Category Archive for: International Trade [Return to Main]

Friday, May 22, 2015

Paul Krugman: Trade and Trust

The Obama administration is risking its credibility over the trade deal:

Trade and Trust, by Pau Krugman, Commentary, NY Times: One of the Obama administration’s underrated virtues is its intellectual honesty. Yes, Republicans see deception and sinister ulterior motives everywhere, but they’re just projecting. The truth is that, in the policy areas I follow, this White House has been remarkably clear and straightforward about what it’s doing and why.
Every area, that is, except one: international trade and investment.
I don’t know why the president has chosen to make the proposed Trans-Pacific Partnership such a policy priority. Still, there is an argument to be made for such a deal, and some reasonable, well-intentioned people are supporting the initiative.
But other reasonable, well-intentioned people have serious questions about what’s going on. ...
The administration’s main analytical defense of the trade deal came earlier this month, in a report from the Council of Economic Advisers. Strangely, however, the report didn’t actually analyze the Pacific trade pact. Instead, it was a paean to the virtues of free trade, which was irrelevant to the question at hand.
First of all, whatever you may say about the benefits of free trade, most of those benefits have already been realized. ...
In any case, the Pacific trade deal isn’t really about trade. Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights — things like drug patents and movie copyrights — and changing the way companies and countries settle disputes. And it’s by no means clear that either of those changes is good for America. ...
As I see it, the big problem here is one of trust.
International economic agreements are, inevitably, complex, and you don’t want to find out at the last minute ... that a lot of bad stuff has been incorporated into the text. So you want reassurance that the people negotiating the deal are listening to valid concerns, that they are serving the national interest rather than the interests of well-connected corporations.
Instead of addressing real concerns, however, the Obama administration has been dismissive, trying to portray skeptics as uninformed hacks who don’t understand the virtues of trade. But they’re not...
It’s really disappointing and disheartening to see this kind of thing from a White House that has, as I said, been quite forthright on other issues. And the fact that the administration evidently doesn’t feel that it can make an honest case for the Trans-Pacific Partnership suggests that this isn’t a deal we should support.

Thursday, May 14, 2015

'Defend Workers and the Environment Before Voting Fast Track'

Jeff Sachs weighs in on the TPP, TTIP, and TPA:

Defend Workers and the Environment Before Voting Fast Track: President Barack Obama is making a full-court press for two new international business agreements, one with Asian-Pacific countries known as Trans-Pacific Partnership (TPP) and the other with European countries known as the Trans-Atlantic Trade and Investment Partnership (TTIP). To secure these, he is calling on Congress to pass Trade Promotion Authority (TPA), also known as "fast track," so that when TPP and TTIP come up for a Congressional vote, they can only be voted up or down, without amendments. ...
The president portrays TPP and TTIP as part of an overall program of "middle-class economics" in which "everybody gets a fair shot, everyone does his fair share, and everybody plays by the same set of rules." That means "making sure that everybody has got a good education," "women are getting paid the same as men for doing the same work," "making sure that folks have to have sick leave and family leave," and "increasing the minimum wage across the country." It means pushing for investments in infrastructure and faster Internet.
The problem, however, is that the president has not succeeded in getting any of those middle-class policies in place. ...
If the U.S. were a fairer society, in which Obama's vision of everybody getting a fair shot truly applied, then TPP and TTIP would be much easier calls. The losers from trade and offshoring would reliably get help from the winners; workers hit by the agreements would have a clear path to new skills, re-training, family support, adjustment assistance, a higher minimum wage, and all of the other protections that the president rightly seeks but can't secure. Yet America today is not that kind of society. The TPP and TTIP would hand another gift to the multinational companies that are lobbying so hard for the two agreements without providing real protections for workers (and for the environment as well). ...
Obama and the Republicans in Congress have not made the case to American workers that trade policies under TPP and TTIP will be part of a fair, middle-class, and environmentally sustainable economy.

Friday, May 01, 2015

'Ten Facts about U.S. Trade'

Since I've posted quite a few things skeptical of the trade agreements the Obama administration has been promoting, including an article of my own, it's fair to give the White House's response. However, the response is speaking in general about trade, and I also think it's fair to ask the degree to which the TPP and the TTIP will provide these benefits, and how the benefits will stack up against the costs (the benefit side is covered to some degree on pages 45 and 46 of the full report):

Ten Facts about U.S. Trade, The White House: President Obama’s top priority is to make sure the United States builds on its economic momentum by continuing to grow businesses, create jobs, and expand the middle class. That is why the President is committed to free and fair trade agreements that level the playing field and benefit American businesses and workers. This report presents original empirical evidence, alongside a summary of the extensive economic literature, on a broad range of effects of enhanced U.S. trade and U.S. free trade agreements (FTAs).[1] Highlights from this report include:
1. U.S. businesses must overcome an average tariff hurdle of 6.8 percent, in addition to numerous non - tariff barriers (NTBs) , to serve the roughly 95 percent of the world’s customers outside our borders. The United States is already one of the most open markets in the world, meaning that the main impact of new trade agreements would be to decrease foreign barriers to U.S. exports. In 2014, almost 70 percent of U.S. imports crossed our borders duty - free, but many of our trading partners maintain higher tariffs that create steep barriers to U.S. exports.
2. Exporters pay higher wages, and the average industry’s export growth over the past twenty years translated into $1,300 higher annual earnings for the typical employee. Studies of U.S. manufacturing industries document that, on average, export - intensive industries pay workers up to 18 percent more than non - export - intensive industries. Controlling for industry, location, and worker characteristics, CEA finds that the average industry’s increase in exports in the 1990s and 2000s translated into an additional $1,300 in annual earnings for the typical middle - class worker.
3. Middle - class Americans gain more than a quarter of their purchasing power from trade. Trade allows U.S. consumers to buy a wider variety of goods at lower prices, raising real wages and helping families purchase more with their current incomes. This is especially important for middle - class consumers who spend a larger share of their disposable income on heavily - traded food and clothing items. Compared to a world with no trade, median - income consumers gain an estimated 29 percent of their purchasing power from trade.
4. Over the past twenty years, the average industry’s increase in exports translated into 8 percent higher labor productivity, or almost a quarter of the total productivity increase over that time. About half of all U.S. imports are inputs that businesses use to produce final goods, which lowers firms’ production costs by making a greater variety of inputs available at lower prices. Additionally, economic research shows that trade increases productivity for businesses and the economy as a whole.
5. When countries make trade deals with China, outsourcing of American jobs increases, while U.S. trade agreements do not change the rate of U.S. investment abroad. Trade agreements with China offer countries preferential access to the vast Chinese market while accepting low labor and environmental standards. U.S. FTAs, on the other hand, raise standards across the board and help U.S. businesses export to foreign markets while still producing goods here. U.S. foreign direct investment (FDI) in FTA partner countries shows little to no change after completion of a trade agreement. However, China’s completion of a trade agreement increases U.S. FDI in China’s FTA partners.
6. Trade raises labor standards and incomes abroad, helping developing countries lift people out of poverty and expanding markets for U.S. exports. Research suggests that trade has helped decrease poverty by raising wages around the world and also finds that expanding U.S. market access promotes higher - quality employment in less - developed countries as workers shift from informal to formal employment. Enforceable labor standards, which form a central part of trade agreements the United States is currently negotiating, have also complemented trade’s direct effects.
7. For every 1 percent increase in income as a result of trade liberalization, pollution concentrations fall by 1 percent. This happens because the adoption of clean technologies spread through trade more than offsets emissions resulting from increased transportation or production. Current trade agreements amplify these effects: the Administration includes environmental commitments as a core part of its values - driven trade approach, including commitments to protect oceans, combat wildlife trafficking, and eliminate illegal logging.
8. Trade helps lower the gender wage gap , with a 10 percentage point decrease in tariffs leading to a 1 percentage point drop in the wage gap. CEA studied the relationship between tariffs and the gender wage gap, finding that industries with larger tariff declines saw greater reductions in the wage gap. Trade also decreases discrimination based on race and immigration status and is correlated with better human - rights conditions.
9. The United States has a $43 billion surplus in agricultural trade and is a worldwide leader in agriculture , employing almost 1.5 million American workers. In 2014, one - half of the wheat, rice, and soybeans produced in the United States was exported, along with over two - thirds of almonds and walnuts and four - fifths of cotton and pistachios. The U.S. Department of Agriculture (USDA) estimates that every $1 in agricultural exports stimulates another $1.22 in related business activity, so that agricultural exports increased total economic output by almost $350 billion in 2014.
10. The United States is the global leader in services exports. Over the past 34 years, real U.S. services exports have grown more than seven - fold, particularly in areas like insurance and financial services. As a result , knocking down barriers to services trade is especially important for the American workforce. Compared to the average across 40 other countries, including most advanced economies and large emerging markets, the United States has lower trade barriers in 14 out of 18 different service sectors. By one estimate, if U.S. services reached the same export potential as manufactured good s, total U.S. exports could increase by as much as $800 billion.
[ 1] This report complements work already published in Chapter 7 of the Council of Economic Advisers’ (CEA) 2015 Economic Report of the President.

Tuesday, April 28, 2015

Why Trade Deals Don't Get More Public Support

At MoneyWatch:

Why trade deals don't get more public support, by Mark Thoma: Although President Obama supports the Trans-Pacific Partnership (TPP) trade agreement, he's running into resistance from many progressives. Why are they opposed to a deal that negotiators have worked on for years, includes the U.S. and 11 Pacific Rim nations (but not yet China) and accounts for 40 percent of the global economy? ...

Update: See also Americans Get Free Trade's Dark Side - Noah Smith.

Sunday, April 26, 2015

'This Is Not A Trade Agreement'

This is not a subtweet:

This Is Not A Trade Agreement, by Paul Krugman: OK, Greg Mankiw has me puzzled. Has he really read nothing about TPP? Is he completely unaware of the nature of the argument?
Personally, I’m a lukewarm opponent of the deal, but I don’t see it as the end of the Republic and can even see some reasons (mainly strategic) to support it. One thing that should be totally obvious, however, is that it’s off-point and insulting to offer an off-the-shelf lecture on how trade is good because of comparative advantage, and protectionists are dumb. For this is not a trade agreement. It’s about intellectual property and dispute settlement; the big beneficiaries are likely to be pharma companies and firms that want to sue governments.
Those are the issues that need to be argued. David Ricardo is irrelevant.

Wednesday, March 11, 2015

'Fear of Cheap Foreign Labor in the Long Depression: 1873-1879'

Tim Taylor:

Fear of Cheap Foreign Labor in the Long Depression: 1873-1879: The US economy was in a continuous recession for 65 months from October 1873 to March 1879. Historians call is the "Long Depression," because the Great Depression from 1929 to 1933 saw "only" 42 consecutive months of economic decline. For comparison, the more recent Great Recession lasted 18 months. ...

Precise government statistics are not available for this time period, of course, but estimates of the unemployment rate for the later part of this period often exceeded 20%, and some exceeded 30%. For those with a job, real wages fell by half. Even those real wages were often paid in the form of company scrip, which could only be used at the company store, and was worth substantially less than cash. ... Output fell sharply. ...

And what was the cause of this collapse? At least one writer back in October 1879, writing for the Atlantic Monthly, believed that globalization and competition from China, India, and Brazil were to blame. An author identified as W.G.M. wrote an essay called "Foreign Trade No Cure for Hard Times," which through the magic of the web can be read online here. W.G.M. argued: 

"We read in a London paper that the Chinese government have purchased machinery, and engaged experienced engineers and spinners in Germany to establish cotton mills in China, so as to free that country from dependence upon English and Russian imports. Though China is somewhat tardy in her action, we may be certain that she is thorough. ... More than this, the time is  not far distant when the textiles from the Chinese machine looms, iron and steel and cutlery from the Chinese furnaces, forges and workshops, with everything that machinery and cheap labor can produce, will crowd every market. The four hundred millions of China, with the two hundred and fifty millions of India,--the crowded and pauperized populations of Asia,--will offer the cup of cheap machine labor, filled to the brim, to our lips, and force us to drink it to the dregs, if we do not learn wisdom. It is in Asia, if anywhere, that the world is to find its workshop. There are the masses, and the conditions, necessary to develop the power of cheapness to perfection, and they will be used. For years we have been doing our utmost to teach the Chinese shoemaking, spinning and weaving, engine driving, machine building, and other arts, in California, Massachusetts, and other States; and we may be sure they will make good use of their knowledge; for there is no people on earth with more  patient skill and better adapted to the use of machinery than the Chinese. When the Chinese government is doing for China, Dom Pedro is doing for Brazil [this would be Dom Pedro II, the last ruler of the Empire of Brazil], though in a different form."

It gives me a smile to think that that dangers of global competition from China, India, and Brazil were being stated so eloquently back in 1879! ...

I wonder how the 1879 argument would have differed if the writer had been able to see how little progress the economies of China and India had made even 100 years after the writing of the article in 1979! For me, an ongoing lesson is that when economic times are rough, blaming other countries is always an easy temptation. ...

'TPP at the NABE'

Paul Krugman:

TPP at the NABE: I was in DC yesterday, giving a talk to the National Association of Business Economists. The subject was the Trans-Pacific Partnership; slides for my talk are here.
Not to keep you in suspense, I’m thumbs down. I don’t think the proposal is likely to be the terrible, worker-destroying pact some progressives assert, but it doesn’t look like a good thing either for the world or for the United States, and you have to wonder why the Obama administration, in particular, would consider devoting any political capital to getting this through.
Actually, I was glad to see Larry Summers weigh in on the same subject in yesterday’s FT. Reading that piece, you may wonder what just happened – did Larry come out for the deal or against it? The answer, I think (slide 1), is that he basically supported an idealized TPP that could have been, but came out against the TPP that actually seems to be on the table. And that means that he and I are in a similar place.
So, about the deal. ...

See also Brad DeLong and Tyler Cowen.

Sunday, March 08, 2015

'A Trade Deal Must Work for America’s Middle Class'

Larry Summers:

A trade deal must work for America’s middle class: Over the next few months the question of US participation in the Trans-Pacific Partnership trade deal is likely to be resolved one way or the other. It is, to put it mildly, a highly controversial issue. ... I believe that the right TPP is very much in the American national interest.
First, in considering what is most fundamental — the interests of American workers... The view now is that trade and globalisation have increased inequality... But increases in the extent of US trade are driven largely by technology and by the increased sophistication of developing country economies — not by trade agreements. ...
Arrangements such as TPP have the potential to tilt the gains from trade towards the American middle class. This is due to the fact that the US has been a very open market for a long time. It means that properly negotiated trade agreements bring down foreign barriers and promote exports to a much greater extent than they ... benefit imports.
Crucially, TPP is necessary to let American producers compete on a level playing field... Only through TPP do we have the chance to manage international competition in the interests of American workers through binding arrangements in areas such as labour and environmental standards. ...

