Not All Trade Protections Are Created Equal

The abstract of a new NBER paper (ungated pdf here):

Over the past decades, the steel industry has been protected by a wide variety of trade policies, both tariff- and quota-based. We exploit this extensive heterogeneity in trade protection to examine the well-established theoretical literature predicting nonequivalent effects of tariffs and quotas on domestic firms’ market power. Robust to a variety of empirical specifications with U.S. Census data on the population of U.S. steel plants from 1967-2002, we find evidence for significant market power effects for binding quota-based protection, but not for tariff-based protection. There is only weak evidence that antidumping protection increases market power.

An interesting follow-up would be to see if this dynamic affects political organization, or if industry groups learn over time to petition for quota-based rather than tariff-based protection.

Envy, Altruism, and Trade Policy

KPC points to a NBER working paper by Lu, Scheve, and Slaughter on the politics of trade policy (ungated pdf here). The abstract:

One important puzzle in international political economy is why lower-earning and less-skilled intensive industries tend to receive relatively high levels of trade protection. This pattern of protection holds even in low-income countries in which less-skilled labor is likely to be the relatively abundant factor of production and therefore would be expected in many standard political-economy frameworks to receive relatively low, not high, levels of protection. We propose and model one possible explanation: that individual aversion to inequality—both envy and altruism—lead to systematic differences in support for trade protection across industries, with sectors employing lower-earning workers more intensively being relatively preferred recipients for trade protection. We conduct original survey experiments in China and the United States and provide strong evidence that individual policy opinions about sector-specific trade protection depend on the earnings of workers in the sector. We also present structural estimates of the influence of envy and altruism on sector-specific trade policy preferences. Our estimates indicate that both envy and altruism influence support for trade protection in the United States and that altruism influences policy opinions in China.

This is an original thesis and utilizes some nifty methodology, and I have no doubt that it will be published in a top journal. It continues what appears to be a growing trend of analyzing social attitudes as determinants of public policy. See also this article from last year on sociotropic attitudes by Mansfield and Mutz. But I have some concerns. (I've only skimmed the paper, not dissected it thoroughly, so these thoughts should be taken as provisional.)

Here is the causal mechanism the authors propose:

1. Policy preferences of citizens are motivated by egalitarian feelings of envy and altruism.

2. These feelings manifest themselves as support for trade protectionism.

But #2 does not necessarily follow from #1. It could just as easily be something like:

1. Policy preferences of citizens are motivated by egalitarian feelings of envy and altruism.

2. These feelings manifest themselves as support for trade openness -- thus capturing the social gains from trade -- coupled with a robust social safety net financed by progressive taxation -- thus compensating the losers and narrowing relative inequalities.

Or, to stick with the logic of collective action that is commonly applied in trade analysis, we might expect trade protection for labor because:

1. If it is the abundant factor of production (and would therefore benefit from an open trading system) then it will have difficulty mobilizing a coalition to effectively lobby for openness. The smaller anti-trade coalition may feel envious or not, but it's basically irrelevant.

2. If it is the scare factor (and would therefore be hurt by an open trading system) then it will be able effectively lobby for closure. The larger anti-trade coalition may fell altruistic or not, but it's basically irrelevant.

In other words, attitudes may correlate with behaviors, but that doesn't necessarily imply that one motivates the other. At least, it doesn't erase basic interest-based motivations in previous trade models. They try to get at this with interview data, but there are always reasons to be skeptical of self-reported motivations.

I'll try to give it a more thorough examination when I have more time, but for now I don't see anything in the Lu/Scheve/Slaughter analysis that eliminates alternative explanations. This is a problem, since we have lots of previous literature that supports more traditional views.

[Edited slightly for clarity at 6:30pm]

Is Obama Mimicking George W. Bush on Trade?

I'm a bit late to the party, I know (I've been busy), but apparently there's a trade skirmish going on that could escalate. I don't know... something about tires and chicken? Here's a bit of a recap: Ben Muse gives 11 reasons why this is bad, DeLong thinks Obama is doing something stupid, Emmanuel is practically gleeful here (and here and here), IELPB has had about 10 posts on the topic in the past half-week, and Drezner's freaking out.

That's just a slice of the running commentary, so what could I add to the discussion at this point? Maybe a bit of context. In 2001, during his first year in office, George W. Bush also raised tariffs in a similarly reckless and illegal way. Drezner noted this on his blog, but argued that this time it's different for two reasons:

1. Bush raised tariffs on a sector (steel); Obama raised tariffs on a country (China).

2. Bush didn't have general protectionist leanings, so it was never likely that widespread protectionism would be a feature of his regime; this is not true of Obama (or at least we don't know that it's true).

So why did Bush raise steel tariffs in 2001? He never wanted to, but doing so got Congress to give him fast-track negotiating authority in the Doha round of WTO talks. As Drezner notes, the Bush administration knew that the tariffs would be ruled against in the WTO, so they weren't actually having to compromise anything (and he should know; he was working in U.S. Treasury at the time). Instead, they were making an end-around Congress and public opinion. Pretty clever.

