Ben Muse

Offshoring and offshore outsourcing may not be important sources of U.S. job loss

Is the U.S. losing a lot of jobs to offshore outsourcing?  Jacob Funk Kirkegaard has looked at the available data, and suspects not: Offshoring, Outsourcing, and Production Relocation - Labor-Market Effects in the OECD Countries and Developing Asia (Peterson Institute working paper, April 2007).

The bottom line:

...Yet, with the broadest and most valid available empirical evidence largely free of se­lection bias showing that just 1 in 25 US separations in mass layoffs can be attributed to either offshoring and offshore outsourcing, one cannot escape the conclusion that the heated public and political debate on the issue has been vastly overblown at least in the United States and that the direct employment effects are very limited. This is especially the case in the US economy as a whole, where very large numbers of jobs are constantly created and destroyed. The latest available data for 2005Q3show that more than 8 million jobs were created, while 7.4 million were lost.

Here are some more details:

Trade, growth, and poverty

Two more World Bank papers:

Gonzalo Salinas and Ataman Aksoy: Growth before and after trade liberalization (World Bank working paper, November 2006):

The empirical study of the impact of trade liberalization has not convinced the skeptics about the economic gains after trade reforms. Some have even argued that trade reforms have led to economic collapse and to deindustrialization. Using a sample that excludes countries that were subject to major exogenous disruptions, the authors note that post-reform economic growth was 1.2 percentage points higher than before the reforms. This is remarkable considering that pre-reform periods were characterized by highly expansionary state policies and large external borrowing, and the crisis years that preceded trade liberalization in the comparisons are eliminated. Growth acceleration occurred irrespective of income per capita level and was quite significant in Sub-Saharan Africa. As expected, small countries benefited most from the reforms.

Aylin Isik-Dikmelik: Trade reforms and welfare : an ex-post decomposition of income in Vietnam (World Bank working paper, October 2006):

This paper analyzes the impact of trade reforms on household welfare. In particular, it studies the importance of each of the links that together constitute the impact using data from the Vietnamese experience in the 1990s. The implementation of trade reforms in the 1990s, most noteworthy of which was the liberalization of rice, resulted in substantial improvement in welfare as evidenced by the drastic decline in poverty. Using analytical and empirical methods, the author examines the role of each channel (direct versus indirect) in this improvement for different groups of households. Results indicate that the growth has been broad based and pro-poor. Poorer households experienced more growth for each and every group analyzed. And contrary to the standard literature, net buyer households had more growth compared with net sellers, emphasizing the importance of indirect links. Decomposition of the growth shows that for rural households, both the direct effect and the multiplier effect drive growth while the multiplier effect was key in urban areas.

Road construction vs. tariff reduction

Ben Shepherd and John S Wilson, Road infrastructure in Europe and Central Asia : does network quality affect trade ? (World Bank working paper, Dec 2006):

The authors present a new database of minimum distance road routes connecting 138 cities in 27 countries across Europe and Central Asia. They use it to show that improved road network quality is robustly associated with higher intraregional trade flows. Gravity model simulations suggest that an ambitious but feasibleroad upgrade could increase trade by 50 percent over baseline, exceeding the expected gains from tariff reductions or trade facilitation programs of comparable scope. Cross-country spillovers due to overland transit are important: total intraregional trade could be increased by 30 percent by upgrading roads in just three countries-Albania, Hungary, and Romania.

I learned about this, and some other good papers, from the World Bank's 11th edition of Trade and Development Quarterly: The Global Dialogue.

U.S. Tariffs Fall Harder On The Poor Than The Rich

The Progressive Policy Institute is right on the money with this week's trade fact: Tariffs are the United States' Most Regressive Tax (Apr 11).

...Alike in the money they raise for government, estate taxes and tariffs are not alike in the people who pay. The estate tax is mainly a tax on wealth, covering only estates above $2 million and (to quote the IRS) "affecting only the wealthiest 2 percent of Americans." The tariff system is mainly a tax on want, raising most of its revenue on life necessities and cheap consumer goods, and affecting poor families with children more than anyone else. Last year, clothes raised about $9 billion of the total $25 billion in tariff revenue, shoes brought in another $2 billion -- nearly as much as cars. Food raised $600 million, mostly from cheese, butter, orange juice, and canned tuna. Cheap household goods, including: towels, forks, spoons, suitcases, drinking glasses, and plates, added about $2 billion more. Altogether, life necessities and mundane consumer products make up about 10 percent of imports but raise about 60 percent of tariff revenue.