Wednesday, March 04, 2015

'No Guarantees, No Trade!'

Friederike Niepmann and Tim Schmidt-Eisenlohr of the NY Fed's Liberty Street Economics blog:

 No Guarantees, No Trade!: World trade fell 20 percent relative to world GDP in 2008 and 2009. Since then, there has been much debate about the role of trade finance in the Great Trade Collapse. Distress in the financial sector can have a strong impact on international trade because exporters require additional working capital and rely on specific financial products, in particular letters of credit, to cope with risks when selling abroad. In this post, which is based on a recent Staff Report, we shed new light on the link between finance and trade, showing that changes in banks’ supply of letters of credit have economically significant effects on firms’ export behavior. Our research suggests that trade finance helps explain the drop in exports in 2008–2009, especially to smaller and poorer markets. ...

Friday, January 30, 2015

'Don't Trade Away Our Health'

Joe Stiglitz:

Don't Trade Away Our Health: A secretive group met behind closed doors in New York this week. What they decided may lead to higher drug prices for you and hundreds of millions around the world.
Representatives from the United States and 11 other Pacific Rim countries convened to decide the future of their trade relations in the so-called Trans-Pacific Partnership (T.P.P.). Powerful companies appear to have been given influence over the proceedings, even as full access is withheld from many government officials from the partnership countries.
Among the topics negotiators have considered are some of the most contentious T.P.P. provisions — those relating to intellectual property rights. And we’re not talking just about music downloads and pirated DVDs. These rules could help big pharmaceutical companies maintain or increase their monopoly profits on brand-name drugs. ...

Wednesday, January 21, 2015

'Rising Fears About Losing and Replacing Jobs'

Tim Taylor:

Rising Fears About Losing and Replacing Jobs: The General Social Survey is a nationally representative survey carried bout by the National Opinion Research Center at the University of Chicago and financially supported by grants from the National Science Foundation. Starting in 1977 and 1978, and intermittently over the years since then, it has included these two questions:

Thinking about the next 12 months, how likely do you think it is that you will lose your job or be laid off—very likely, fairly likely, not too likely, or not at all likely?

About how easy would it be for you to find a job with another employer with approximately the same income and fringe benefits you have now? Would you say it would be very easy, somewhat easy, or not easy at all?

Back in 1980, Charles Weaver wrote an article about the patterns of the answers in the first wave of this data. He updates the results and looks for patterns over time in "Worker’s expectations about losing and replacing their jobs: 35 years of change," in the January 2015 issue of the Monthly Labor Review, published by the US Bureau of Labor Statistics. ...

Both simple comparisons and more sophisticated analyses suggests that fear about losing and replacing jobs has been rising over time. Here's the simple comparison from Weaver: "Compared with workers in 1977 and 1978, workers in 2010 and 2012 expressed significantly less job security. They were more afraid of losing their jobs (11.2 percent versus the earlier 7.7 percent) and were less likely to think that they could find comparable work without much difficulty (48.3 percent versus the earlier 59.2 percent)."

The more detailed breakdown of the data shows which groups have seen their labor market fears increase the most. On the question how likely you are to lose your current job, the answer for the population as a whole rose 3.5 percentage points from 1977-78 to 2010-12. But for blue-collar craft workers the increase was 11.1 percentage points, and for blue collar operatives the rise was 9.7 percentage points. Also, from the early to the most recent survey, those in the age 50-59 age bracket were 8.2 percentage points more likely to think that they were likely to lose their job.

On the issue of whether workers expected to be able to find a comparable job, the answer for the population as a whole dropped 10.9 percentage points from 1977-78 to 2010-12. For those with "some college," but not a college degree, the expectation fell by 23.1 percentage points, and for white collar workers in clerical jobs it fell by 23.9 percentage points. Interestingly, for workers 60 and over the confidence in being able to fine a comparable job was actually 1.7 percentage point greater in the 2010-12 results than in the 1977-78 results.

An obvious question is whether the greater fears about losing jobs and replacing jobs are a relatively recent development--in particular, whether they happened only in the aftermath of the Great Recession--or whether this has been a steady trend over time. Stewart runs through a number of different statistical exercises to consider this point...

Stewart writes: "In 2010 and 2012, more workers feared losing their jobs, and far fewer workers said that it would be easy to find a comparable job, than in 1977 and 1978. ... Some may infer that the lower job security felt by Americans in 2010 and 2012 was an aberration, based upon the unusual conditions presented by the recent recession. But the reality is that the downward trend in feelings of job security has been going on for the last 35 years, apart from the “extra push” it has received from the “`Great Recession,' ..."

As I mentioned in yesterday's blog post, I think the most powerful fear in the current labor market is not about mass unemployment, but instead is a concern that the available alternative jobs may be of lower quality in terms of wages, benefits, work conditions, job security, and the prospect for a future career path.

Sunday, December 21, 2014

'The Net Petroleum Exporter Myth'

Bill McBride at Calculated Risk:

Katie Couric and the Net Petroleum Exporter Myth: To understand what the general public is hearing about oil, I watched a Yahoo video yesterday with Katie Couric explaining the decline in oil prices.

In general the piece was very good. Couric started by explaining that the decline in oil prices could be explained in two words: Supply and Demand.  She discussed reasons for more supply and softening demand. ...

But then Couric mentioned a myth I've heard several times recently. She said:

In fact, [the U.S.] is now the world’s largest producer of petroleum, and for the last two years, it has been selling more to other countries than it’s been buying. Who knew?

"Who knew?"  No one, because it is not true. Yes, the U.S. is the largest producer this year (ahead of Saudi Arabia and Russia), but the U.S. is NOT "selling more to other countries than it's been buying".

The source of this error is that the U.S. is a net exporter of refined petroleum products, such as refined gasoline. Here is the EIA data on Weekly Imports & Exports of crude oil and petroleum products.  The U.S. is importing around 9 million barrels per day of crude oil and products, and exporting around 4 million per day (mostly refined products). The U.S. is a large net importer! ...

Monday, November 03, 2014

'The World Is Still Not Flat'

Justin Fox:

The World Is Still Not Flat, by by Justin Fox: Globalization marches on. But the pace isn’t all that fast, and the overall level of global connectedness still hasn’t gotten back to its all-time peak of 2007. The overwhelming majority of commerce, investment, and other interactions still occur within — not between — nations.
That’s the message from the just-released DHL Global Connectedness Index 2014...
The big news..., other than global connectedness getting back close to its 2007 peak, is that the breadth of connectedness is still declining. Breadth is a measure that reflects how many different countries a particular country is interacting with and the distances over which interactions occur, among other things. ...
This global decline in the breadth of connectedness ... suggests that “with the big shift in economic activity to emerging markets, the world is in some sense getting pulled apart.” For the past couple of decades, globalization been largely driven by trade, investment, and other interactions between developed countries and developing ones. Now the action is among the developing countries (and formerly developing countries), which is having the effect of re-regionalizing many economic flows. ...

[There's quite a bit more in the full post.]

Sunday, September 28, 2014

'The rise of China and the Future of US Manufacturing'

Acemoglu, Autor, Dor, Hansen, and Price (I've noted this paper once or twice already in recent months, but thought it worthwhile to post their summary of te work):

The rise of China and the future of US manufacturing, by Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, Vox EU: The end of the Great Recession has rekindled optimism about the future of US manufacturing. In the second quarter of 2010 the number of US workers employed in manufacturing registered positive growth – its first increase since 2006 – and subsequently recorded ten consecutive quarters of job gains, the longest expansion since the 1970s. Advocating for the potential of an industrial turnaround, some economists give a positive spin to US manufacturing’s earlier troubles: while employment may have fallen in the 2000s, value added in the sector has been growing as fast as the overall US economy. Its share of US GDP has kept stable, an achievement matched by few other high-income economies over the same period (Lawrence and Edwards 2013, Moran and Oldenski 2014). The business press has giddily coined the term ‘reshoring’ to describe the phenomenon – as yet not well documented empirically – of companies returning jobs to the United States that they had previously offshored to low-wage destinations. 
Before we declare a renaissance for US manufacturing, it is worth re-examining the magnitude of the sector’s previous decline and considering the causal factors responsible for job loss. The scale of the employment decline is indeed stunning. Figure 1 shows that in 2000, 17.3 million US workers were employed in manufacturing, a level that with periodic ups and downs had changed only modestly since the early 1980s. By 2010, employment had dropped to 11.5 million workers, a 33% decrease from 2000. Strikingly, most of this decline came before the onset of the Great Recession. In the middle of 2007, on the eve of the Lehman Brothers collapse that paralysed global financial markets, US manufacturing employment had already dipped to 13.9 million workers, such that three-fifths of the job losses over the 2000 to 2010 period occurred prior to the US aggregate contraction. Figure 1 also reveals the paltriness of the recent manufacturing recovery. As of mid-2014, the number of manufacturing jobs had reached only 12.1 million, a level far below the already diminished pre-recession level.

Figure 1. US employment , 1980q1-2014q3

Source: US Bureau of Labor Statistics.

We examine the reasons behind the recent decline in US manufacturing employment (Acemoglu et al. 2014). Our point of departure is the coincidence of the 2000s swoon in US manufacturing and a significant increase in import competition from China (Bernard et al. 2006). Between 1990 and 2011 the share of global manufacturing exports originating in China surged from two to 16% (Hanson 2012). This widely heralded export boom was the outcome of deep economic reforms that China enacted in the 1980s and 1990s, which were further extended by the country’s joining the World Trade Organization in 2001 (Brandt et al. 2012, Pierce and Schott 2013). China’s share in US manufacturing imports has expanded in concert with its global presence, rising from 5% in 1991 to 11% in 2001 before leaping to 23% in 2011. Could China’s rise be behind US manufacturing’s fall?
The first step in our analysis is to estimate the direct impact of import competition from China on US manufacturing industries. Suppose that the economic opening in China allows the country to realise a comparative advantage in manufacturing that had lain dormant during the era of Maoist central planning, which entailed near prohibitive barriers to trade. As reform induces China to reallocate labour and capital from farms to factories and from inefficient state-owned enterprises to more efficient private businesses, output will expand in the sectors in which the country’s comparative advantage is strongest. China’s abundant labour supply and relatively scarce supply of arable land and natural resources make manufacturing the primary beneficiary of reform-induced industrial restructuring. The global implications of China’s reorientation toward manufacturing – strongly abetted by inflows of foreign direct investment – are immense. China accounts for three-quarters of all growth in manufacturing value added that has occurred in low and middle income economies since 1990.
For many US manufacturing firms, intensifying import competition from China means a reduction in demand for the goods they produce and a corresponding contraction in the number of workers they employ. Looking across US manufacturing industries whose outputs compete with Chinese import goods, we estimate that had import penetration from China not grown after 1999, there would have been 560,000 fewer manufacturing jobs lost through 2011. Actual US manufacturing employment declined by 5.8 million workers from 1999 to 2011, making the counterfactual job loss from the direct effect of greater Chinese import penetration amount to 10% of the realised job decline in manufacturing.
These direct effects of trade exposure do not capture the full impact of growing Chinese imports on US employment. Negative shocks to one industry are transmitted to other industries via economic linkages between sectors. One source of linkages is buyer-supplier relationships (Acemoglu et al. 2012). Rising import competition in apparel and furniture – two sectors in which China is strong – will cause these ‘downstream’ industries to reduce purchases from the ‘upstream’ sectors that supply them with fabric, lumber, and textile and woodworking machinery. Because buyers and suppliers often locate near one another, much of the impact of increased trade exposure in downstream industries is likely to transmit to suppliers in the same regional or national market. We use US input-output data to construct downstream trade shocks for both manufacturing and non-manufacturing industries. Estimates from this exercise indicate sizeable negative downstream effects. Applying the direct plus input-output measure of exposure increases our estimates of trade-induced job losses for 1999 to 2011 to 985,000 workers in manufacturing and to two million workers in the entire economy. Inter-industry linkages thus magnify the employment effects of trade shocks, almost doubling the size of the impact within manufacturing and producing an equally large employment effect outside of manufacturing.
Two additional sources of linkages between sectors operate through changes in aggregate demand and the reallocation of labour. When manufacturing contracts, workers who have lost their jobs or suffered declines in their earnings subsequently reduce their spending on goods and services. The contraction in demand is multiplied throughout the economy via standard Keynesian mechanisms, depressing aggregate consumption and investment. Helping offset these negative aggregate demand effects, workers who exit manufacturing may take up jobs in the service sector or elsewhere in the economy, replacing some of the earnings lost in trade-exposed industries. Because aggregate demand and reallocation effects work in opposing directions, we can only detect their net impact on total employment. A further complication is that these impacts operate at the level of the aggregate economy – as opposed to direct and input-output effects of trade shocks which operate at the industry level – meaning we have only as many data points to detect their presence as we have years since the China trade shock commenced. Since China’s export surge did not hit with full force until the early 1990s, the available time series for the national US economy is disconcertingly short.
To address this data challenge, we supplement our analysis of US industries with an analysis of US regional economies. We define regions to be ‘commuting zones’ which are aggregates of commercially linked counties that comprise well-defined local labour markets. Because commuting zones differ sharply in their patterns of industrial specialisation, they are differentially exposed to increased import competition from China (Autor et al. 2013). Asheville, North Carolina, is a furniture-making hub, putting it in the direct path of the China maelstrom. In contrast, Orlando, Florida (of Disney and Harry Potter World Fame), focuses on tourism, leaving it lightly affected by rising imports of manufactured goods. If the reallocation mechanism is operative, then when a local industry contracts as a result of Chinese competition, some other industry in the same commuting zone should expand. Aggregate demand effects should also operate within local labour markets, as shown by Mian and Sufi (2014) in the context of the recent US housing bust. If increased trade exposure lowers aggregate employment in a location, reduced earnings will decrease spending on non-traded local goods and services, magnifying the impact throughout the local economy.
Our estimates of the net impact of aggregate demand and reallocation effects imply that import growth from China between 1999 and 2011 led to an employment reduction of 2.4 million workers. This figure is larger than the 2.0 million job loss estimate we obtain for national industries, which only captures direct and input-output effects. But it still likely understates the full consequences of the China shock on US employment. Neither our analysis for commuting zones nor for national industries fully incorporates all of the adjustment channels encompassed by the other. The national-industry estimates exclude reallocation and aggregate demand effects, whereas the commuting-zone estimates exclude the national component of these two effects, as well as the non-local component of input-output linkage effects. Because the commuting zone estimates suggest that aggregate forces magnify rather than offset the effects of import competition, we view our industry-level estimates of employment reduction as providing a conservative lower bound.
What do our findings imply about the potential for a US manufacturing resurgence? The recent growth in manufacturing imports to the US is largely a consequence of China’s emergence on the global stage coupled with its deep comparative advantage in labour-intensive goods. The jobs in apparel, furniture, shoes, and other wage-sensitive products that the United States has lost to China are unlikely to return. Even as China’s labour costs rise, the factories that produce these goods are more likely to relocate to Bangladesh, Vietnam, or other countries rising in China’s wake than to reappear on US shores. Further, China’s impact on US manufacturing is far from complete. During the 2000s, the country rapidly expanded into the assembly of laptops and cell-phones, with production occurring increasingly under Chinese brands, such as Lenovo and Huawei. Despite this rather bleak panorama, there are sources of hope for manufacturing in the United States. Perhaps the most encouraging sign is that the response of many companies to increased trade pressure has been to increase investment in innovation (Bloom et al. 2011). The ensuing advance in technology may ultimately help create new markets for US producers. However, if the trend toward the automation of routine jobs in manufacturing continues (Autor and Dorn 2013), the application of these new technologies is likely to do much more to boost growth in value added than to expand employment on the factory floor.
References
Acemoglu D, V Carvalho, A Ozdaglar, and A Tahbaz-Salehi (2012), “The Network Origins of Aggregate Fluctuations.” Econometrica, 80(5): 1977-2016.
Acemoglu D, D H Autor, D Dorn, G H Hanson, and B Price (2014), “Import Competition and the Great US Employment Sag of the 2000s.” NBER Working Paper No. 20395.
Autor, D H and D Dorn (2013), “The Growth of Low Skill Service Jobs and the Polarization of the US Labor Market.” American Economic Review, 103(5), 1553-1597.
Autor D H, D Dorn, and G H Hanson (2013a) “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review, 103(6): 2121-2168.
Bernard A B, J B Jensen, and P K Schott (2006), “Survival of the Best Fit: Exposure to Low-Wage Countries and the (Uneven) Growth of US Manufacturing Plants.” Journal of International Economics, 68(1), 219-237.
Bloom N, M Draca, and J Van Reenen (2012), “Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT, and Productivity.” Mimeo, Stanford University.
Brandt L, J Van Biesebroeck, and Y Zhang (2012), “Creative Accounting or Creative Destruction? Firm-Level Productivity Growth in Chinese Manufacturing.” Journal of Development Economics, 97(2): 339-351.
Hanson, G (2012), “The Rise of Middle Kingdoms: Emerging Economies in Global Trade.” Journal of Economic Perspectives, 26(2): 41-64.
Mian, A and A Sufi (2014), “What Explains the 2007-2009 Drop in Employment?” Econometrica, forthcoming.
Pierce, J R and P K Schott (2013), “The Surprisingly Swift Decline of US Manufacturing Employment.” Yale Department of Economics Working Paper, November.