Why can't Obama do the same thing? Drezner says it's because he's more wedded to Big Labor than Bush was. Really? Big Labor is always going to vote for Obama against any Republican, while Bush knew that his re-election fight would be difficult, so appealing to voters in Rust Belt states could mean the difference between winning and losing. Like W.J. Clinton, Obama likely has more latitude than a Republican in a similar position would have; like W.J. Clinton, Obama could probably get more done on trade than any Republican facing an a Democratic Congress.

If he wants to. He may not, of course. I've expressed frustration at his lack of attention paid to trade so far, and I've previously tried to parse his mixed signals on trade. Supposedly he'll give a speech on trade on the 17th that could clarify things, but he hasn't been consistent on trade over the past few years, and I don't expect him to start now.

What I do think is that Obama very much values expert advice, and his approach to economic issues is mostly technocratic. Surely Summers and Geithner and Goolsbee are yelling into his ear on this. In fact, both Geithner and Goolsbee have been sent to reassure nervous trading partners before. And remember how Obama was for "Buy American" provisions in the stimulus bill before he was against them? He's been cagey on trade for awhile, and I think there's probably a reason for that: his supporters think that NAFTA was a mistake and that China is killing them. Obama doesn't share that belief, but he can't/won't say that (though he will hint at it). Especially not until something gets done on health care.

Which makes me think that there may be more to this than is immediately obvious. Perhaps Obama wants to signal to Big Labor that he's on their side, but do so in a way that doesn't handcuff him.

The wild card here is China. In 2001, the U.S. was taken to the WTO and smacked down by the Dispute Settlement Court. In fact, I think they were banking on that. This time, China started dispute settlement proceedings but didn't wait for the completion of that process; it retaliated immediately. Obama might not have been counting on that. But now Obama is facing more pressure to revoke the tariffs: those adversely affected by China's retaliatory tariffs, and those who generally prefer an open trading system (and/or don't want to anger China just now). In other words, Big Labor might be on his side, but Big Agriculture won't be.

In short, I'm not sure how this will play out just yet, but I don't expect a wide-ranging trade war between China and the U.S. (sorry Emmanuel). That's the M.A.D. of international trade, and there's just too much at stake for either side to push the button. Doesn't mean they won't butt heads or test each other from time to time, but a return to mercantilism just isn't on the table.

Naming and Shaming

Direct from the G20 summit:

A commitment to "name and shame" countries that renege on free trade agreement.

If protectionism stems from domestic political pressure, will international "shame" only increase a politician's payoff to trade closure?  A leader (or legislature) gets a lot of political mileage out of protecting their constituency from the big, bad, greedy world.  But, that political capital skyrockets when that leader/legislature does so in the face of international pressure to do other wise.  

I predict lots of David vs. Goliath analogies in the months to come.  Just another reminder that audience costs cut both ways - they can constrain or embolden.

G-20

The current G-20 summit, like most, is often big on headlines but short on substance. There are the requisite anti-everything protests, the expected French threat to pick up their ball and go home if they don't get their way, the typically vague but high-minded communique, the downgraded expectations, and the regret.

So what can come out of this? The major players will continue to verbally commit to coordination, as they have always done, but coordination requires compromise, and so far no world leader seems interested in giving up some autonomy in exchange for policy convergence. And President Obama is either uninterested in setting the course for the G-20 or is unable to do so. His response toward the crisis has so far been to take care of his own first, and deal with the systemic global problems later (if at all). Remember: not only did Obama not attend the recent World Economic Forum in Davos, but he didn't bother to send a single high-ranking official either. So far, his attitude towards European leaders has been reminiscent of FDR, and not in a good way.

The U.S., France, and U.K. have found some common ground already: they're going after off-shore tax havens. Unfortunately, this has next-to-nothing to do with the present crisis.

The November G-20 meeting produced basically one commitment: to uphold free trade and refuse to resort to protectionism. How did that work out? As Drezner notes:

Sounds great, except that two days after the summit, Moscow announced that increased tariffs on imported cars. A day after that, India slapped a 5 percent duty on several iron and steel products. A month later, Brazil approved the idea of raising common external tariffs among the countries under the Mercosur agreement on a number of goods, including textiles and wine. China increased export tax rebates on more than 3,700 goods. The U.S. Congress approved "Buy American" provisions in the February stimulus package that blocked government procurement from most developing countries, including the BRIC economies. The World Bank recently reported that 17 of the 20 countries had imposed a total of 47 trade-restrictive measures. Simply put, the first G20 summit produced little action but copious amounts of hypocrisy.

Even further, there are few focal points for reaching agreements. China and Russia desire an end to the dollar as the world's reserve currency, Brazil has argued that the costs of global stimulus should be borne by the countries that caused the crisis, the EU refuses to consider further fiscal stimulus, and everybody seems to want broad, sweeping changes to the regulatory structure; what those changes actually entail, however, is TBD.

