WTO: Protectionist Anti-"Dumping" Tariffs on the Rise

This shouldn't surprise anyone who has paid any attention to anything in the past year, but WTO's 2009 World Trade Report indicates that many states have responded to the financial crisis by ramping up protections for domestic firms. We know all about the bailouts and subsidies, but as the World Bank PSD blog notes, the WTO report highlights the rise in anti-dumping duties:

The WTO Report notes that the use of protectionist measures such as Anti Dumping (AD) duties is already on the rise. Specifically, in 2008, the number of AD initiations increased by 28 percent compared with 2007. Eighteen WTO members reported initiating a total of 208 new investigations compared with 163 initiations reported for 2007. The number of new measures applied also increased by about the same rate in 2008. A total of 15 members reported applying 138 new AD measures, 29 per cent higher than the 107 new measures reported for 2007 (WTO Annual Report 2009, page 133).

The International Economic Law and Policy Blog recently highlighted an on-going case between China and the E.U., and Greg Mankiw criticized one U.S. anti-dumping policy before the economic crisis hit.

So what is "dumping"? Dumping occurs when a manufacturer in one country sells its products in other country at prices below the production cost or below the price in the home market. Dumping is considered an unfair trade practice because it explicitly seeks to gain market share by driving producers in the importing country out of business through predatory pricing (note: the same thing can happen in purely domestic markets; Walmart is often accused of this sort of predatory pricing). After the domestic producer has been driven out of business the foreign producer will raise prices and benefit from a lack of competition. Makes sense, right?

In practice, however, things often work much differently. Most "dumping" tariffs are not about predatory pricing, but are rather about preserving local industries through maintaining artificially high prices. As Mankiw and Swagel wrote in a 2005 Foreign Affairs article [pdf]:

The ostensible purpose of antidumping law is to help ensure competition by punishing foreign firms that sell their products at “unfair” prices in U.S.markets. In practice, however, antidumping has strayed far from this purpose, becoming little more than an excuse for special interests to shield themselves from competition at the expense of both American consumers and other American companies.

Moreover, when companies dump their products they are doing consumers a favor. Consumers are able to gain more surplus from the transaction, while producers lose surplus from the added competition. When dumping occurs the new equilibrium price is rarely higher than the pre-dumping price. This happens either because domestic producers become more efficient (or sacrifice some of their surplus) and remain in the market, or new entrants keep the industry competitive. In either case, the new equilibrium price is lower than the old one, which benefits consumers.

In the cases where "predatory pricing" succeeds in driving competitors out of business and also succeeds in limiting future competition, it is an inefficient and costly practice. But such cases are very rare. It is much more common for inefficient domestic producers to use dumping laws as a crutch to ward off competition. Thus, anti-dumping laws can actually facilitate the very situations they are intended to prevent!

The U.S. antidumping statute dates to 1921, before the GATT or WTO or modern era of globalization. Most other countries have similar policies, and exceptions for dumping tariffs have been written into WTO agreements. But that doesn't make it a good practice, and the world would be better off if dumping tariffs were truly reserved for the type of predatory pricing that lead to less (rather than more) competition.

[Edit: My original title was nonsensical.]

Au Revoir, Brad Setser

The blogosphere loses a titan to the National Economic Council:

I have accepted a new job, one that will require a certain level of discretion. I am excited by its challenges: ‘Balanced and sustainable” growth is something that I believe in. But suspending this blog is still hard. ...

Fundamentally this blog was about an issue – the United States’ trade deficit, the offsetting trade surpluses in other parts of the world and the capital flows that made this sustained “imbalance” possible. Most of my early blog posts argued, in one way or another, that taking on external debt to finance a housing and consumption boom wasn’t the best of ideas. Even if (or especially if) the deficit was financed by governments rather than private markets.