Thursday, September 18, 2014

National Attitudes on International Trade

[Travel day -- heading south for the winter -- so just a few quick ones before hitting the road.]

Tim Taylor:

National Attitudes on International Trade: Americans, who are sometimes caricatured as being especially supportive of free trade, are actually among those most opposed. People from the low-income countries of the world, far from feeling oppressed by international trade, are often among its stronger supporters. The Pew Research Center has a new survey out--"Faith and Skepticism about Trade, Foreign Investment"--on the responses of people in 44 nations to questions about the effects and consequences of international trade. Here is a sampling of the evidence...

Thursday, August 21, 2014

Who Wins and Loses from Global Trade?

At MoneyWatch

Who wins and loses from global trade?: Why are most economists more in favor of free trade than the general public?
One reason may be that the models economists use to evaluate the impact of global trade often overlook some significant ways it affects jobs, income and social services. ...

Sunday, August 10, 2014

'The US Manufacturing Base is Surprisingly Strong'

According to this research, "the preponderance of net job loss in the US manufacturing sector comes within companies that stay at home and do not invest abroad":

The US manufacturing base is surprisingly strong, by Theodore H. Moran and Lindsay Oldenski, Vox EU: Introduction Recently, a number of studies, descriptive employment statistics, and statements by US politicians have raised concerns about the strength of US manufacturing. For example, in a January 2014 Journal of Economic Perspectives article, Martin Baily and Barry Bosworth expressed concern about the recent absolute decline in US manufacturing employment, as well as the long-recognised decreasing share of manufacturing within overall US employment. They also argued that productivity growth in manufacturing can be attributed solely to the unusual performance of computer production rather than to the accomplishments of the manufacturing sector more broadly. US Senator Bernie Sanders of Vermont states on his website that “The manufacturing sector in Vermont and throughout the United States has eroded significantly in recent years and must be rebuilt to expand the middle class”. President Barack Obama has based his corporate tax reform proposals on the view that US manufacturing firms must be discouraged from “shipping jobs overseas” (State of the Union 2013).

To be sure, the evidence is indisputable that manufacturing employment has been steadily declining as a share of total US employment, and the absolute number of US manufacturing jobs has plummeted by almost 30% just since 2000. But the perennial focus on employment masks important signs of the growing strength of the US manufacturing base. In a recent Peterson Institute for International Economics (PIIE) policy brief (Moran and Oldenski 2014), we analyse the most detailed and up-to-date data on the state of US manufacturing.

  • Our research shows that the overall size of the US industrial base – real value-added in manufacturing – has been growing rapidly for more than four decades, and is on track to surpass the all-time 2006-7 high before the end of 2014.
  • In contrast to other researchers, we show that US manufacturing growth is broad-based and includes subsectors such as transportation equipment, medical equipment, machinery, semiconductors, communications equipment, and motor vehicles, as well as computers and electronics.
  • Moreover, contrary to widespread hand-wringing about weakening competitive performance on the part of US firms and workers, productivity in the manufacturing sector has been growing, both absolutely and relative to other sectors of the US economy.

At the same time, the most recent data show that the productivity growth in US manufacturing is also strong in comparison to other countries.

  • Finally, our research shows clearly that increased offshoring of manufacturing operations by US multinationals is associated with increases in the size and strength of their manufacturing activities in the US.

Indeed, the preponderance of net job loss in the US manufacturing sector comes within companies that stay at home and do not invest abroad. Of particular note is the large feedback to US R&D and other high-skilled services from outward investment on the part of US manufacturing multinationals. ...

Conclusions A careful look at the most recent and detailed data shows that despite falling employment, the US manufacturing base is growing larger, more productive, and more competitive. The results of our empirical analysis show that the expansion of operations abroad by US manufacturing multinationals leads to particularly strong increases in economic activity – including creation of greater numbers of high-paying manufacturing jobs – by those same firms in the US domestic economy. The policy implications are clear – any measures that the US might take to hinder or dis-incentivise outward expansion by US firms would lead to less robust economic activity – and fewer good US jobs at home, not more.

Friday, July 18, 2014

Stiglitz Interview

Joseph Stiglitz Hails New BRICS Bank Challenging U.S.-Dominated World Bank & IMF

Transcript - Part 1

Joseph Stiglitz on TPP, Cracking Down on Corporate Tax Dodgers

Transcript - Part 2

Tuesday, July 08, 2014

'Why Hasn't the Yen Depreciation Spurred Japanese Exports?'

Mary Amiti, Oleg Itskhoki, and Jozef Konings:

Why Hasn't the Yen Depreciation Spurred Japanese Exports?, by Mary Amiti, Oleg Itskhoki, and Jozef Konings, Liberty Street Economics: The Japanese yen depreciated 30 percent from its peak in the fourth quarter of 2011 against its trading partners. This was expected to boost its exports as the lower yen makes Japanese goods more competitive on global markets. Instead, the volume of Japanese exports of goods actually fell by 0.6 percent over this same period, as can be seen in the chart below. Weaker external demand surely contributed to this poor export performance. Yet over the same period, U.S. goods exports grew by more than 6 percent, which suggests that other factors are also at play. In this post, we draw on our recent paper “Importers, Exporters, and Exchange Rate Disconnect” that highlights another channel to help explain these puzzling developments. In that study, we show that a key to understanding why there is low pass-through from exchange rates into export prices is that large exporters are also large importers, so they face offsetting exchange rate effects on their marginal costs. In the case of Japan, the connection between the yen and production costs has been made stronger since the country replaced nuclear power with imported fuels in the aftermath of the 2011 earthquake.
It has been well established that exchange rate changes are not fully passed through to export prices in foreign currency terms; that is, a 10 percent depreciation in the yen results in a less than a 10 percent fall in Japanese export prices and, thus, a relatively smaller boost to export quantities in response to a depreciation. This low pass-through has generally been attributed to “local currency pricing” and to “pricing-to-market.” If firms choose to invoice their exports in foreign currency terms, then prices are “sticky” in that currency, so exchange rate changes mechanically translate into changes in the exporter’s markup, with a weaker yen increasing the profit margin of exporters. A local currency pricing study shows that Japanese exporters to the United States generally invoice in U.S. dollars. In addition, exporting firms often tend to adjust their markups in response to an exchange rate depreciation, even if they do not invoice in the foreign currency, with the size of this adjustment depending on demand conditions in each export market.
The new finding in our study is that the incomplete pass-through is the most pronounced for exporters with large import shares—each additional 10 percentage points of imports in total variable costs reduces exchange rate pass-through by over 6 percentage points. We also show that large exporters are import-intensive, have high foreign market shares, set high markups, and actively move them in response to changes in their marginal costs. Thus, the prices of the largest firms, which account for a disproportionate share of trade, are insulated from exchange rate movements both through the hedging effect of imported inputs and through active offsetting markup adjustment in response to cost shocks. ...

Tuesday, July 01, 2014

Stiglitz: Making the case for industrial policy

I have a new article at MoneyWatch:

Stiglitz: Making the case for industrial policy: Nobel Prize winning economist Joseph Stiglitz's latest book, "Creating a Learning Society: A New Approach to Growth, Development, and Social Progress," co-written with Bruce C. Greenwald, takes on one of the most sacred ideas in economics, the benefits of free trade between nations. Ever since Adam Smith and David Ricardo pointed out the benefits of absolute and comparative advantage, economists have promoted the advantages of specialization and trade among nations: Protectionism of markets or industries within a country is to be avoided, and open markets are the key to prosperity for all.
There may be winners and losers within a country, with an example of the latter being workers who become unemployed as production moves to countries with an advantage in a particular industry. Still, it's generally possible to compensate the losers and still have enough left over to make everyone in a country better off.
But is this true always and everywhere? If not, what are the exceptions to the argument that free trade has the potential to make everyone better off? And when is protectionism in one form or another justified? ...

Thursday, March 27, 2014

'Nafta Still Bedevils Unions'

I still believe international trade makes us better off on net, but there are winners and losers from these agreements and we don't do anywhere near enough to help those who are hurt by these deals -- no wonder they are opposed:

Nafta Still Bedevils Unions, by Annie Lowrey, NY Times: Two decades after its enactment, the North American Free Trade Agreement — better known as Nafta — remains a source of deep disagreement among economists.
Maybe it has led employers to add tens of thousands of jobs. Or perhaps it has caused the loss of 700,000 jobs. Maybe it has been “a bonanza for U.S. farmers and ranchers,” as the United States Chamber of Commerce has said. But perhaps it has depressed wages for millions of working families. Then again, maybe all sides are wrong: “Nafta brought neither the huge gains its proponents promised nor the dramatic losses its adversaries warned of,” wrote Jorge G. Castañeda in an essay for Foreign Affairs this winter. “Everything else is debatable.”
But for labor groups, there is no debate: Nafta hurt American jobs and household earnings. And the sweeping trade agreement cast a shadow that persists today, spurring deep skepticism of the major trade deals the Obama administration is negotiating with Europe and a dozen Pacific Rim countries. ...
On Thursday, the A.F.L.-C.I.O. released a report excoriating Nafta... Among its conclusions: That Nafta increased corporate profits while depressing wages; that its labor-protection provisions have not improved labor conditions on the ground; that its environmental standards have not protected the environment; and that higher trade flows have not meant shared prosperity. ...

Saturday, March 15, 2014

'On the Wrong Side of Globalization'

Joe Stiglitz:

On the Wrong Side of Globalization: Trade agreements are a subject that can cause the eyes to glaze over, but we should all be paying attention. Right now, there are trade proposals in the works that threaten to put most Americans on the wrong side of globalization.
The conflicting views about the agreements are actually tearing at the fabric of the Democratic Party, though you wouldn’t know it from President Obama’s rhetoric. In his State of the Union address, for example, he blandly referred to “new trade partnerships” that would “create more jobs.” Most immediately at issue is the Trans-Pacific Partnership, or TPP, which would bring together 12 countries along the Pacific Rim in what would be the largest free trade area in the world.
Negotiations for the TPP began in 2010, for the purpose, according to the United States Trade Representative, of increasing trade and investment, through lowering tariffs and other trade barriers among participating countries. But the TPP negotiations have been taking place in secret, forcing us to rely on leaked drafts to guess at the proposed provisions. At the same time, Congress introduced a bill this year that would grant the White House filibuster-proof fast-track authority, under which Congress simply approves or rejects whatever trade agreement is put before it, without revisions or amendments.
Controversy has erupted, and justifiably so. Based on the leaks — and the history of arrangements in past trade pacts — it is easy to infer the shape of the whole TPP, and it doesn’t look good. There is a real risk that it will benefit the wealthiest sliver of the American and global elite at the expense of everyone else. The fact that such a plan is under consideration at all is testament to how deeply inequality reverberates through our economic policies. ...

