The Custom-House

The end of the line for one of the WTO DG candidates

Through early April, three ambassadors to the WTO have been quietly surveying their peers, trying to gauge the depth and breadth of support for, and the strength of the opposition to, each of the four candidates for WTO Director-General.   

They finished their survey today (Wednesday, April 13).  Now they'll think it over for a couple of days, and then they will try to decide which of the four has the least, and weakest, support, which faces the strongest opposition.  Once they give their opinion, one of the candidates will be expected to withdraw.

Richard Waddington reports for Reuters: WTO Heads For First "Conclave" (April 14).

"...The decision on who falls at the first hurdle is complicated by the fact the selection panel, which also includes Canadian ambassador Don Stephenson and Norway's Eiric Glenne [as well as Kenyan ambassador, and General Council Chair, Amina Mohamed - Ben], cannot simply tot up votes.

Because the aim is to find a consensus candidate, they must also take account of how widely support is spread across the various regions and how much opposition a candidate faces..."

 

Why does China account for such a large part of the U.S. trade deficit?

Why does China account for such a large part of the U.S. trade deficit? 

Forget the renminbi. Nicholas Lardy says to look at changing patterns of economic activity within East Asia.  Over the last 20 years, other East Asian countries have been transferring many of their assembly operations to China.  They still make the parts, but these are increasingly assembled in China and exported from there to the U.S. and Europe. 

In fact, although China's share of the U.S. deficit has grown, the overall share of key East Asian countries, including China, has shrunk.

Here's a selection from Lardy's essay, "China: The Great New Economic Challenge":

"...the growing imbalance is because China has become a leading location for the assembly of a broad range of manufactured goods, mostly by foreign firms that have relocated their assembly activities to China from other sites in Asia...

China's global pattern of trade - surpluses with the United States and Europe but deficits with most of its Asian neighbors - stems from China's rapidly increasing role in the global production chains of multinational corporations.  China's openness to FDI, its trade policies, and its relatively abundant labor supply have made it the premier location for the assembly of manufactured goods for the global market.

But how does China's outsized role in global producton of manufactured goods lead to a pattern fo trade in which China runs trade surpluses with the United States and, to a lesser extent, the European Union, while running trade deficits with many of its Asian neighbors?  The explanation lies in three characteristics of China's very large FDI inflows.  First, Asian firms account for a much larger share of China's inward foreign investment than do European and American firms...

Second, Asian firms relocate to China primarily to use China as an export platform whereas most American and European firms invest in China primarily to sell into the domestic market...

Third, foreign firms producing for the domestic market tend also to source their inputs largely on the domestic market rather than from their home countries... In contrast, as Asian firms have relocated their assembly operations to China, they have continued to source needed high-value-added parts and components from their traditional suppliers, which tend to be located elsewhere in Asia...

Two-thirds of China's imports from Taiwan consist not of finished goods but of parts and components that subsequently are assembled into final foods in factories owned by Taiwanese firms.  These goods then are exported, predominantly to the United States and Europe...

The result is that China has become the source of many goods the United States once imported from Japan, Hong Kong, Korea and Taiwan.  As shown in figure 4.1, the share of the US global trade deficit asising from East Asian countries as a group has actually declined in the two decades since the bilateral deficit with China first emerged in the mid-1980s."

His figure shows that, in 1985, the US had no deficit in trade with China, but that over half of its overall trade deficit was with the Japan, Hong Kong, Korea and Taiwan. 

In contrast, the figure shows that in 2003, when the U.S. deficit with China had grown to 22.7% of its overall trade deficit, the U.S. deficit with China and the other four countries, all together, had shrunk to 39.4% of its total trade deficit.

Lardy's essay is in The United States and the World Economy edited by C. Fred Bergsten (pages 126-129).  You can read Lardy's essay online, along with the other chapters, but you can't print them out.