I always intended to write extensively about the world’s emerging markets. I never anticipated that I would end up writing most frequently about an emerging economy that I hardly knew when I first started writing this blog: China. Back in 2004, I was an expert on sovereign debt, not sovereign wealth. But some stories seize you. And China’s rise as a global creditor was just that story. I never thought China’s government would ever add close to $800 billion to its foreign assets over four quarters — accumulate close to $2,500 billion in foreign assets. China has stretched all definitions of the possible. There is – understandably – an enormous amount of interest in the consequences of a world where China is the world’s key creditor country; that, more than anything, seemed to drive this blog’s traffic.

The U.S. government is gaining a superb analyst, but the private commentariat is losing one. For years, Setser has been my go-to guy on China, sovereign wealth funds, sovereign debt, trade flows, balance of payments, currency adjustments, and other issues. Hopefully someone new will step into the breach, and hopefully Setser can do some good at NEC.

For a recent example of Setser's work, see this post from a few days ago on "Geoeconomics", or "anything that touches on both the economy and geopolitics". (sounds a lot like IPE to me.)

China, 17th-Century Mercantilists, Space Exploration, and Population Control

Via Brad DeLong, I see that Martin Hutchinson has been digging in dusty parts of the library:

China's recent announcement that it would use its US$2 trillion of foreign reserves to boost its companies' overseas acquisitions tells us that its economic beliefs are neither those of Adam Smith, nor of Karl Marx, but of the 17th century mercantilist Thomas Mun. It is becoming clear that in economics, unlike in "hard" sciences, old belief systems never die.

Mun (1571-1641) wrote a classic magnum opus England's Treasure by Foreign Trade. Published only after his death in 1664, it was nevertheless very influential. Mun had been a director of the East India Company, and, unlike earlier theorists, believed that foreign trade was beneficial. However, he didn't hold with any high-faluting nonsense like comparative advantage or maximization of global economic welfare. For Mun, the purpose of foreign trade was to export more than you imported and, consequently, amass a huge store of foreign "Treasure," whichyou could then use to found colonies that would take control of natural resources.

To further this objective, countries should: cut back domestic consumption as far as possible; increase the use of land and other domestic resources to reduce imports; encourage the export of goods made with foreign raw materials; and export goods with price-inelastic demand because profits would be greater.

Okay, let's read not read too much into things, but clearly the Chinese growth model has a mercantilist element. So far, fair enough. But then Hutchinson goes off the deep end. He argues that the only two ways around this model are: a). Start extracting natural resources from Mars; b). Cull the human population by 6 billion or so to get back to the 1 billion that were alive in Adam Smith's day. I'm not exaggerating here. Hutchinson clearly claims that those are the only two possible outcomes. Here's his conclusion:

Returning to a global population of 1 billion would be difficult, but it may be more practicable than a gigantic interstellar exploration program. If so, it may form the only viable exit from the inexorable approach of the world of Thomas Mun.

Wha? Difficult? Some understatement. And I didn't realize that the concept of comparative advantage had a population limit.

On a quasi-related note, Hutchinson's invocation of Mun w/r/t China reminded me of James Fallows' 1993 invocation of Friedrich List w/r/t Japan. Fallows' piece is a much better article, but the general point is the shockingly similar: an Asian economy rises to power by eschewing the Smith/Ricardo model in favor of some other oft-forgotten political economist from yesteryear. In Fallows' case, it was List, a 19th-century German-born mercantilist who had some ideas in common with Alexander Hamilton.

I think Hutchinson and Fallows both over-state their cases that Japan and China are well-modeled by List or Mun, but at least Fallows isn't arguing in favor of intergalactic mining, or the "difficult" task of getting rid of 6 billion people.

Is Obama Exploiting Africa?

Michael Stulman sees something sinister:

It seems the White House and the Obama administration has made the African continent the focus of their P.R. campaign this summer. Secretary of State Hillary Clinton will soon begin her seven-country tour of Africa. This comes on the heels of President Barack Obama’s speech in Ghana earlier this summer; the aim of both tours appear to stress U.S. commitment to Africa. The public is made to believe that addressing health, corruption, gender-based violence, poverty, trade, conflict, democratization and foreign assistance, among others, are the goals of a U.S. newly devoted to Africa and its unique challenges.