Friday, February 28, 2014

Paul Krugman: No Big Deal

It's not clear that the Trans-Pacific Partnership is a good idea:

No Big Deal, by Paul Krugman, Commentary, NY Times: Everyone knows that the Obama administration’s domestic economic agenda is stalled in the face of scorched-earth opposition from Republicans. And that’s a bad thing: The U.S. economy would be in much better shape if Obama administration proposals like the American Jobs Act had become law.
It’s less well known that the administration’s international economic agenda is also stalled, for very different reasons. In particular,... the proposed Trans-Pacific Partnership, or T.P.P. — doesn’t seem to be making much progress...
And you know what? That’s O.K. It’s far from clear that the T.P.P. is a good idea. ... I am in general a free trader, but I’ll be undismayed and even a bit relieved if the T.P.P. just fades away. ...
There’s a lot of hype about T.P.P. .... Supporters like to talk about the fact that the countries at the negotiating table comprise around 40 percent of the world economy, which they imply means that the agreement would be hugely significant. But trade among these players is already fairly free, so the T.P.P. wouldn’t make that much difference.
Meanwhile, opponents portray the T.P.P. as a huge plot, suggesting that it would destroy national sovereignty and transfer all the power to corporations. This, too, is hugely overblown. ...
What the T.P.P. would do, however, is increase the ability of certain corporations to assert control over intellectual property. Again, think drug patents and movie rights.
Is this a good thing from a global point of view? Doubtful. ... True, temporary monopolies are, in fact, how we reward new ideas; but arguing that we need even more monopolization is very dubious — and has nothing at all to do with classical arguments for free trade. ...
In short, there isn’t a compelling case for this deal... Nor does there seem to be anything like a political consensus in favor, abroad or at home. ...
So what I wonder is why the president is pushing the T.P.P. at all. ... My guess is that we’re looking at a combination of Beltway conventional wisdom — Very Serious People always support entitlement cuts and trade deals — and officials caught in a 1990s time warp, still living in the days when New Democrats tried to prove that they weren’t old-style liberals by going all in for globalization. ...
So don’t cry for T.P.P. If the big trade deal comes to nothing, as seems likely, it will be, well, no big deal.

Thursday, December 12, 2013

Trans Pacific Partnership is Not Especially Important

Paul Krugman argues that the Trans Pacific Partnership is no big deal:

I’ve been getting a fair bit of correspondence wondering why I haven’t written about the negotiations for a Trans Pacific Partnership...
The answer is that I’ve been having a hard time figuring out why this deal is especially important. ...
The big talk about TPP isn’t that silly. But my starting point for things like this is that most conventional barriers to trade — tariffs, import quotas, and so on — are already quite low, so that it’s hard to get big effects out of lowering them still further. ...
An aside: one little-known aspect of the literature on trade liberalization is that to get any kind of large effect it’s necessary to drop the assumption that markets are highly competitive and efficient, and assume instead that there are large inefficiencies that will be reduced as a result of international competition. ...
As I read it, to make TPP something really important you have to (a) bring China inside, which isn’t on the table right now and (b) have major effects on foreign direct investment. ...
OK, I don’t want to be too dismissive. But so far, I haven’t seen anything to justify the hype, positive or negative.

Monday, November 04, 2013

Paul Krugman: Those Depressing Germans

Why won't policymakers "around the world to face up to the nature of our economic problems"?:

Those Depressing Germans, by Paul Krugman, Commentary, NY Times: German officials are furious at America, and not just because of the business about Angela Merkel’s cellphone. What has them enraged now is one (long) paragraph in a U.S. Treasury report... In that paragraph Treasury argues that Germany’s huge surplus on current account — a broad measure of the trade balance — is harmful, creating “a deflationary bias for the euro area, as well as for the world economy.”
The Germans angrily pronounced this argument “incomprehensible.” “There are no imbalances in Germany which require a correction of our growth-friendly economic and fiscal policy,” declared a spokesman for the nation’s finance ministry.
But Treasury was right, and the German reaction was disturbing. For one thing, it was an indicator of the continuing refusal of policy makers in Germany, in Europe ... and around the world to face up to the nature of our economic problems. For another, it demonstrated Germany’s unfortunate tendency to respond to any criticism of its economic policies with cries of victimization. ...
Five years after the fall of Lehman, the world economy is still depressed, suffering from a persistent shortage of demand. In this environment, a country that runs a trade surplus is, to use the old phrase, beggaring its neighbors. It’s diverting spending away from their goods and services to its own, and thereby taking away jobs. ...
Furthermore,... Germany ... shares a currency with its neighbors, greatly benefiting German exporters, who get to price their goods in a weak euro instead of what would surely have been a soaring Deutsche mark. Yet Germany has failed to deliver on its side of the bargain: To avoid a European depression, it needed to spend more as its neighbors were forced to spend less, and it hasn’t done that.
German officials won’t, of course, accept any of this. They consider their country a shining role model,... and the awkward fact that we can’t all run gigantic trade surpluses simply doesn’t register.
And the thing is, it’s not just the Germans. Germany’s trade surplus is damaging for the same reason cutting food stamps and unemployment benefits in America destroys jobs — and Republican politicians are about as receptive as German officials to anyone who tries to point out their error. In the sixth year of a global economic crisis whose essence is that there isn’t enough spending, many policy makers still don’t get it. And it looks as if they never will.

Saturday, November 02, 2013

'Employment Effects of International Trade'

This is a research summary from the NBER Digest. I discusses work from Autor, Dorn, Hanson, and Song that finds "Workers bear substantial costs as a result of the 'shock' of rising import competition":

Employment Effects of International Trade, by Claire Brunel, NBER Digest: In the past two decades, China's manufacturing exports have grown dramatically, and U.S. imports from China have surged. While there are many reports of plant closures and employment declines in sectors where import competition from China and elsewhere has been strongest, there is little evidence on the long-run effect on workers. In Trade Adjustment: Worker Level Evidence (NBER Working Paper No. 19226), David Autor, David Dorn, Gordon Hanson, and Jae Song examine the impact of exposure to rising trade competition from China on the employment and earnings trajectory of U.S. workers between 1992 and 2007. They find that workers bear substantial costs as a result of the "shock" of rising import competition. The adjustment to such shocks is highly uneven across workers, and varies according to their previous conditions of employment.
Individuals who in 1991 worked in manufacturing industries that experienced high subsequent import growth earned lower cumulative earnings over the 1992-2007 period, and they were at elevated risk of exiting the labor force and obtaining public disability benefits. The difference between a manufacturing worker at the 75th percentile of industry trade exposure and one at the 25th percentile of exposure amounted to reduced earnings equal to 46% of initial yearly income. Trade exposure also increased job churning across firms, industries, and sectors. Workers in sectors highly exposed to trade with China spent less time working for their initial employers, less time in their initial two-digit manufacturing industries, more time working elsewhere in manufacturing, and more time working outside of manufacturing.
The authors find that both the degree of job churn and the way earnings and employment adjust to import shocks differ substantially across demographic groups. Earnings losses are larger for individuals with low initial wages, low initial tenure, low attachment to the labor force, and for those employed at large firms with low wage levels. Losses for workers with high initial earnings are generally quite modest. For a given size import shock, high wage workers experience a larger reduction in their earnings and employment with their initial employer compared to low wage workers. However, for high skill workers separations are more likely to be voluntary, and are less likely to take place as part of a mass layoff, so initial losses are offset by gains in subsequent jobs. Low-wage workers tend to stay longer in their initial trade-exposed firms and industries, are more likely to separate from their initial firm during mass layoffs, and incur greater losses of earnings both at the initial firm and after moving to other employers.

Thursday, September 05, 2013

'Global Supply Chains and the Changing Nature of International Trade'

Tim Taylor:

Global Supply Chains and the Changing Nature of International Trade: The World Investment Report 2013 from UNCTAD (the UN Conference on Trade and Development) is my go-to source for statistics about levels and trends of foreign direct investment. This year, Chapter IV offers an interesting additional essay on "Global Value Chains: Investment and Trade for Development. Here are a few points that jumped out at me.

The Preeminence of International Trade in Intermediate Goods 

The textbook story of international trade, in which an easily identifiable product made in one country like cars, computers, textiles, oil, wine or wheat is traded for a similar good in another country is no longer a fair representation of the majority of world trade. "About 60 per cent of global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption." ...
The Centrality of Transnational Corporations in International Trade

Global supply chains are typically coordinated by transnational corporations, often through making foreign direct investments in other countries (which is why it makes sense to have a discussion of global supply chains in a report focused on foreign direct investment). In fact, a relatively small number of transnational corporations are the organizations that coordinate and carry out the overwhelming majority of international trade, through some combination of owning foreign subsidiaries, contract manufacturing, franchising, or arms'-length buying and selling from local firms. ...
Global Value Chains and Economic Development

Clearly, global supply chains lead to prices for consumers in the importing countries that are lower than they would otherwise be--that's most of the reason that transnational corporations develop such chains. They also make profits for transnational corporations? But do the global supply chains help low- and middle-income countries develop? The answer depend several factors. ...

The overall pattern seems to be that participation in global value chains does in fact typically benefit economic growth and development, but there are a bunch of potentially difficult and important issues about treatment of workers, environmental effects, interactions with local institutions and the host government, and so on.

Wednesday, August 21, 2013

'What Trade Theory Doesn’t Explain'

Nancy Folbre:

... Trade theory emphasizes that those who benefit from free trade should be able to compensate those who suffer, making everyone better off. What trade theory doesn’t explain is why the beneficiaries would offer such compensation unless they are forced to do so. ...

And if one political party is absolutely opposed to redistribution no matter what -- even if it's to compensate the losers in a way that makes everyone better off -- then government can't ensure that the beneficiariues are "forced to" compensate the losers.

Thursday, July 25, 2013

Hamilton: Krugman's Worries about China

Jim Hamilton says to keep your eyes on China's economy:

Worries about China, by Jim Hamilton: Paul Krugman is among those starting to be concerned about an economic downturn in China. Here are my thoughts on this issue.

... What rings alarm bells for me is the recent sharp spikes in interbank lending rates..., such moves could definitely be signaling some financial fragility. ...

Paul Krugman writes:

Suppose that those of us now worried that China's Ponzi bicycle is hitting a brick wall (or, as some readers have suggested, a BRIC wall) are right. How much should the rest of the world worry, and why?

I'd group this under three headings:

1. "Mechanical" linkages via exports, which are surprisingly small.
2. Commodity prices, which could be a bigger deal.
3. Politics and international stability, which involves some serious risks.

To Paul's list, I would add a fourth: financial linkages. If there are significant disruptions to China's system for funding credit, that could have implications for anyone borrowing from or lending to Chinese entities.....

I'd also like to add an observation to Paul's second point involving commodity prices. A significant economic downturn in China could well mean a collapse in oil prices. One would think that, as a net importer, this would be an overall favorable development for the United States, and certainly it would be a significant plus for many individual U.S. firms and producers. But it's worth remembering what happened after the collapse in oil prices in 1986. In the years leading up to that, just as today, there had been a dramatic economic boom in the U.S. oil-producing states... When oil prices collapsed, domestic producers took a significant hit. ...

My bottom line: China is worth watching.

'A Better Way to Think About Trade'

Simon Johnson:

A Better Way to Think About Trade, by Simon Johnson, Commentary, NY Times: Representative Sander Levin of Michigan, the senior Democrat on the Ways and Means Committee, which has jurisdiction over many trade issues, proposed this week that the United States make a significant change in its approach to international trade. ...
Mr. Levin made three main proposals... The first point is that enforceable labor and environmental standards need to be given more emphasis in American trade agreements... Recent horrendous events in Bangladesh have driven home the unfortunate truth that if matters are left purely “to the market,” there will be ... dangerous working conditions. ...
When I discuss these matters with global business executives, almost without exception they are of the opinion that health and safety should be subject to minimum acceptable ... standards everywhere. Mr. Levin is pushing on an open door.
Mr. Levin’s second point is just as compelling. ... Many countries claim to engage in free trade. But some governments ... have become adept at ... engaging in unfair trade practices.
Mr. Levin is talking about removing government distortions, and this is why I expect he may receive a great deal of Republican support.
And this is also where Mr. Levin’s third proposal will really hit a nerve. There are countries that manipulate their exchange rate ... in order to gain a competitive advantage... Again, the issue is ... governments’ getting away with actions that distort markets on a grand scale. Here, too, I don’t know many Republicans who would feel good about this. ...
This is a targeted and responsible proposal. It should get support from both sides of the aisle on Capitol Hill. ...

Short on time and it's late, so I'm going to turn this over to you. Here's a counterargument to one of the points:

Safety laws do workers more harm than good, by Jagdish Bhagwati and Amrita Narlikar

But I don't expect it will find a very receptive audience. Comments?

Thursday, July 18, 2013

'Economic Shocks Reverberate in World of Interconnected Trade Ties'

What determines international trade flows?

Economic Shocks Reverberate in World of Interconnected Trade Ties, by Matthieu Bussière, Alexander Chudik and Giulia Sestieri Vol. 8, No. 6, July 2013, FRB Dallas Economic Letter: Renewed debate about currency wars and the question of global trade imbalances are part of a longer-running economic discussion about what drives a country’s exports and imports.
More specifically, what determines international trade flows? ... Studies of the current account—the balance of goods and services traded internationally, plus net income from abroad and net cross-border transfer payments—have long emphasized the role of the exchange rate in adjusting to excessive current account surpluses and deficits. In the context of global imbalances, several efforts have been made to estimate the magnitude of the dollar depreciation needed to reduce the U.S. trade deficit, which reached around 6 percent of gross domestic product (GDP) in the year preceding the 2008 financial crisis.[1] However, it’s also important to take into account the role of demand because its fluctuations at home and abroad can offset relative price movements.
Based on a global vector autoregression (GVAR) macroeconomic model of trade flows, it appears that world exports respond more to an unexpected event, or shock, affecting U.S. output than to a comparable unplanned event involving the dollar. Additionally, shocks abroad bring wide-ranging responses that tend to be felt among countries with strong trading relationships. A positive bump to German output would increase output and exports among other European economies. Surprisingly, perhaps, it would also increase exports and GDP in more distant countries such as Mexico. The effect of a positive shock to Chinese imports would be especially large among other Asian countries but less so in Europe. ...