These goods are most important in the lives and budgets of poor families with children. The Bureau of Labor Statistics' Consumer Expenditure surveys show that a typical top-ten-percent family spent about 4.4 percent of its pre-tax income on food and clothes (excluding alcohol and restaurant meals) in 2005, and the comparable bill for a single-parent family was 15.8 percent of income. Any flat tariff on shoes and clothes, therefore, would hit single moms about three times as hard as rich families. The actual tariff system is not flat, though, but steeply tilted against poor people, as tariffs are systematically high on cheap products but low on luxury goods. Sterling silver forks, for example, have no tariff while cheap stainless steel forks get 20 percent. A long-sleeved men's silk shirt has a 1.1 percent tariff and its polyester equivalent 25.9 percent; silk brassieres get 2.7 percent, while cotton and polyester bras get 16.9 percent. Shoes, luggage, plates, drinking glasses, skirts, and similar products are just the same. PPI's 2002 article, "Toughest on the Poor: Tariffs, Taxes and the Single Mom," suggests that though the tariff system is the smallest of the main federal taxes, tariffs rank second only to payroll taxes in the lives of single mothers, and likely cost women leaving the welfare system a week's salary each year.

(emphasis added)

Max Baucus

Sarah Lueck profiles Senate Finance Chairman Max Baucus.  As Finance Committee Chair, he will play a key role in upcoming trade debates: Key Senate Figure Walks Fine Line (Wall Street Journal, Apr 11):

Have imports or exports driven Korean productivity growth (since 1980)?

So, will a U.S.-Korea trade agreement affect Korean productivity growth more through increased exports to the U.S., or through Korea's own increased openness to imports? 

Sangho Kim of Honam University, Hyunjoon Lim of the University of Rochester, and Donghyun Park of Nanyang Technological University look at The Effect of Imports and Exports on Total Factor Productivity in Korea (Research Institute of Economy, Trade, and Industry, April 2007), and find that:

1. imports have been more important for growth in total factor productivity than exports - at least since 1980 (their data set covers the years 1980-2003;
2. imports of consumer goods and capital goods have had a significant effect, imports of raw materials have not;
3. imports from G7 countries have had a significant effect, imports from other countries have not;
4. "These findings imply that the beneficial impact of imports stems not only from competitive pressures arising from the imports of consumer goods but also from technological transfers embodied in the imports of capital goods and imports from developed countries";
5. "However, our GDP growth regression results suggest that the beneficial effect of imports on productivity arises primarily from the competitive effects of imported consumer goods".

What does it mean for policy:

More Trade Diversion

In a post last week, I collected stories on several countries that are concerned about being placed at a competitive disadvantage in either the Korean, or the U.S. market, or in both, by the U.S.-Korea FTA: Trade Diversion (Apr 3).

Fear of trade diversion may motivate the U.S. as well.  Fred Bergsten points to trends toward Asian regional economic integration (in the form of a Northeast Asia Free Trade Area agreement between China, Korea,and Japan, a "10+3" agreement between ASEAN, China, Korea, and Japan, or a '10+6" agreement adding in Australia, New Zealand, and India), and to various American concerns about this, including diversion of its own trade. 

Viewed in this light, the U.S.-Korean agreement has defensive and reactive elements on the part of the U.S.: China and Economic Integration in East Asia: Implications for the United States (Peterson Institute, March 2007):

The World's Top Ports

Emmanuel at International Political Economy Zone asks (and answers), "What's the World's Busiest Port? (Mar 16).

How to offer a toast at a Chinese business function

DiligenceChina explains: Drinks with the Party Guys: Toasting delegations and government representatives (Mar 30).

I learned about this from Dan Harris at the China Law blog, who adds some useful commentary: Rules Of China Toasting/Government As Friend (Apr6)

Some pros and cons of FTAs

Earlier this week Martin Wolf had a column in the Financial Times on the shortcomings of the U.S.-Korea FTA. (I quoted from this story in a post on Korea's FTA: Trade Diversion).  Wolf solicits comments from a pool of economists on his columns.  There were several interesting ones this time:  A Korean-American strand enters trade’s spaghetti bowl.