In their recent book, The Scramble for Africa: Darfur, Intervention and the USA Steven Fake and Kevin Funk eloquently detail how U.S interests in Africa are far from altruistic or humanitarian, even though they appear so on the surface.

According to the authors, the U.S. is engaged in a scramble for Africa’s resources, chiefly oil. The U.S. gets more oil from Africa than it does from the Middle East; by 2015, up to a quarter of its oil imports will come from Western Africa, including Ghana. Therefore, it is not surprising to see that Ghana was chosen for Obama’s first Sub-Saharan Africa appearance. It is a democratic and stable country for one, and the recent discovery of oil certainly has weight. U.S. interest in Africa has grown as the oil fields have multiplied. Africa is of national strategic importance because of what it can do for the U.S., not because of what the U.S. can do for Africa.

The same is true of recent Chinese, Indian, and European excursions into Africa as well. I don't know whether this is supposed to be surprising, but I do wonder what motivates conclusions like Stulman's:

Far from humanitarianism, the U.S. policy towards Africa has become increasingly concentrated on creating an environment amenable to resource exploitation, no matter the consequences on the level of poverty or democracy in African nations.

On the one hand, the rich West must dedicate itself to African development; on the other hand, the rich West must not engage in any commerce with Africa that might actually foster such development. On the one hand, Africans should lift themselves out of poverty; on the other hand, Africans should not use their natural resources to lift themselves out of poverty. On the one hand, the U.S. should abstain from nation-building; on the other hand, the U.S. should not "support corrupt and oppressive regimes" in Africa.

To some extent, I share Stulman's cynicism about all of this. But in many ways, the best thing that could possibly happen for Africa is for the rest of the world to start throwing themselves at Africa's feet. Africa needs to strengthen economic ties with the world's major economies, it needs to develop national industries, it needs a source of employment, and it needs a rising middle class to challenge corrupt governments. Foreign aid hasn't worked; why not try commerce?

The Dumbest Thing I've Read in Awhile

In a book review Lynsey Hanley of The Guardian says that economic growth should be abolished:

We are rich enough. Economic growth has done as much as it can to improve material conditions in the developed countries, and in some cases appears to be damaging health. If Britain were instead to concentrate on making its citizens' incomes as equal as those of people in Japan and Scandinavia, we could each have seven extra weeks' holiday a year, we would be thinner, we would each live a year or so longer, and we'd trust each other more.

Epidemiologists Richard Wilkinson and Kate Pickett don't soft-soap their message. It is brave to write a book arguing that economies should stop growing when millions of jobs are being lost, though they may be pushing at an open door in public consciousness. We know there is something wrong, and this book goes a long way towards explaining what and why.

Via Yglesias, who claims that equality leads to growth (which may or may not be true) but dances around the main point which is exemplified by the part I bolded: in the absence of growth, everybody is made worse off, but the people at the bottom of the social scale suffer disproportionately. When growth suffers, those with the fewest skills and lowest levels of education are the first ones to lose their jobs and homes. As Krugman noted the other day, the American economy requires a 2% growth rate just to maintain a constant employment rate, and faster growth rates are strongly associated with lower unemployment. This is especially true for those at the bottom of the social scale (including, as Yglesias mentions, unskilled immigrants from poor countries).

But even if all of that were not true, this argument still makes no sense. Whether equality fosters growth (as Yglesias maintains) or growth fosters equality (as I suspect), the richest countries in the world tend to be the most equal. The map above shows Gini coefficients for the world in 2007-2008, as reported in the U.N. Development Report (click here for a larger version). A higher Gini coefficient refers to a more unequal society. So what do we see? Countries that are rich tend to also be more equal than countries that are poor. And how to do you get rich? There is only one way: economic growth. So perhaps the best way to address within-country inequality is spend more effort trying to maximize growth. If we seek to address between-country inequality, then our only alternative is a pro-growth strategy for the developing world. And in recent times, the most successful growth models for emerging economies is to be export-led. But who buys the exports? The developed world. And how can the developed world afford to buy those exports? I think you can see where I'm going with this.