Monday, May 27, 2013

Stiglitz: Globalization and Taxes

Joe Stiglitz on tax avoidance by companies such as Apple and Google:

Globalisation isn't just about profits. It's about taxes too: ... Apple, like Google, has benefited enormously from what the US and other western governments provide: highly educated workers trained in universities that are supported both directly by government and indirectly (through generous charitable deductions). The basic research on which their products rest was paid for by taxpayer-supported developments – the internet, without which they couldn't exist. Their prosperity depends in part on our legal system – including strong enforcement of intellectual property rights; they asked (and got) government to force countries around the world to adopt our standards, in some cases, at great costs to the lives and development of those in emerging markets and developing countries. Yes, they brought genius and organizational skills, for which they justly receive kudos. But while Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders, taking generously from the benefits afforded by our system, but not willing to contribute commensurately. Without public support, the wellspring from which future innovation and growth will come will dry up – not to say what will happen to our increasingly divided society. ...
To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals. Companies like General Electric lobbied for, and got, provisions that enabled them to avoid even more taxes. They lobbied for, and got, amnesty provisions that allowed them to bring their money back to the US at a special low rate, on the promise that the money would be invested in the country; and then they figured out how to comply with the letter of the law, while avoiding the spirit and intention. If Apple and Google stand for the opportunities afforded by globalization, their attitudes towards tax avoidance have made them emblematic of what can, and is, going wrong with that system.

Much more here.

Monday, April 01, 2013

'Unconventional Monetary Policy and the Dollar'

Reuven Glick and Sylvain Leduc examine the effectiveness of monetary policy when the policy rate is at the zero bound (i.e. they look at the ability of unconventional policy to change the exchange rate -- this is a highly condensed version of their argument):

Unconventional Monetary Policy and the Dollar, by Reuven Glick and Sylvain Leduc, Economic Letter, FRBSF: After the financial crisis began in 2007, the Federal Reserve reduced the federal funds rate, its main policy tool, close to zero, its lowest possible level. It has remained there since. Because the federal funds rate cannot be reduced further, the Fed has introduced unconventional policy measures to stimulate the economy. One of these unconventional measures is large-scale asset purchases, which are intended to lower long-term interest rates. Another measure is known as forward guidance, communication about the Fed’s expectations for future policy that is intended to guide market expectations and reduce policy uncertainty.
The effectiveness of these new policy tools is an open question. In particular, we don’t know whether the standard channel for transmitting monetary policy through financial markets works as well now as it did in the past. One way to measure the effectiveness of unconventional monetary policy tools is through the U.S. dollar exchange rate. Although the Fed does not target the exchange rate specifically, monetary policy decisions ultimately affect the dollar’s value, which can have important effects on the economy. For example, before the crisis, the dollar typically depreciated following declines in the target for the federal funds rate. The lower value of the dollar in turn helped raise U.S. net exports, boosting output and employment in the United States. 
This Economic Letter examines how unconventional policy decisions have affected the value of the. dollar since the Fed lowered the federal funds rate close to zero in December 2008. We look at how the dollar’s value changed during the minutes immediately after Fed policy announcements. This helps isolate the response of the dollar to monetary announcements from other possible factors. In addition, because financial and currency markets may anticipate policy changes and build those expectations into prices, we account for those expectations and focus on the effects of surprise policy announcements.
Our analysis shows that unconventional monetary policy has affected the dollar exchange rate. In particular, surprise unconventional policy easing has pushed down the value of the dollar roughly as much as similar surprise downward moves in the federal funds rate did before the crisis. ...
It is more difficult to assess whether these changes in the dollar’s value stemming from unconventional monetary policy have similar effects on U.S. net exports as those stemming from conventional policy.  The recent boost to net exports from a weaker dollar may have been obscured by other factors, such as reductions in foreign demand stemming from uncertainty about Europe’s economic recovery.

Tuesday, March 05, 2013

'Why Have Americans Become More Positive About Trade?'

Anyone have an answer?:

Why Have Americans Become More Positive About Trade?, by Erik Voten: A recent Gallup Poll has found that Americans have become remarkably more positive about foreign trade. Below is the key graph:

Tradegrowth

This is a pretty major shift that could bode well for President Obama’s announced plans for a new transatlantic trade deal and the Trans-Pacific Partnership. So why such a big shift? ...
[T]here is also a partisan story to be told here. Back in 2009, 43% of Democrats and 45% of Republicans saw trade as an opportunity for growth rather than a threat to the economy. In 2013. this is 66% of Democrats and 51% of Republicans.  In other words, most of the change has come from Democrats following President Obama’s prominent endorsement of new trade deals in the State of the Union address. ... Democrats are now 15 points more favorable towards free trade than Republicans in this poll.
Another fascinating difference with 2009 lies in the income breakdowns. In 2009, 52% of those making more than $75,000 were positive about trade versus only 35% of those making less than 35%.  In 2013, these numbers were 57% and 54% respectively. ...
The patterns are pretty similar if you look at liberal/conservative rather than party identification and education rather than income. ... The question to ask is thus why so many Americans who identify as Democrats (and liberals) and so many Americans with low incomes and/or little education have become more positive about trade?

Wednesday, February 06, 2013

Jagdish Bhagwati Does Not Seem to Like Al Gore

Not sure where to start with this one other than to note that Jagdish Bhagwati does not seem to like Al Gore:

Futurama, by Jagdish Bhagwati: ...Al Gore ... surely succeeded beyond his wildest expectations as the author of An Inconvenient Truth. But his phenomenal success had little to do with science (which has remained somewhat controversial: many of us remember for instance the not-too-distant scare about global cooling, also from climate scientists) and much to do with the photographs of polar bears caught on drifting ice as glaciers melted. An image like that is what we all need when we push our pet agendas. Alas, none of us is so fortunate. Nor is Gore as he turns now to writing about our future. ...
The problem Gore faces in the bulk of this book therefore is that his identification of problems, and his proposed solutions, are not compelling. His erudition is considerable but is necessarily limited since he casts his net wide, and he is both unfamiliar with important issues pertinent to his analysis and also shallow in his prescriptions for remedial policies. ...
Given Gore’s justified reputation on climate change, a disappointing feature of Gore’s book is in the chapter titled “The Edge.” I agree with him that the evidence on climate change, and the contribution to it by man-made carbon emissions, is about as good as science can provide; and he is persuasive in his sketch of the scenario of the dangers that global warming, unchecked, hold for mankind. Where he fails is in the remedies that he discusses. To focus on just one issue: there is now agreement from the last meeting at Cancún on the attempted renewal of Kyoto Protocol that $100 billion be found annually to create new technologies of mitigation and adaptation to climate change. It is expected that a significant share of this will be public funds. We have the precedent that public monies should largely be used to create public good: thus the new seeds under the green revolution were publicly financed and they were available to everyone virtually for free. Should we then not expect the green technologies developed with public funds to be available for free to Mars, China, and India?
But, to my knowledge, Gore has not embraced this proposal, which would make, say, India accept more ambitious targets of carbon reduction because it would reduce the cost of doing so. I would not make the ferocious charges that Gore levels at the opponents of climate change (see page 283). But may I wonder whether the reason for Gore’s omission is that he is heavily invested in green-energy stocks and would like to see public funds to be used only for private payoffs by these firms?
The good in the book is therefore offset by the bad. But even the bad will produce good if it irritates us into thinking harder about the many issues that Gore correctly insists we must confront.

Gore's sin is not embracing a particular proposal, and it must be because "he is heavily invested in green-energy stocks?" Pretty thin charge, and pretty speculative -- I expected a more compelling complaint. (Bhagwati agress with Gore on the science, says he's persuasive, etc., and acts like the know-it-all judge of all things related to climate change, yet he tosses out the global cooling thing? There's a reason this is called the "global cooling myth.")

In another part, I was surprised to hear a call for unions:

...The problem in this world of competition among similar products is that comparative advantage is now fragile: it has a “knife-edge” quality. One day you have it; the next day you do not. Almost every entrepreneur has a rival breathing down his neck; and this need not be from China or India, with their “low wages”—what Gore frets about—but may be Poland or France or Sweden. There are three implications.
First, firms need flexibility in firing if they are to hire.
Second, we can no longer assure economic security for workers by giving them lifetime employment. The security has to be for the worker herself, unrelated to specific occupation and employment.
Third, the volatility also means that we can no longer expect firms to provide training and hence “human capital” to blue-collar workers who can be expected to leave at the next sign of trouble at their plant or firm. We therefore have to provide this human capital through efforts by unions, employers, community colleges, etc.
Gore also accepts uncritically the notion that we are doomed to greater inequality in a globalized world of trade and multinational investment. The evidence is more mixed than he reports...

I think it would only be fair to note the incentives work the other way as well. With firms willing to fire workers at the drop of a hat -- older social obligations to retain workers through tough times are largely gone -- there's no incentive for workers to invest in themselves if the human capital is unique to the particular firm. Why bother if you are unlikely to be there for very long? (That is, I don't think the problem is workers who "leave at the next sign of trouble." f course they'll leave for another opportunity if they fear they'll be fired in the near future due to the "trouble.")

Wednesday, January 02, 2013

Fed Watch: The Japan Story Continues to Evolve

Tim Duy:

The Japan Story Continues to Evolve, by Tim Duy: Evolving economic policy in Japan is an excellent distraction from the fiscal cliff story. From my perspective, the most interesting idea Abe floated was forcing the Bank of Japan to buy government debt to support additional fiscal stimulus. Noah Smith countered that Abe is unlikely to experiment with monetary policy and will simply fall back on a mercantilist policy. While I think it is too early to ignore the fiscal policy aspect, it is increasingly clear that Abe thinks the future of Japan is in its past. From Ambrose Evans-Pritchard:

Premier Shenzo Abe is to spend up to one trillion yen (£7.1bn) buying plant in the electronics, equipment, and carbon fibre industries to force the pace of investment, according to Nikkei news.

This on the back of:

The disclosure came just a day after Mr Abe vowed to revive Japan's nuclear industry with a fresh generation of reactors, insisting that they would be "completely different" from the Fukishima Daiichi technology.

I imagine that should advanced civilizations ever travel to the Earth, they would be amazed that we allow fission reactors on the surface of the planet. I am amazed after by this after the lessons of Chernobal and Fukishima.

I have trouble with this characterization:

The industrial shake–up shows the ferment of fresh thinking in the third–largest economy after years of paralysis.

I am not sure this is fresh thinking at all. It sounds as if Japan is trying to go backwards in time to the 1980's. Especially when combined with an obvious intent to devalue the Yen for mercantilist reasons:

He has set an implicit exchange range target of 90 yen to the dollar, instructing the Bank of Japan to drive down the yen with mass purchases of foreign bonds along lines pioneered by the Swiss.

Finance minister Taro Aso brushed aside warnings that naked intervention would anger trade partners and damage Japan's strategic alliance with the US. "Foreign countries have no right to lecture us," he said, accusing the West of failing to abide by a G20 pledge in 2009 to forgo competitive devaluations.

As I have said in the past, I think that a yen/dollar target of 90 will yield only minor economic benefits at the price undermining Japan's international relationships. The US and Europe will reply that their quantitative easing programs are primarily aimed at boosting domestic demand, whereas if Japan appears to be pursuing an obvious beggar-thy-neighbor strategy. Of course, Abe isn't too worried about offending the international community. From Reuters:

Japanese Prime Minister Shinzo Abe wants to replace a landmark 1995 apology for suffering caused in Asia during World War Two with an unspecified "forward-looking statement", a newspaper reported on Monday...

..Any hint that Japan is back-tracking from the 1995 apology, issued by then Prime Minister Tomic Murayama, is likely to outrage neighbours, particularly China and North and South Korea, which endured years of brutal Japanese rule.

This is shaping up as a year in which Japan moves to center-stage in the international arena.

Bottom Line: Explicit cooperation between fiscal and monetary authorities to dramatically support domestic demand in Japan would be a step forward, but everything else that seems to be coming from Abe is a step backwards.

Monday, December 17, 2012

Brad DeLong: Are Your Wages Set in Beijing?

Brad DeLong answers the question: Are Your Wages Set in Beijing?

This is I think an argument from my old teacher Richard Freeman, about how in the eighties and nineties effectively 2 billion workers were added to the potential global manufacturing work force. Developments in communication and trade, the coming of the container, the coming of the Deng Xiaoping policy reforms in China, reform in India, confidence these policy changes would persist--all these meant that businesses all around the world wondering where to locate manufacturing could be confident that they could if they wanted to, if it made sense, draw on a labor force that was 2 billion bigger than it had been in the 1970s.
In that context, the fact that the United States had a lot of highly-skilled manufacturing workers who had an immense productivity edge was no longer an effective factor in world production. Thus the claim is that an awful lot of the rise in inequality in the United States between 1980 and today is the result of this global pressure on the American economy.
Back in the mid 1990s when I was working for the Clinton Administration, I wrote a bunch of memos about how this was then nonsense--that is, it was simply too small to matter.
Since the mid 1990s, this factor has become significantly larger.
But I’d say it’s still in fourth place as far as the increase in U.S. inequality is concerned.
First place has been the education factor--the fact the United States is no longer clearly the most educated country in the world, and the education system is no longer is putting downward pressure on wage inequality.
Second place is the shift in the tax and transfer system--the fact that our tax and transfer system as a whole is less progressive than it was a generation ago, and that in fact it’s regarded as Kenyan Muslim socialism to even return taxes on the rich back to their levels of the Clinton Administration. ...
Third are the social structural and economic changes that allow the princes of Wall Street and the plutocrat CEOs to successfully charge what they do charge. ...
Global pressures are fourth. They are there, but they are ... more like ten percent of the process.
And with that ten percent we should in fact be willing to deal. We still are the most favored nation by luck in history. We thus have responsibility to manage the international system as a whole. We have a responsibility to be the importer of last resort for countries that are trying to develop by building up their own industries.
I place more weight on "social structural and economic changes" than he does (with the words "economic and political power" tossed into the mix somewhere).

Tuesday, December 11, 2012

Fed Watch: Disappointing Trade Report

Tim Duy:

Disappointing Trade Report, by Tim Duy: Today's international trade report confirms that sluggish global growth is taking a toll on the US economy. Exports are now barely up compared to last year:

Exp

Calculated Risk notes the wider goods deficit with the Eurozone. I would add that this is clearly on the back of weaker exports (imports are up slightly). On the plus side, exports of services were up 4.3 percent, while goods exports were down slightly, a story consistent with the divergent ISM manufacturing and services surveys.
Also note the negative year-over-year growth around 1998, the time of the Asian Financial Crisis, which means that even a significant external shock does not necessarily induce a US recession. That said, the softer external sector does leave the economy more vulnerable to negative internal shocks. In the late 1990's, the US experienced a positive internal shock, mitigating the impact of the Asian Financial Crisis. In the near-term, such a positive shock does not look as likely this time around. 
I take little comfort from the import data:

Imp

Flat to negative numbers are typically consistent with recession as they reflect periods of negative domestic demand. We can't write off the slightly negative reading as simply a reflection of falling oil imports (down $625 million); non-petroleum imports (down $792 million) also fell slightly compared to a year ago. Unless the pace of import-substitution is happening very quickly, this data seems like something of a red flag.  Something to be cautious of as we head into 2013.
Bottom Line: While I do not believe the US economy is in recession by any stretch of the imagination, I am under no illusions about the lack of underlying momentum. Slow and steady, in my opinion. But slow also means more vulnerable; there was more room to absorb an external hit in the late 1990's than today. Which again leaves me wary about the impact of tighter fiscal policy, and I am not alone. I question the belief that the clarity-induced confidence of a deal will be sufficient to offset the impact of tighter policy. Just as the Federal Reserve has committed to asset purchases until labor markets are substantially and sustainably stronger, fiscal policymakers should commit to easy policy until those conditions are met as well. Instead, we are poised for another austerity experiment. For now, the plan is to squeeze through the choppy first part of 2013 to the restorative powers of improved private sector balance sheets at the end of 2013. Hopefully we make it there relatively unscathed.  