Cuttaree says he's going to win

Mauritian Foreign Minister Jaya Krishna Cuttaree is home after a campaign trip to Geneva, expressing confidence he'll survive the first round of WTO Director-General consulations.

Pauline  Etienne reports in l'express.

The OAS Secretary-General

The Financial Times reports that the Organization of American States (OAS) failed to elect a new Secretary-General Monday (April 11), after four hours of voting.  A new election is scheduled for May 2: "OAS members fail to elect a new leader".

The candidate backed by the U.S. bowed out on Friday, after failing to get enough support: "OAS race comes to head today". 

"The withdrawal from the race of Francisco Flores, the candidate who was backed by the US, means that Latin American influence over a body traditionally dominated by Washington is likely to increase."

Here's another sign, in addition to the Papal and WTO races, of the changing balance of influence between developed, and developing, countries.  "The Pope and the WTO Director-General".

Light posting in April

Posting may be light until early May.  I will try and keep up on the WTO selection process.

Ben

China and the U.S. trade deficit

Last week, the Senate voted in favor of a "China Currency Bill,"  a proposal to impose a special tariff on Chinese goods, if the Chinese don't revalue their currency.

If the Senate thinks China is responsible for the U.S. deficit, Stephen Roach, of Morgan Stanley, is here to say the Senators are wrong: The Drumbeat of Protectionism. 

A focus on China directs U.S. attention from the real problem, and may lead it to take counterproductive actions:

"...In my view, the US external deficit is, first and foremost, an outgrowth of America’s unprecedented shortfall of domestic saving. The net national saving rate -- the combined saving of consumers, businesses, and the government sector, all adjusted for depreciation -- has plunged to a record low of 1.5% of GDP since early 2002. Lacking in domestic saving, American must then import surplus saving from abroad to keep its economy growing -- and run massive current-account and trade deficits to attract the capital. If the US Congress were to close down trade with China today, a saving-short America would then have to run a deficit with a higher-cost producer somewhere else in the world -- the functional equivalent of a tax hike on the American public. The fact that China accounts for the biggest portion of the US trade deficit is actually a good thing -- it offers America access to high-quality, low-cost goods. If a nation has to run a trade deficit -- and unfortunately that’s the inescapable verdict for a saving-short US economy -- then it makes eminent sense to trade most aggressively with the world’s low-cost producer. That’s precisely what’s happening."

via "New Economist".

The Pope and the WTO Director-General

Martin Walker points to a similarity between the upcoming Papal election and the ongoing WTO Director-General selection process: the developing world is asserting its claims to both positions more strongly than ever before: ("The Pope Quota", Foreign Policy, April 2005, free registration required)

"At first glance, the hushed deliberations of the 117 Roman Catholic cardinals who will elect the next pope don’t have much in common with the diplomatic jostling over the leadership of the World Trade Organization (WTO). Yet in both  cases, the traditional right of Europeans to lead international institutions—sacred   and profane—is under fire..."

"...It is becoming clear that the governments of the approximately 150 countries that call themselves the developing world are no longer prepared to let the 30-odd rich nations dominate the top jobs..."

One disturbing consequence:

In practice, the rebellion against the rich means that many critical international institutions may soon have an informal quota system—a mixed blessing at best. The post of secretary-general of the United Nations has passed from one continent to another for decades now. Kofi Annan represents Africa’s turn at the helm. Before him was Boutros Boutros-Ghali, who represented the Arab world; Javier Pérez de Cuéllar of South America; the European Kurt Waldheim; and Burma’s U Thant. (Rumor has it that it will be Asia’s turn again when Annan’s term ends.) Reviewing this list, it must be said that the United Nations’ unwritten rule of quotas has not produced many outstanding figures."

Who would be hit by preference erosion?

Many poor and developing countries get exemptions or partial exemptions from standard developed country tariff rates.  These exemptions, or "tariff preferences" are meant to give them a competitive edge,  and to help them grow.