Robert Ward, of the Development Studies Institute at the London School of Economics, thinks bilateral FTAs are more likely to constrain the industrial policies of developing countries than multilateral trade reform implemented through WTO processes:

The US-Korean FTA in the Korean National Assembly

Now the FTA agreement, whose exact terms we don't know at this point, goes to the U.S. Congress, and the Korean National Assembly. 

In this post I've tried to pull together some Korean news stories on the prospects for ratification in the National Assembly.  I'd caution that I'm feeling my way forward here, and that I don't have enough independent knowledge of Korean politics and public life to evaluate and weigh the different sources, and fit them into a whole picture, as well as I'd like -

Trade Diversion

The title is a nod to Jonathan Dingel's excellent trade blog.

A U.S. - Korea trade agreement is going to impact third parties.  These impacts create incentives for these countries themselves to seek FTAs with the U.S. and Korea.  A variety of news stories have been addressing this.

This is not an attractive alternative to a multilateral approach through the World Trade Organization, as this Financial Times editorial points out: One trade deal done, thousands to go (Apr 3).  Martin Wolf also weighs in: A Korean-American strand enters trade’s spaghetti bowl (Financial Times, Apr 3):

This month marks the 60th anniversary of the General Agreement on Tariffs and Trade, of which Cordell Hull was a founding father. It also sees the announcement of a “free trade agreement” between his country and South Korea. The core of the Gatt was non-discrimination. The core of the new agreement is its opposite. Thus has the US taken the betrayal of its erstwhile principles even closer to its logical conclusion....

In this case, the US and South Korea agree to discriminate in favour of exporters or investors based in each other’s territory. The obvious potential economic cost of such an agreement is what Jacob Viner, the great inter-war trade economist, called “trade diversion”. In other words, the partners might shift from more competitive to less competitive suppliers. In this case, however, trade diversion may be modest, since these two countries are among the world’s most competitive suppliers of a wide range of goods and services.

A more significant economic cost, however, is systemic. The number of preferential trade agreements has exploded upwards in recent years (see chart). An agreement between the US and South Korea is itself a quantum leap in this progression... Other countries will be desperate to avoid the adverse effects upon them. This makes probable yet another jump in the prevalence of such agreements.

Several of the stories in the survey of press clippings below discuss the way the U.S.-Korea agreement encourages further bilateral agreements.  He goes on:

That will have at least two further economic consequences. First, an increasing proportion of the world’s trade is sure to be governed by the diverse rules of origins and special procedures of a host of discriminatory bilateral and plurilateral agreements. That guarantees an explosion in administrative complexity. Second, every further bilateral agreement will alter the degree of preference enjoyed by existing suppliers. That guarantees an explosion of business uncertainty. These are indeed inevitable results of what Prof Bhagwati has called the “spaghetti bowl” of preferences....

I didn't know we exported $337 million in farm products to Cuba in 2006.

The Department of Commerce's International Trade Commission has started a study on how U.S. agricultural exports to Cuba are affected by various restrictions on trade and travel: ITC TO INVESTIGATE ECONOMIC IMPACT OF U.S. TRADE AND TRAVEL RESTRICTIONS WITH CUBA ON U.S. AGRICULTURE EXPORTS (Press release, April 2):

The U.S. International Trade Commission (ITC or Commission) has launched an investigation to report on the effects of U.S. trade and travel restrictions with Cuba on U.S. exports of agricultural, fish, and forest products to that country. U.S. exports to Cuba of these products amounted to $337 million in 2006.

The investigation, U.S. Agricultural Sales to Cuba: Certain Economic Effects of U.S. Restrictions, was requested by the U.S. Senate Committee on Finance in a letter received on March 16, 2007.

In its request letter, the Committee noted that it wished to gain a better understanding of the economic effects on U.S. agricultural sales to Cuba of statutory and administrative restrictions related to trade with and travel to Cuba by U.S. citizens.