I have little hope that anything productive will come out of the G-20 meeting; coordinated action is just too difficult when each country has different challenges and priorities. But now that the first burst of stimulus is past, I do hope that a real commitment to maintain an open trading system is within reach. Perhaps the crisis can even force the resumption of Doha (I'm not holding my breath). Yes, an open trading system means that some stimulus intended for domestic constituencies will spill out into other countries. That's inevitable and also acceptable, especially since a retreat into protectionism could have very perverse effects for already-reeling economies.

The priority of the G-20 meetings should be to shore up the economic activity that we still have to use as a foundation for recovery. Roll back the creeping protectionism of the past 6 months, make a strong commitment to maintaining an open system of trade. True, it's only a marginal victory, but at this point I think that's all the G-20 can realistically hope for. Unfortunately, even that much may be too tall an order.

Trade and Compensation, Again

Yet another round of debate on “trade, income, and compensation.” In case you are just tuning in, the trade, income, and compensation debate is the following: Trade liberalization reduces the income of one group of people and raises the income of a different group. Should those who gain compensate those who lose?

Here is why this is tiresome.

A. There is no “right” answer. There are good arguments to be made for yes, and there are good arguments to be made for no. There are no external grounds to which we can appeal to select one over the other.

B. Adherents to the yes side (winners should compensate losers) typically under-analyze the economics.

1. The moral obligation to compensate losers must be reciprocal. If tariff reductions redistribute income then tariff increases must redistribute income in the opposite direction. If we should compensate losers from tariff reductions then we should also compensate losers from tariff increases. As textile workers and farmers and (insert protected industry here) have not compensated losers from high tariffs, I do not see why those who win from low tariffs now have a moral obligation in the other direction. Appeals to “fairness” lose their purchase.

2. Losers from trade liberalization already have been compensated. The tariff enables workers to earn above-market returns. This rent compensates for the lower income they earn once the tariff is gone. Imagine that a worker in a protected industry saves the rent (the difference between the wage in the next best available job and her current wage). Once the tariff is eliminated and the worker is employed at a lower wage, those saved rents, spent slowly over time, provide an income higher than the new lower wage. The fact that people don’t behave this way is irrelevant to the broader insight—the rent the tariff provides is compensation for the risk that the tariff might one day disappear. It is not obvious that society has an obligation to compensate them again.

C. Adherents to the “no" side typically under analyze the political problem.

1. Tariffs reflect political influence. Eliminating a tariff, therefore, requires a policy exchange. This policy exchange need not be compensation for workers in the now-liberalized industry, but it must be something equal to the present value that the tariff holder attaches to the stream of rents the tariff generates. Normative arguments (aw, you should just surrender your property rights) are irrelevant. No free lunch in politics either.

2. Sustaining low tariffs in a democratic society requires popular support . The public is more likely to support trade if they believe they are somewhat insured against its downside risk. Hence, compensation might be a political necessity for openness in a democratic society.

D. Thus, debating whether we should or shouldn't compensate losers is pointless; the question is whether compensation is a necessary part of the policy bargain that must be struck in order to construct majority support for trade. As this is not a normative question, debating the question in normative terms—should we or shouldn’t we—is entirely beside the point.

Exchange Rates and Anti-dumping Duties

More protectionist rumblings targeted at China from Congress. "Passed by a vote of 20-1, the Senate Finance Committee's measure would allow U.S. companies to seek anti-dumping duties on goods from any country that maintains a "fundamentally misaligned" exchange rate after being formally cited by the United States." (hat tip Greg Mankiw).

The curious thing is that this particular measure lags real world developments; firms already seek anti-dumping duties in response to exchange rate misalignments, even without a formal cite by the U.S. government.* The legislation is relevant, however, as adding exchange rates expressly to the law will make it easier to reach a positive finding in the investigation.

*Knetter, Michael and Thomas Prusa. 2003. "Macroeconomic Factors and Antidumping Filings: Evidence from Four Countries," Journal of International Economics 61 (1): 1-17.

Protectionism by Other Means

As the Democrats in Congress fret and fuss about "globalization," the Bush administration responds by moving to increase barriers to Chinese imports. The U.S. Court of International Trade released an important opinion yesterday concerning how the Commerce Department handles "unfair trade" complaints against China. This morning, "The administration of George W. Bush, escalating its trade dispute with China, announced ... that it would impose potentially steep tariffs on Chinese manufactured goods, with a move to protect American paper producers from unfair Chinese government subsidies.

The action reverses 23 years of U.S. trade policy by treating China, which is classified as a "nonmarket economy," in the same way that other U.S. trading partners are treated in disputes involving government subsidies."

The ability to treat China "like other U.S. trading partners" also implies that we can look forward to rising tariffs on a lot of the manufactured goods we import from China.