Of course, I haven't mentioned the importance of absolute as well as relative levels of wealth, the underrated benefits of compounding growth rates, the social (in)justice of legislating the preferences of some (for more leisure relative to income, say) as mandates for others, the importance of incentives, or the sheer unholy slap-your-forehead dumbness of Hanley's second sentence: "Economic growth has done as much as it can to improve material conditions in the developed countries."

No it hasn't. Not by a long shot.

How to Immunize a Country from Financial Crises

You could follow Moldova's example:

In fact, the country hardly has a banking or financial sector at all.

Moldova's economy was ranked 5th most stable in a recent report by The Banker. Moldova is the last communist country in the Soviet bloc, and has GDP per capita of $1,830. The most common investment strategy? Convert local leu into dollars or euros and hide them under the mattress.

Much more at the link.

UPDATE: Douglas Muir at A Fistful of Euros has another take on Moldova. It's less blissful.

Rethinking China

The Economist says that the Great Adjustment is well underway in China:

The good news is that the [current account] surplus is already shrinking. The strong rebound in China’s economy in the second quarter—pushing GDP 7.9% higher than a year ago—came entirely from domestic demand. This sucked in more imports, while exports continued to slump. ...

China’s real domestic demand is likely to grow by at least 10% this year. In fact, the popular perception that China has always relied on export-led growth is rather misleading. Its current-account surplus did soar from 2005 onwards but until then was rather modest. And over the past ten years net exports accounted, on average, for only one-tenth of its growth.

So what's the bad news? The rising domestic demand comes from investment, not consumption:

The problem is more that the mix of domestic demand between consumption and investment is unbalanced, and becoming even more so. In 2008 private consumption accounted for only 35% of GDP, down from 49% in 1990 (see chart 2). By contrast, investment had risen from 35% to 44% of GDP. This year the bulk of the government’s stimulus is going into infrastructure, further swelling investment’s share. Chinese capital spending could exceed that in America for the first time, while its consumer spending will be only one-sixth as large. This is China’s most glaring economic imbalance.

Consumption makes up only 35% of Chinese GDP, compared to 70% in the U.S. The Chinese savings rate remains over 50% (!), and the vast majority of that comes from households and companies. Part of that comes from the fact that China has a very weak social safety net, but another part remains the undervaluation of the RMB, which hurts the purchasing power of Chinese consumers. From 2005 to early this year the RMB appreciated substantially against the dollar, but has since fallen back as China re-pegged to the dollar. One estimate quoted in the article claims that the RMB should appreciate by as much as 25% to reach trade-weighted parity with the dollar.

Still, China appears to have turned a corner in its transition away from an export-led growth model. Now the emphasis must become transitioning towards a greater role for domestic consumption.

ht: Mark Thoma

"In Favor of Industrial Farming"

Or, "The Omnivore's Delusion: Against the Agri-intellectuals". A Missouri farmer pushes back against the likes of Michael Pollan and Food, Inc., and argues that those criticizing industrial farming don't have a grip on the realities that farmers face, or the necessary trade-offs of moving to an all organic, more "natural" norm of farming. For starters, we'd have to cull the human population by several billion people, engage in more environmental degradation, and speed up climate change. There's another component, familiar to IPE students:

We are clearly in the process of deciding that we will not continue to raise animals the way we do now. Because other countries may not share our sensibilities, we'll have to withdraw or amend free trade agreements to keep any semblance of a livestock industry.

Agricultural policy has been one of the major sticking points in the Doha round of WTO talks, and there is reason to suspect that if the U.S. starts requiring organic or free-range certifications for food imports that developing countries will respond with retaliatory "process" tariffs of some kind, and having WTO backing to boot. Which might be worth it, but it does up the ante quite a bit.

Here's the concluding argument:

But farmers have reasons for their actions, and society should listen to them as we embark upon this reappraisal of our agricultural system. I use chemicals and diesel fuel to accomplish the tasks my grandfather used to do with sweat, and I use a computer instead of a lined notebook and a pencil, but I'm still farming the same land he did 80 years ago, and the fund of knowledge that our family has accumulated about our small part of Missouri is valuable. And everything I know and I have learned tells me this: we have to farm "industrially" to feed the world, and by using those "industrial" tools sensibly, we can accomplish that task and leave my grandchildren a prosperous and productive farm, while protecting the land, water, and air around us.