As requested, the ITC, an independent, nonpartisan, factfinding federal agency, will provide an overview of recent and current trends in Cuban purchases of agricultural, fish and forestry products, including identification of major supplying countries, products, and market segments; analyze the effects that U.S. restrictions relating to export financing terms and travel to Cuba by U.S. citizens may have had or currently have on Cuban purchases of U.S. agricultural, fish, and forestry products; and estimate U.S. sales of agricultural, fish, and forestry products under three scenarios: (i) U.S. restrictions affecting agricultural exports are removed; (ii) U.S. restrictions on travel to Cuba by U.S. citizens are lifted; and (iii) U.S. restrictions affecting agricultural exports are removed and U.S. restrictions on travel to Cuba by U.S. citizens are lifted.

The ITC will submit its report to the Committee by June 29, 2007.

Countervailing duties on Chinese paper

In an important change in U.S. trade policy towards China, the Commerce Department last week decided to impose duties on imports of certain types of paper from China, to offset Chinese subsidies.  The Commerce fact sheet says,

Commerce preliminarily determined that Chinese producers/exporters have received net countervailable subsidies ranging from 10.90 to 20.35 percent. As a result of this preliminary determination, Commerce will instruct U.S. Customs and Border Protection to suspend liquidation of entries of subject merchandise and to collect a cash deposit or bond based on these preliminary rates.

The implications extend beyond the paper industry.  Steven R. Wiseman reported for the New York Times: In Big Shift, U.S. Imposes Tariffs on Chinese Paper (March 31).

Jonathan Dingel has been following this over at Trade Diversion: China hit by US CVDs (March 30), and been asking good questions Where are Commerce's Chinese subsidy calculations? (April 2).

What did the U.S. and Korean negotiators agree to?

Evan Ramstad describes key features of the trade agreement for the Wall Street Journal (U.S.-Korea Trade Deal Still Faces Hurdles (April 3).  He says that the final text won't be available for "a week or two."  Meanwhile, we know a few things:

KORUS FTA agreement

U.S. and South Korean negotiators reached agreement on April 1 (in the U.S.), as late as they possibly could, and still notify the U.S. Congress in time to take advantage of the existing U.S. trade promotion authority: S. Korea, U.S. reach free trade agreement (Yonhap News, April 2 in Korea); South Korea, U.S. Reach Free Trade Deal (AP, April 1 in the U.S.).

Evan Ramstad describes how it ended for the Wall Street Journal (U.S.-Korea Trade Deal Still Faces Hurdles (April 3):

The two countries reached the deal just before midnight, Eastern Time in the U.S., in time to reach Congress ahead of a deadline tied to the expiration of Mr. Bush's trade-negotiating powers.

With fewer than 80 minutes remaining to the U.S. deadline, South Korea Trade Minister Kim Hyun Chong left the Grand Hyatt Hotel in Seoul, where the negotiations were taking place, to meet Mr. Roh and several other cabinet ministers to discuss final terms. He called Mr. Bhatia on his way back to the hotel -- 22 minutes before the deadline -- to say the countries had a deal.

A complete draft of the deal will take a week or two, after which Messrs. Bush and Roh will have to win approval for the deal from lawmakers.

Here's a somewhat earlier Ramstad story (U.S., South Korea Reach Trade Pact, Wall Street Journal, April 2 in U.S.):

Another way to use anti-dumping laws

Greg Hitt and James Hookway report on the use of U.S. anti-dumping laws for something similar to private extortion in Monday's Wall Street Journal: U.S. Shrimpers Haul CashFrom Lower-Cost Rivals (April 2).  How much would you, as an exporter to the U.S., be willing to pay an association that had the ability to create a lot of market uncertainty for you through manipulation of U.S. anti-dumping laws? 

In 2005, the Southern Shrimp Alliance won an anti-dumping tariff case against foreign shrimp producers.  Under the Byrd Amendment, about $100 million in fines from the tariffs were distributed among shrimpers and processors:

Hilary Clinton's evolving position on trade

Kristin Jensen and Mark Drajem report on the way Hilary Clinton is positioning herself on trade.  Jensin and Drajem think that, as a candidate,  Clinton is less supportive of a liberal trading regime than her husband was, as President: Clinton Breaks With Husband's Legacy on Nafta Pact, China Trade   (Bloomberg, Mar 30) :