Sunday, December 09, 2012

'Globalization is Not the Answer to the Lesser Depression'

Paul Krugman:

Dean Baker catches David Ignatius suggesting that trade liberalization can provide enough economic boost to offset the effects of austerity. As Dean says, the arithmetic is totally off — almost two orders of magnitude off. ...
First, there’s an especially strong tendency to mythologize the power of free trade. Not that open world markets are a bad thing; they’re definitely a force for good, especially for small, poor countries. But my experience is that the less somebody knows about international trade, the more likely he or she is to imagine that modest moves toward or away from protectionism will have huge effects. Trade economists, who have actually worked with the models, have a much less grandiose view.
Second, even to the extent that trade liberalization would raise the efficiency of the world economy, it is not, repeat not, a route to overall job creation. Yes, everyone would export more; they would also import more. There is no reason at all to assume that the jobs gained from export creation would exceed the jobs lost to import competition.
Globalization is not the answer to the Lesser Depression.

Thursday, November 15, 2012

'Manufacturing Fetishism'

John Kay:

Fetish for making things ignores real work, by John Kay, Commentary, Financial Times: ...The ... iPhone ... sells, in the absence of carrier subsidy, for about $700. Purchased components ... may account for as much as $200 of this. ... “Assembled in China” costs about $20. The balance represents the return to “designed in California”, which is why Apple is such a profitable company.
Manufacturing fetishism – the idea that manufacturing is the central economic activity and everything else is somehow subordinate – is deeply ingrained in human thinking..., probably formed in the days when economic activity was the constant search for food, fuel and shelter. ...
Most of what you pay reflects the style of the suit, the design of the iPhone,... the painstaking pharmaceutical research... Physical labor incorporated in manufactured goods is a cheap commodity in a globalised world. ... 
Manufacturing was once a principal source of low-skilled employment but this can no longer be true in advanced economies. Most unskilled jobs in developed countries are necessarily in personal services. Workers in China can assemble your iPhone but they cannot serve you lunch, collect your refuse or bathe your grandmother. Anyone who thinks these are not “real jobs” does not understand the labor they involve. ...
Where will exports come from, they ask? From exporting “designed in California” or “tailored in Savile Row.” Ask Apple, or your tailor, how they derive their earnings.

Wednesday, August 29, 2012

'Changing Views of Globalization’s Impact'

Edward Alden of the Council on Foreign Relations:

Changing Views of Globalization’s Impact, by Edward Allen, Commentary, NY Times: ...For decades, economists resisted the conclusion that trade – for all of its many benefits — has also played a significant role in job loss and the stagnation of middle-class incomes in the United States. ...
Rather than focusing on trade, economists argued that other factors – especially “skill-biased technical change,” technological innovation that puts an added premium on skilled workers – played the biggest role in holding down middle-class wages. But now economists are beginning to change their minds. Responding to The Times’s recent survey about the causes of income stagnation, many top economists have cited globalization as a leading cause.
While the evidence is still not conclusive, it is pretty strong. Trade’s effect on jobs and income, which was probably modest through the 1990’s, now seems to be growing much larger. [list and discussion of recent studies]...
The usual rebuttal to these findings is to argue that they stem mostly from manufacturing. And manufacturing, the argument goes, is facing a long-run, secular decline in employment that is largely technology-driven, not unlike the story of agriculture in the 20th century. The job losses in manufacturing may seem as if they have been caused by trade,... but they have actually been caused by technological change.
Through the 1990s, that story was largely plausible. But over the last decade it is not. ... There is no question that over the last decade United States manufacturing has declined, taking away jobs and driving down wages for those who are still employed. Robert Atkinson and colleagues have a useful paper on this topic, showing that the loss of more than five million jobs in manufacturing in a decade was not primarily a technology and productivity story.
The real-world evidence makes it surprising that it has taken economists so long to catch on...
I've expressed pro-trade views in the past, and I still have them. But it's not enough to say, as we do, that the gains from trade are such that (under fairly general conditions) we can make everyone better off and no one worse off. If the actual result is that all the gains go to the top of the income distribution, and all the costs go to the working class -- if the distribution of the gains results in a large class of losers -- then it is much harder to defend. We must find a way to ensure that trade realizes the promise of "lifting all boats" instead of just the yachts.

Friday, July 20, 2012

Reich: The Problem Isn’t Outsourcing

On Twitter, Modeled Behavior says:

This should be default liberal position. Recommended RT @MarkThoma: The Problem Isn't Outsourcing... - Robert Reich

However, for my taste, Reich gives in too much to the idea that income flows over the last several decades have followed changes in productivity. But they haven't, increases in the productivity of labor have not translated into corresponding increases in real wages, the gains have gone to the top of the income distribution instead, and it's not clear to me how calling for more a more competitive, more productive workforce will change that. Of course we want labor to be more competitive and more productive, but we also want workers to be rewarded when this happens:

The Problem Isn’t Outsourcing. It’s that the Prosperity of Big Business Has Become Disconnected from the Well-Being of Most Americans, by Robert Reich: President Obama is slamming Mitt Romney for heading companies that were “pioneers in outsourcing U.S. jobs,” while Romney is accusing Obama of being “the real outsourcer-in-chief.”
These are the dog days of summer and the silly season of presidential campaigns. But can we get real, please? The American economy has moved way beyond outsourcing abroad or even “in-sourcing.” Most big companies headquartered in America don’t send jobs overseas and don’t bring jobs here from abroad. That’s because most are no longer really “American” companies. They’ve become global networks that design, make, buy, and sell things wherever around the world it’s most profitable for them to do so.
As an Apple executive told the New York Times, “we don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.” ...
What’s going on? Put simply, America isn’t educating enough of our people well enough to get American-based companies to do more of their high-value added work here. ... Transportation and communication systems abroad are also becoming better and more reliable. In case you hadn’t noticed, American roads are congested, our bridges are in disrepair, and our ports are becoming outmoded.
So forget the debate over outsourcing. The way we get good jobs back is with a national strategy to make Americans more competitive — retooling our schools, getting more of our young people through college or giving them a first-class technical education, remaking our infrastructure, and thereby guaranteeing a large share of Americans add significant value to the global economy.
But big American-based companies aren’t pushing this agenda, despite their huge clout in Washington. They don’t care about making Americans more competitive. They say they have no obligation to solve America’s problems. ...
The core problem isn’t outsourcing. It’s that the prosperity of America’s big businesses – which are really global networks that happen to be headquartered here – has become disconnected from the well-being of most Americans.
Mitt Romney’s Bain Capital is no different from any other global corporation — which is exactly why Romney’s so-called “business experience” is irrelevant to the real problems facing most Americans.
Without a government that’s focused on more and better jobs, we’re left with global corporations that don’t give a damn.

Wednesday, July 18, 2012

Mankiw on the US Olympic Uniforms Made in China

Pro-Growth Liberal:

Mankiw on the US Olympic Uniforms Made in China, Econospeak: Greg picks on Senator Reid:

Will some enterprising reporter please ask Senator Reid for the opportunity to inspect the senator's closet and check the labels of his clothing to make sure they are all American-made? I look forward to seeing Mr. Reid's bonfire. In the alternative, I would be happy to send the senator of copy of my favorite textbook. He should pay particular attention to Chapters 3 and 9.

Hey – I think we all get the point about comparative advantage. Larry Popelka made the case for Greg:

Garment manufacturing is a low-cost commodity business. Most of the value in the apparel industry comes from design, technology, sales, marketing, and distribution—not manufacturing. The successful players in apparel, such as Ralph Lauren and Nike (NKE), figured this out long ago

Look – we all understand that Ralph Lauren did what was best for Ralph Lauren and if the US Olympic Committee wanted these uniforms to be both designed by both Ralph Lauren and Made in America, maybe the contract with Ralph Lauren should have said so. But Larry also noted that politicians in BOTH parties are angry at Ralph Lauren. So why is Greg lecturing Senator Reid and not certain Republicans. For example, Donald Trump loves to China bash even though his clothing line is also Made in China. Of course, Trump is not the GOP Presidential candidate – that would be Mitt Romney:

On the campaign trail, Romney labels China’s leaders as “cheaters” and “currency manipulators.” His ads say the Republican nominee would be a president who “stands up to China on trade and demands they play by the rules.” He has vowed to issue, on his first day in office, an executive order labeling China a currency manipulator.

Thursday, June 21, 2012

Economists Find Evidence for Famous Hypothesis of Comparative Advantage

Evidence for comparative advantage:

Economists find evidence for famous hypothesis of ‘comparative advantage’, MIT News: David Ricardo’s concept of “comparative advantage” is one of the most famous and venerable ideas in economics. Dating to 1817, Ricardo’s proposal is that countries will specialize in making the goods they can produce most efficiently — their areas of comparative advantage — and trade for goods they make less well, rather than making all kinds of products for themselves.

As a thought example, Ricardo proposed, consider cloth and wine production in England and Portugal. If English manufacturers are relatively better at making cloth than wine, and Portugal can produce wine more cheaply than England can, the two countries will specialize: England will concentrate on making cloth, Portugal will focus on making wine, and they will trade for the products they do not produce domestically.

Neat as this explanation may seem, it is by definition hard to prove. If England does not make wine, and Portugal does not make cloth, it is very hard to say how efficiently they could produce those goods. The same applies to any country not manufacturing any given product. So does Ricardo’s idea resemble reality?

A recent paper by MIT economists Arnaud Costinot and Dave Donaldson uses a novel approach to suggest that Ricardo’s hypothesis is buttressed by real-world evidence. ...
Why nations specialize

To arrive at this conclusion, Costinot and Donaldson identified a data source that let them quantify nations’ potential productivity: The Food and Agriculture Organization (FAO), an arm of the United Nations, analyzes farming conditions globally, estimating potential agricultural productivity based on factors such as soil type, climate and water availability.

Costinot and Donaldson looked at the numbers from an FAO model of yields of 17 crops on 1.6 million plots of land in 55 countries to examine whether countries specialize in the way Ricardo believed. That is, if a country’s terrain allows it to grow wheat more productively than grapes, comparative advantage suggests that specialization will occur. So Costinot and Donaldson compared the predicted output of crops in each of the 55 countries (based on the FAO data and on prevailing prices) with the actual output of those crops.

The numbers show that Ricardo was right — to an extent, anyway. Costinot and Donaldson analyzed the results so that if the real world worked just as Ricardo supposed, the correlation between productivity and output would be 1.000. Instead, the logarithmic correlation they found was 0.212, with a margin for error of 0.057.

“We found a positive and statistically significant correlation,” Costinot says.

The paper, “Ricardo’s Theory of Comparative Advantage: Old Idea, New Evidence,” was published in the May issue of the American Economic Review. ...

Caveats and future directions

That said, Antras suggests a couple of caveats to the paper. One is that agricultural productivity is not purely a function of environmental factors; technical know-how and the availability of equipment also influence which crops are grown where. Secondly, Antras notes, the less-than-total correlation indicates that additional factors affect international trade as well. “The results suggest the theory is validated, but it is also quite clear that there are many other things that drive trade patterns,” Antras says.

For their part, Costinot and Donaldson acknowledge these qualifications...And the MIT economists add a third caveat: The data consist of productivity estimates made by agronomists; if those estimates are a bit off, it would affect the bottom-line findings as well.

Still, Donaldson says, “I was surprised at how, even with all the complexity in the real world, there was still this positive correlation between the theory and reality.

Monday, June 04, 2012

"Will Jobs Be Reshored from China?"

Timothy Taylor:

Will Jobs Be Reshored from China?, by Timothy Taylor: China is becoming a less attractive place for off-shoring of manufacturing. But the result isn't likely to be a large movement of jobs back to the United States. Instead, globally mobile manufacturers are likely to seek out alternative low-cost destinations. Michel Janssen, Erik Dorr, and Cort Jacoby of the Hackett Group discuss these issues in a report called "Reshoring Global Manufacturing: Myths and Realities." The subtitle is: "By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate." The report is freely available here, with free registration.  ...

I was ... struck by some comments in the report about Apple's labor costs with the iPad and outsourcing to China. They emphasize that in some industries like furniture manufacturing, cost matters most. But in other industries, product quality, protection of intellectual property, time to market and ramp-up speed may matter more.

"The Chinese labor-cost component of an entry-level iPad retailing for $500 is estimated at $10, or 2% of revenue, while the profit margin is estimated at $150, or 30% of revenue. If Apple were to move production to the USA, and if one assumes that assembly costs would triple (to $30), it is conceivable that Apple could convince customers to pay for a large portion of the price increase based on the appeal of a “made in the USA” product. ... Furthermore, ...  such a move could substantially boost Apple’s corporate image. However, the U.S. lacks the sheer labor capacity that would be required in order to ramp up production of iPads at the speed needed to maintain the company’s edge in the hyper-competitive tablet and mobile device market. ... Thus one may assume that Apple’s manufacturing sourcing strategy is primarily motivated by scalability and supply chain risk, and only secondarily by total landed cost."

