIT) that the Commerce Department’s current method of applying countervailing and anti-dumping duties on imports from China and other “non-market economies” (NMEs) like Vietnam was invalid because it led to “double counting.” I’ve previously commented on the CIT decision – GPX Int’l Tire Corp. v. United States – and it was a pretty big deal. But it was somewhat limited because it applied to only Commerce’s methodology for applying anti-dumping and countervailing duties simultaneously on the same NME-origin product.

The CAFC, on the other hand, went a whole lot further than the CIT, finding that, under current US law, “government payments cannot be characterized as ’subsidies’ in a non-market economy context, and thus that countervailing duty law does not apply to NME countries.” So instead of ruling on the discrete “double counting” issue, the CAFC essentially said that the entire CVD law doesn’t apply to Chinese and other NME imports.

That’s an even bigger deal.

His long post has details.