Unsurprisingly, the article was published by the American Enterprise Institute, a right-wing think tank. There is hardly any discussion of the various ethical claims most often made about agriculture policy. The article instead focuses on the practical difficulties of moving in the direction that the Pollanistas prefer. The author does not claim that we shouldn't move in that direction, only that we should have a true appreciation for the full package of what we'd get.

I hope this article inspires some honest rebuttals. I don't know of anyone who is completely comfortable with the way food is manufactured in the U.S., but we rarely have open and informed discussion of agricultural policy in this country. Instead, public commentary often devolves into ill-informed, emotional moralizing. We can, and should, do better.

China's Dollar Problem

Jean Paul Getty famously said "If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." Such is the position in which China finds itself:

Indeed, China has little incentive to talk down the dollar and such calls are regarded as little more than pleas to the US authorities to keep their finances in check.

Simon Derrick, at Bank of New York Mellon, says China is not in a position to sell a significant portion of its dollar holdings in the open market without causing considerable damage to itself. This means that it must explore a number of different short- and long-term strategies to deal with the problem.

“Developments this year indicate that China now believes that its best long-term strategy is to increase the international role of the renminbi, including its use as a reserve currency,” he says. “This might be the first signal that China is now considering a potential timetable, presumably over years rather than months, for moving towards capital account convertibility.”

Capital account convertibility will not happen in the immediate future, but eventually China will have to go there. The question is what they can, or should, do in the meantime. If they slow the export boom they will be forcing millions into unemployment. A model of economic growth based on boosting domestic consumption cannot grow 10% per year, and the process of structural adjustment will have destabilizing effects in the economy. And of course, any destabilization of the economy could destabilize the Chinese regime.

They can't let that happen. So in the short run, at least, the U.S. debt held by China will remain China's problem.

New E.U. Visa-free Travel Rules for the Balkans

Serbia, Montenegro, and Macedonia are in (congrats Besir!) but Albania, Bosnia, and Kosovo are out (sorry Arta). This is a mess:

This leads to some interesting weirdness. If you’re an ethnic Serb living in Serbia? Come January 1, you’re good, no problem. Ethnic Serb living in Bosnia? You can’t travel to the EU on your Bosnian passport, but you can easily get a Serbian passport that will let you fly like a bird. Ethnic Serb living in Kosovo? Too bad — you can get a Serbian passport, but it will be the special “Red K” passport that will trigger alarms if you try to cross an EU border.

Ethnic Albanian living in Kosovo? Same drill — you’re stuck in Kosovo. Ethnic Albanian living next door in Macedonia, Montenegro, or Serbia itself? Congratulations! You’re free to go.

Obviously there is going to be some sudden border-crossing in the next few months. Albanians in Albania and Kosovo will suddenly discover roots in Macedonia; Serbs in Kosovo will suddenly develop addresses in Serbia proper. Nationalists on all sides will construe it as evidence that their side is right.

The non-Serb, non-Croat (Muslim) Bosniaks get screwed the most: they don't have another "ethnic homeland" to claim heritage in and get travel permission.

The reason for the pickiness is the fear that poor citizens of Balkan states will flood the E.U. with migrant labor. Arguably, Serbia, Montenegro, and Macedonia are in a better position to stem that tide than the others. While visa-free travel permission does not come with work permits, there are real reasons for worrying that that functions as a mere formality. The E.U. would prefer not to have a flood of undocumented workers, for obvious reasons.

But there could be another reason for being choosy. The three countries left out of the new policy -- Albania, Kosovo, Bosnia -- have Muslim majorities (gasp!), so while the E.U. isn't exactly saying that Muslims aren't wanted, they're sorta saying that Muslims aren't wanted. At least, that's how some Europeans are seeing it.