Wednesday, May 02, 2012

"Why a More Flexible Renminbi Still Matters"

A quick one while waiting for Bill Clinton to take the stage at the conference I'm attending. This is Ken Rogoff:

Why a More Flexible Renminbi Still Matters, by Kenneth Rogoff, Commentary, Project Syndicate: One of the most notable macroeconomic developments in recent years has been the sharp drop in China’s current-account surplus. The International Monetary Fund is now forecasting a 2012 surplus of just 2.3% of GDP, down from a pre-crisis peak of 10.1% of GDP in 2007, owing largely to a decline in China’s trade surplus – that is, the excess of the value of Chinese exports over that of its imports.
The drop has been a surprise to the many pundits and policy analysts who view China’s sustained massive trade surpluses as prima facie evidence that government intervention has been keeping the renminbi far below its unfettered “equilibrium” value. Does the dramatic fall in China’s surplus call that conventional wisdom into question? Should the United States, the IMF, and other players stop pressing China to move to a more flexible currency regime?
The short answer is “no.” China’s economy is still plagued by massive imbalances, and moving to a more flexible exchange-rate regime would serve as a safety valve and shock absorber. ...[continue reading]...

Saturday, March 24, 2012

"What Should Trade Negotiators Negotiate About?"

Robert Skidelsky:

...The target of all versions of fair trade is “free trade,” and the most damaging attacks on FAIRTRADE have come from free traders. In Unfair Trade, a pamphlet published in 2008 by the Adam Smith Institute, Mark Sidwell argues that FAIRTRADE keeps uncompetitive farmers on the land, holding back diversification and mechanization. According to Sidwell, the FAIRTRADE scheme turns developing countries into low-profit, labor-intensive agrarian ghettos, denying future generations the chance of a better life.
This is without considering the effect that FAIRTRADE has on the poorest people in these countries – not farmers but casual laborers – who are excluded from the scheme by its expensive regulations and labor standards. In other words, FAIRTRADE protects farmers against their rivals and against agricultural laborers.
Consumers, Sidwell argues, are also being duped. Only a tiny proportion – as little as 1% – of the premium that we pay for a FAIRTRADE chocolate bar will ever make it to cocoa producers. Nor is FAIRTRADE necessarily a guarantee of quality: because producers get a minimum price for fair-trade goods, they sell the best of their crop on the open market.
But, despite its shaky economics, the fair-trade movement should not be despised. While cynics say that its only achievement is to make consumers feel better about their purchases – rather like buying indulgences in the old Catholic Church – this is to sell fair trade short. In fact, the movement represents a spark of protest against mindless consumerism, grass-roots resistance against an impersonal logic, and an expression of communal activism.
That justification will not convince economists, who prefer a dryer sort of reasoning. But it is not out of place to remind ourselves that economists and bureaucrats need not always have things their own way.

Not sure how much time I'll have -- I'm traveling today and have to meet a deadline along the way -- so let me turn the conversation over to someone who might know a bit about this topic, Paul Krugman:

What Should Trade Negotiators Negotiate About? A Review Essay, by Paul Krugman: If economists ruled the world, there would be no need for a World Trade Organization. The economist's case for free trade is essentially a unilateral case - that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do. Or as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts. So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interest. (Students of international trade theory know that there is actually a theoretical caveat to this statement: large countries have an incentive to limit imports - and exports - to improve their terms of trade, even if it is in their collective interest to refrain from doing so. This "optimal tariff" argument, however, plays almost no role in real-world disputes over trade policy.)
Fortunately or unfortunately, however, the world is not ruled by economists. The compelling economic case for unilateral free trade carries hardly any weight among people who really matter. If we nonetheless have a fairly liberal world trading system, it is only because countries have been persuaded to open their markets in return for comparable market-opening on the part of their trading partners. Never mind that the "concessions" trade negotiators are so proud of wresting from other nations are almost always actions these nations should have taken in their own interest anyway; in practice countries seem willing to do themselves good only if others promise to do the same.
But in that case why should the tits we demand in return for our tats consist only of trade liberalization? Why not demand that other countries match us, not only in what they do at the border, but in internal policies? This question has been asked with increasing force in the last few years. In particular, environmental advocates and supporters of the labor movement have sought with growing intensity to expand the obligations of WTO members beyond the conventional rules on trade policy, making adherence to international environmental and labor standards part of the required package; meanwhile, business groups have sought to require a "level playing field" in terms of competition policy and domestic taxation. Depending on your point of view, the idea that there must be global harmonization of standards on employment, environment, and taxation is either the logical next step in global trade negotiations or a dangerous overstepping of boundaries that threatens to undermine all the progress we have made so far.
In 1992 Columbia's Jagdish Bhagwati (one of the world's leading international trade economists) and Robert E. Hudec (an experienced trade lawyer and former official now teaching at Minnesota) brought together an impressive group of legal and economic experts in a three-year research project intended to address the new demands for an enlarged scope of trade negotiations. Fair Trade and Harmonization: Prerequisites for Free Trade? (Cambridge MA: MIT Press, 1996) is the result of that project. This massive two-volume collection of papers is unavoidably a bit repetitious. One also wonders why only economists and lawyers were involved - what happened to the political scientists? (More on that later). But the volumes contain a number of first-rate papers and offer a valuable overview of the debate.
In this essay I will not try to offer a comprehensive review of the papers; in particular I will give short shrift to those on competition and tax policy. Nor will I try to deal with the quite different question of how much coordination of technical standards - e.g. health regulations on food (remember the Eurosausage!), or safety regulations on consumer durables - is essential if countries are to achieve "deep integration". Instead, I will try to sort through what seem to be the main issues raised by new demands for international labor and environmental standards..
The economics and politics of free trade
In a way, the most interesting paper in the Bhagwati-Hudec volumes is interesting precisely because the author seems not to understand the logic of the economic case for free trade - and in his incomprehension reveals the dilemmas that practical free traders face. Brian Alexander Langille, a Canadian lawyer, points out correctly that domestic policies such as subsidies and regulations may influence a country's international trade just as surely as explicit trade policies such as tariffs and import quotas. Why then, he asks, should trade negotiations stop with policies explicitly applied at the border? He seems to view this as a deep problem with economic theory, referring repeatedly to the "rabbit hole" into which free traders have fallen.
But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports - no matter how expensive to produce in terms of other opportunities foregone - is a victory, and an increase in imports - no matter how many resources it releases for other uses - is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense - but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.
What Langille fails to understand, then, is that serious free-traders have never accepted as valid economics the demand that our trade liberalization be matched by comparable market-opening abroad; and so they are not being inconsistent in rejecting demands for an extension of such reciprocity to domestic standards. If economists are sometimes indulgent toward the mercantilist language of trade negotiations, it is not because they have accepted its intellectual legitimacy but either because they have grown weary of saying the obvious or because they have found that in practice this particular set of bad ideas has led to pretty good results.
One way to answer the demand for harmonization of standards, then, is to go back to basics. The fundamental logic of free trade can be stated a number of different ways, but one particularly useful version - the one that James Mill stated even before Ricardo - is to say that international trade is really just a production technique, a way to produce importables indirectly by first producing exportables, then exchanging them. There will be gains to be had from this technique as long as world relative prices differ from domestic opportunity costs - regardless of the source of that difference. That is, it does not matter from the point of view of the national gains from trade whether other countries have different relative prices because they have different resources, different technologies, different tastes, different labor laws, or different environmental standards. All that matters is that they be different - then we can gain from trading with them.
This way of looking at things, among its other virtues, offers an en passant refutation of the instinctive feeling of most non-economists that a country that imposes strong environmental or labor standards will necessarily experience difficulties when it trades with other countries that are not equally high-minded. The point is that all that matters for the gains from trade are the prices at which you trade - it makes absolutely no difference what forces lie behind those prices. Suppose your country has been cheerfully exporting airplanes and importing clothing in return, believing that the comparative advantage of your trading partners in clothing is "fairly" earned through exceptional productive efficiency. Then one day an investigative journalist, hot in pursuit of Kathie Lee Gifford, reveals that the clothing is actually produced in 60-cent-an-hour sweatshops that foul the local air and water. (If they hurt the global environment, say by damaging the ozone layer, that is another matter - but that is not the issue).You may be outraged; but the beneficial trade you thought you had yesterday has not become any less economically beneficial to your country now that you know that it is based on these objectionable practices. Perhaps you want to impose your standards on these matters, but this has nothing to do with trade per se - and there are worse things in the world than low wages and local pollution to excite our moral indignation.
This back-to-basics case for rejecting calls for harmonization of standards is elaborated in two of the papers in Volume 1 of Bhagwati-Hudec: a discussion of environmental standards by Bhagwati and T.N. Srinivasan, and a discussion of labor standards by Drusilla Brown, Alan Deardorff, and Robert Stern. In each case the central theme is that neither the ability of a country to impose such standards nor its benefits from so doing depend in any important way on whether other countries do the same; so why not leave countries free to choose?
Bhagwati and Srinivasan also raise two other arguments on behalf of a laissez-faire approach to standards, arguments echoed by several other authors in the volume. The first is that nations may legitimately have different ideas about what is a reasonable standard. (The authors quote one environmentalist who asserts that "geopolitical boundaries should not override the word of God who directed Noah" to preserve all species, then drily note that "as two Hindus .. we find this moral argument culture-specific"). Moreover, even nations that share the same values will typically choose different standards if they have different incomes: advanced-country standards for environmental quality and labor relations may look like expensive luxuries to a very poor nation. Second, to the extent that nations for whatever reason choose different environmental standards, this difference, like any difference in preferences, actually offers not a reason to shun international trade but an extra opportunity to gain from such trade. It is very difficult to be more explicit about this without being misrepresented as an enemy of the environment - an excerpt from the entirely sensible memo along these lines that Lawrence Summers signed but did not write at the World Bank a few years ago is reprinted in my copy of The 776 Stupidest Things Ever Said - so it is left as an exercise for readers.
The back-to-basics argument against harmonization of standards, then, is completely consistent and persuasive. And yet it is also somehow unsatisfying. Perhaps the problem is that we know all too well how little success economists have had in convincing policymakers of the case for unilateral free trade. Why, then, should we imagine that restating that case yet again will be an effective argument against the advocates of international harmonization of standards? Confronted with the failure of the public to buy the classical case for free trade, and unwilling simply to preach the truth to each other, trade economists have traditionally followed one of two paths. Some try to give the skeptics the benefit of the doubt, attempting to find coherent models that make sense of their concerns. Others try to make sense not of the skeptics' ideas but their motives, attempting to seek guidance from models of political economy. The same two paths are followed in these volumes, with several papers following each approach.
Second-best considerations and the "race to the bottom"
The general theory of the second best tells us that if incentives are distorted in some markets, and for some reason these distortions cannot be directly addressed, policies in other markets should in principle take the distortions into account. For example, environmental economists have become sensitized to the likely interactions between pollution fees - designed to correct one distortion of incentives - with other taxes, which have nothing to do with environmental issues but which, because they distort incentives to work, save, and invest may crucially affect the welfare evaluation of any given environmental policy.
There is a long history of protectionist arguments along second-best lines. (Among Jagdish Bhagwati's seminal contributions to international trade theory was, in fact, his work showing that many critiques of free trade are really second-best arguments - and that the first-best response rarely involves protection). Here's an easy one: suppose that an industry generates negative environmental externalities that are not properly priced, and that international trade leads to an expansion of that industry in your country. Then that trade may indeed reduce national welfare (although of course trade may equally well have the opposite effect: it may cause your country to move out of "dirty" into "clean" industries, and thereby lead to large welfare gains). However, the advocates of international environmental and labor standards seem to be offering a more subtle argument. They seem to be claiming that an environmental (or labor) policy that would raise welfare in a closed economy - or that would raise world welfare if implemented by all countries simultaneously - will reduce national welfare if implemented unilaterally. Thus the independent actions of national governments in the absence of international standards on these issues can lead to a "race to the bottom", with global standards far too lax.
What sort of model might justify this fear? In an extremely clear paper in Volume 1, John D. Wilson gives the issue his (second) best shot, showing that international competition for capital - in a world in which the social return to capital exceeds its private return, for example due to capital taxation - could do the trick. Other things being the same, tighter environmental or labor regulation will presumably decrease the rate of return on investments, and thus any country which has a pre-existing tendency to attract too little capital will have an incentive to avoid such regulations; whereas a collective, international decision to impose higher standards would not lead to capital flight, since the capital would have nowhere to go.
Is this a clinching argument? Not necessarily. For one thing, like all second-best arguments it is very sensitive to tweaking of its assumptions. As Wilson points out, capital importation may have adverse as well as positive effects, especially from the point of view of an environment-conscious country. In that case a positive rate of taxation is appropriate - and if the actual rate of taxation is too low, countries may adopt excessively strong environmental standards in a "race to the top". If this seems implausible, Wilson reminds us of the NIMBY (not in my backyard) phenomenon in which no local jurisdiction is willing to be the site for facilities the public collectively needs to locate somewhere.
Even if you regard a race to the bottom as more likely than one to the top, there is still the question of whether such second-best arguments are really very important. This is doubtful, especially where environmental standards are concerned. The alleged impact of such standards on firms' location decisions looms large in the demands of activists who want these standards harmonized. But the chapter by Arik Levinson, surveying the evidence, finds little reason to think that international differences in these standards actually have much effect on the global allocation of capital.
So while it is possible to devise second-best models that offer some justification for demands for harmonization of standards, these models - on the evidence of this collection, at any rate - do not seem particularly convincing. The classical case for laissez-faire on national economic policies is surely not precisely right, but it does not seem wrong enough to warrant the heat now being generated over the issue of harmonization. Simply pointing this out, however, while important, does not make the phenomenon go away. So it is at least equally important to try to understand the political impulse behind demands for harmonization, and in particular to ask whether the political economy of standard-setting offers some indirect rationale for insisting on harmonization of such standards.
The political economy of standards
Consider - as Brown, Deardorff, and Stern do - a single industry, small enough to be analyzed using partial equilibrium, in which a country is considering imposing a new environmental or labor regulation that will raise production costs. As they point out, if the costs of the regulation are less than the social costs imposed by the industry in its absence, then it is worth doing regardless of whether other countries follow suit. But the distribution of gains between producers and consumers does depend on whether the action is unilateral or coordinated. If one country imposes a costly regulation while others do not, the world price will remain unchanged and all of the burden will fall on producers; if many countries impose the regulation, world prices will rise and some of the burden will be shifted to consumers.
So what? Well, it is a fact of life, presumably rooted in the public-goods character of political action, that trade policy tends to place a much higher weight on producers than on consumers. So even though the national welfare case for the regulation is not weakened at all by the fact that the good is traded, the practical political calculus of getting the regulation implemented could quite possibly depend on whether other countries agree to do the same. This suggests an alternative version of the "race to the bottom" story. The problem, one might argue, is not that countries have an incentive to set standards too low in a trading world. Rather, it is that politicians, who respond to the demands of special-interest groups, have such an incentive. And one might argue that this failure of the political market, rather than distortions in goods or factor markets, is what justifies demands for international harmonization of standards.
An environmentalist or defender of workers' rights might also make a related argument. He or she might say "You know that countries aren't in a zero-sum competition, and I know that they aren't, but the public and the politicians think they are - and industry lobbies consistently use that misconception as an argument against standards that we ought to have. So we need to set those standards internationally in order to neutralize that bogus but effective political ploy". It is very difficult for trade economists to reject this line of argument on principle. After all, it is very close to the reason why free-traders who know that the economic case for liberal trade is essentially unilateral are nonetheless usually staunch defenders of the GATT: trade negotiations may be based on a false theory, but by setting exporters as counterweights to producers facing import competition they nonetheless are politically crucial to maintaining more or less free trade. That is, the true purpose of international negotiations is arguably not to protect us from unfair foreign competition, but to protect us from ourselves. (When the United States recently imposed utterly indefensible restrictions on Mexican tomato exports, an Administration official remarked off the record that Florida has a lot of electoral votes while Mexico has none. The economically correct rebuttal to this sort of thing is to point out that the other 49 states contain a lot of pizza lovers; the politically effective answer is to subject US-Mexican trade to a set of rules and arbitration procedures in which the Mexicans do too have a vote).
While one cannot dismiss such political-economy arguments as foolish, however, the problem is to know where to stop. Here is where it would have been useful to hear from some political scientists, who might be able to tell us more about when international negotiations over standards are likely to improve domestic policies, and when they are likely simply to serve as a cover for protectionist motives. But while I would have liked to see an analysis from that point of view, much of the legal analysis that occupies Volume 2 of the Bhagwati-Hudec books does shed light on the problem.
Standards and the rule of law
Economists pronounce on legal matters at their peril: law, even international trade law, is a discipline all its own, with a jargon just as impenetrable to us as ours is to them. Let me therefore tread cautiously in interpreting the arguments here. As I understand it, the problem involved in defining the limits of fair trade is not too different from that of defining the limits of free speech. Take it as a given that countries can do things that are perceived to be economically harmful to other countries - it does not necessarily matter whether this perception is correct. Which of these things can realistically be prohibited, and which should be tolerated? The answer is a matter of degree. The fellow at the next table who insists on talking loudly to his partner about marketing is annoying, but one cannot reasonably ask the law to do anything about him; the person who shouts "Fire" in a crowded theater is something else again.
Where does one draw the line in international economic relations? The prevailing principle of international law derives from the 17th-century Peace of Westphalia, which ended the Thirty Years' War by establishing the rule that states may do whatever they like (such as imposing the sovereign's religion) within their borders - only external relations are the proper concern of the international community. By this principle labor law, or environmental policies that do not spill across borders, should be off limits.
Now in practice we do not always honor the principle of the hard-shell Westphalian state. We are sometimes willing to impose sanctions or even invade to protect human rights. Even in trade negotiations it is an understood principle that if a country de facto undoes its trade concessions with domestic policies - for example, offsetting a tariff cut with an equal production subsidy - it is considered to have failed to honor its agreement. But while borders are fuzzier in legal practice than they are on a map, the basic structure of trade negotiations is still basically Westphalian. The demand for harmonization of standards is, in effect, a demand that this should change.
We have seen that the strictly economic case for that demand is fairly weak, but there may be a stronger case on grounds of political economy. But what do the legal experts say? The general answer, as I understand it, is that they don't think it is a good idea. A lucid chapter by Frieder Rousseler grants that the political argument for harmonization has some force, but concludes that to give in to it would open up too wide a range of potential complaints, much the same as would happen if I were allowed to sue people whose words annoy rather than actually slander me. Other authors, such as Virginia Leary and Robert Hudec himself, seem to have a similar point of view, suggesting only that nations might want to enter into specific environmental and labor agreements that would then be enforced by the same institutions that enforce trade agreements. (One essay, however, a piece by Daniel Gifford and Mitsuo Matsushita on competition policy, seems more economistic than the economists: it argues that the international acceptability of competition policies should be judged on whether they seem likely, or at least motivated by the desire, to enhance efficiency).
To an economist, at least, the legal case here seems fairly similar to the economic case for trade negotiations. We have a purist principle: unilateral free trade, the Westphalian state. We recognize based on experience that it is useful to compromise that principle a bit, so that we work with mercantilists rather than simply castigating them and allow a bit of international meddling in internal affairs. But while a bit of pragmatism is allowed, the principle remains there; and it is not a good idea to stray too far. On the evidence of these volumes, then, the demand for harmonization is by and large ill-founded both in economics and in law; realistic political economy requires that we give it some credence, but not too much. Unfortunately, that will surely not make the issue go away. Expect many more, equally massive volumes to come.

Friday, March 09, 2012

Rodrik: Free-Trade Blinders

Dani Rodrik on free trade and the distribution of income:

Free-Trade Blinders, by Dani Rodrik, Commentary, Project Syndicate: I was recently invited by two Harvard colleagues to make a guest appearance in their course on globalization. “I have to tell you,” one of them warned me beforehand, “this is a pretty pro-globalization crowd.” ...
[M]aybe they did not understand how trade really works. After all, when I met with them, I posed the same question in a different guise, emphasizing the likely distributional effects of trade. This time, the free-trade consensus evaporated...
I began the class by asking students whether they would approve of my carrying out a particular magic experiment. I picked two volunteers, Nicholas and John, and told them that I was capable of making $200 disappear from Nicholas’s bank account – poof! – while adding $300 to John’s.  This feat of social engineering would leave the class as a whole better off by $100. Would they allow me to carry out this magic trick?
Those who voted affirmatively were only a tiny minority. ... Clearly the students were uncomfortable about condoning a significant redistribution of income, even if the economic pie grew as a result. How is it possible, I asked, that almost all of them had instinctively favored free trade, which entails a similar – in fact, most likely greater – redistribution from losers to winners? They appeared taken aback. ...

Too many economists ... attribute concerns about globalization to crass protectionist motives or ignorance, even when there are genuine ethical issues at stake. By ignoring ... redistributive outcomes that we would consider problematic at home, they fail to engage the public debate properly. They also miss the opportunity to mount a more robust defense of trade when ethical concerns are less warranted.

While globalization occasionally raises difficult questions about the legitimacy of its redistributive effects, we should not respond automatically by restricting trade. ... But democracies owe themselves a proper debate, so that they make such choices consciously and deliberately. Fetishizing globalization simply because it expands the economic pie is the surest way to delegitimize it in the long run.

Friday, February 24, 2012

Autor, Dorn, and Hanson: When (and Where) Work Disappears

The loss of manufacturing jobs to overseas producers has large negative impacts on workers and their communities. I'm with David Autor, one of the authors of the study described below, when he says "policymakers need new responses to the loss of manufacturing jobs: 'I’m not anti-trade, but it is important to realize that there are reasons why people worry about this issue.' ... Trade may raise GDP, but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate":

When (and where) work disappears, MIT News: ...A new study co-authored by MIT economist David Autor shows that the rapid rise in low-wage manufacturing industries overseas has ... had a significant impact on the United States. The disappearance of U.S. manufacturing jobs frequently leaves former manufacturing workers unemployed for years, if not permanently, while creating a drag on local economies and raising the amount of taxpayer-borne social insurance necessary to keep workers and their families afloat.
Geographically, the research shows, foreign competition has hurt many U.S. metropolitan areas — not necessarily the ones built around heavy manufacturing in the industrial Midwest, but many areas in the South, the West and the Northeast, which once had abundant manual-labor manufacturing jobs, often involving the production of clothing, footwear, luggage, furniture and other household consumer items. Many of these jobs were held by workers without college degrees, who have since found it hard to gain new employment.
“The effects are very concentrated and very visible locally,” says Autor... “People drop out of the labor force, and the data strongly suggest that it takes some people a long time to get back on their feet, if they do at all.” Moreover, Autor notes, when a large manufacturer closes its doors, “it does not simply affect an industry, but affects a whole locality.” ...
The findings highlight the complex effects of globalization on the United States. “Trade tends to create diffuse beneficiaries and a concentration of losers,” Autor says. “All of us get slightly cheaper goods, and we’re each a couple hundred dollars a year richer for that.” But those losing jobs, he notes, are “a lot worse off.” For this reason, Autor adds, policymakers need new responses to the loss of manufacturing jobs: “I’m not anti-trade, but it is important to realize that there are reasons why people worry about this issue.” ...
Double trouble: businesses, consumers both spend less when industry leaves
In the paper, Autor, Dorn (of the Center for Monetary and Fiscal Studies in Madrid, Spain) and Hanson (of the University of California at San Diego) specifically study the effects of rising manufacturing competition from China, looking at the years 1990 to 2007. ...
The types of manufacturing for export that grew most rapidly in China during that time included the production of textiles, clothes, shoes, leather goods, rubber products — and one notable high-tech area, computer assembly. Most of these production activities involve soft materials and hands-on finishing work. “These are labor-intensive, low-value-added [forms of] production,” Autor says. “Certainly the Chinese are moving up the value chain, but basically China has been most active in low-end goods.”
In conducting the study, the researchers found more pronounced economic problems in cities most vulnerable to the rise of low-wage Chinese manufacturing; these include San Jose, Calif.; Providence, R.I.; Manchester, N.H.; and a raft of urban areas below the Mason-Dixon line — the leading example being Raleigh, N.C. “The areas that are most exposed to China trade are not the Rust Belt industries,” Autor says. “They are places like the South, where manufacturing was rising, not falling, through the 1980s.” ...
And as the study shows, when businesses shut down, it hurts the local economy because of two related but distinct “spillover effects,” as economists say: The shuttered businesses no longer need goods and services from local non-manufacturing firms, and their former workers have less money to spend locally as well. ... “People like to think that workers flow freely across sectors, but in reality, they don’t,” Autor says. ...
New policies for a new era?
In Autor’s view, the findings mean the United States needs to improve its policy response to the problem of disappearing jobs. “We do not have a good set of policies at present for helping workers adjust to trade or, for that matter, to any kind of technological change,” he says.
For one thing, Autor says, “We could have much better adjustment assistance — programs that are less fragmented, and less stingy.” The federal government’s Trade Adjustment Assistance (TAA) program provides temporary benefits to Americans who have lost jobs as a result of foreign trade. But as Autor, Dorn and Hanson estimate in the paper, in areas affected by new Chinese manufacturing, the increase in disability payments is a whopping 30 times as great as the increase in TAA benefits.
Therefore, Autor thinks, well-designed job-training programs would help the government’s assistance efforts become “directed toward helping people reintegrate into the labor market and acquire skills, rather than helping them exit the labor market.”
Still, it will likely take more research to get a better idea of what the post-employment experience is like for most people. ...
“Trade may raise GDP,” Autor says, “but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate.”

Sunday, February 19, 2012

NBER Research Summary: Offshoring, International Trade, and American Workers

Here's a description of recent academic work on offshoring and US workers:

Offshoring, International Trade, and American Workers, by Ann Harrison and Margaret McMillan, NBER Reporter 2011 Number 4: Research Summary: In 1982, only one out of four employees of U.S. multinationals was located offshore, and over 90 percent of those employees were in industrial countries. By 2007, the share of offshore employment had reached 44 percent, and the majority of those jobs were in low-income countries. These trends in offshoring are mirrored in the statistics on international trade: over the past two decades imports from low-wage countries have more than doubled.1
Over this same time period, U.S. employment in the manufacturing sector fell sharply and income inequality increased. ... Our research is motivated by these parallel developments and seeks to understand the implications for American workers.
Are U.S. Based Multinationals Exporting Jobs?
This question has always been of interest to policymakers and is arguably more important now than ever before. Accordingly, there is no shortage of academic research on this topic.2 The problem is that the answer to the question seems to change depending on the study. ... Our research examines this seemingly contradictory evidence in an attempt to bring closure to this debate. ...
Interpreting the Results on Multinational Employment Abroad
Our results indicate that whether the offshoring of jobs by U.S. multinationals leads to a decline in U.S. based employment depends on both the location of the investment abroad and the motive for the investment. In general, the expansion of employment in low-income countries has been associated with a contraction in employment in the United States... However, when American workers and workers in low-income countries perform different tasks, the expansion of multinational employment abroad can lead to increases in domestic employment. Taken together, these results go a long way toward explaining why previous researchers have found seemingly contradictory results. ...
Economy-wide Trends in Employment, Wages and Inequality
Using data from the CPS, we show that between 1982 and 2002, total manufacturing employment fell from 22 to 17 million, with rapid declines at the beginning of the 1980s and in recent years. However, the effects were uneven across different types of workers. For workers without a college degree, there were significant declines in manufacturing employment over the entire period. The opposite was true for workers with a college degree. Within manufacturing, the labor force has become increasingly well educated, as college graduates replace workers with high school degrees.
Wage trends mirror the shifts in employment. While wages fell for the least educated workers, they increased for workers with at least some years of college. The biggest wage gains were for manufacturing workers with an advanced degree. The decline in wages for high school dropouts and the steep wage increases at the upper end of the income distribution indicate a sharp increase in wage inequality.
Are Trade and Offshoring Responsible for Growing Wage Inequality?
... We focus on ... the movement of workers across sectors and occupations. To the extent that trade leads workers to switch industries (for example from manufacturing to services) or occupations (for example from machine tool operator to burger flipper), studies that focus on the impact of trade liberalization on within-sector inequality miss an important part of the story.
... We begin by showing that trade and offshoring are associated with a contraction in the manufacturing workforce. Then,... we demonstrate that workers who switch industries within manufacturing experience almost no decline in wages. However, when workers relocate to the service sector, they experience a significant wage loss. The negative wage impact is particularly large among displaced workers who also switch occupations. ... These effects are most pronounced for workers who perform routine tasks. This downward pressure on wages because of import competition and offshoring has been overlooked since it operates between and not within sectors. ...
Implications for American Workers
The trends in offshoring and international trade that we have described are likely to accelerate. China currently employs around 120 million people in the manufacturing sector and, although some reports indicate that wages are rising in China, those wages are still only a tiny fraction of wages in the United States. Moreover, China is expanding its manufacturing base to low-wage countries across the globe through a series of overseas economic zones11 . The implication for American workers is that in order to regain ground, they will need to find jobs outside of manufacturing where wages are comparable to those in manufacturing.
This is a tall order. ... This state of affairs has led some economists, including one of us, to reconsider the role of industrial policy. ...