Trade negotiations that reduce standard developed country tariff rates erode the effective size of these preferences, and the competitive advantages they provide ("preference erosion").  This could happen even if the preferences were left untouched.

These preferences may or may not be a good thing, economists and others are divided.  But they certainly create a practical problem for the WTO's current Doha Round of trade negotiations.   The WTO reaches decisions about reducing trade barriers on the basis of consensus among member countries.  Many of these countries receive preferences whose value could be eroded by tariff reductions.  Since they have a stake in high standard tariff rates, will they ever agree to a substantial liberalizing reform?  If not, how will the WTO's members reach a consensus?

So it's worthwhile taking a closer look at these preferences.

Two recent IMF studies suggest that the preference erosion issue is important to a relatively small number of countries, and for a smaller number of products. 

One study looked at the poorest countries, and the other looked at middle income countries.  Both studies look at potential impacts of changes in the tariff preferences provided by the "Quad" countries: the U.S., Europe, Canada, and Japan.  The studies used somewhat different methods, but both focus on the impact of a hypothesized 40% preference erosion in the Quad markets. The 40% is somewhat above the impact from the last major round of trade negotiations.  Both studies use methods that tend to provide upper bound estimates of the impact on the countries that get the preferences.

Poor countries

Arvind Subramanian looked at the impact of tariff preference erosion on the world's poorest countries (less developed countries, or LDCs) in the 2003 IMF report, "Financing of Losses From Preference Erosion." (To get this, use the WTO document search page, and type WT/TF/COH/14 - just like that - in the "document symbol" box)

Estimates of the losses from preference erosion for these countries are pretty small. He finds that 40% reductions in the standard manufacturing and agricultural tariffs of the Quad nations, would lead to a 1.7% reduction in the aggregate value of LDC exports. A low average could still conceal large impacts on individual countries.  In this case:

"For 26 out of the 46 LDCs, export losses from preference erosion are estimated to be less than two per cent, and for another 15 countries less than five percent. Thus, only five countries may face losses exceeding five percent of exports. These are Malawi (11.5 per cent), Mauritania (8.8 per cent), Haiti (6.4 per cent), Cape Verde (6.3 per cent) and Sao Tome and Principe (5.2 per cent).  In absolute value, the largest likely losers are Bangladesh (US$222 million), Cambodia (US$54 million), Malawi (US$49 million), Mauritania (US$40.4 million) and Tanzania (US$29 million). Thus, only Malawi and Mauritania could face a loss that is large in absolute and relative terms."

In a survey paper this spring (see below), Alexandraki comments that Subramanian found that preference erosion would only be significant for a few products - tobacco, textiles, fisheries and cocoa.

Middle income countries

Katerina Alexandraki and Hans Peter Lankes looked at middle income countries.    The study itself is "The Impact of Preference Erosion on Middle-Income Developing Countries." (IMF Working Paper WP/04/169. September 2004). 

A summary of the results by Alexandraki, with background on the preference erosion issue, and policy implications, just came out in the March 2005 issue of the IMF's magazine,  Finance & Development:  "Preference Erosion: Cause for Alarm?".

Middle income countries had per capita gross national income between $766 and $9,385 (although the group examined excluded major oil exporters, and European Union accession countries).

Overall, a big reduction in the tariff preference had a small impact on middle income countries:

"...results for the hypothetical case where trade liberalization in the Quad causes a 40 percent reduction in each beneficiary's aggregate preference margin. The impact of preference erosion is found to be small overall (between 0.5 and 1.2 percent of total exports of the middle-income countries considered, depending on elasticities of export supply)..."

(and the authors feel that these estimates are biased upward)

Impacts would be concentrated on a few middle income countries. Of the 76 countries examined, 13 could see their total exports of goods drop by more than five per cent (under the same export elasticity assumption used by Subramanian).  Mauritius takes the biggest hit - a loss equal to 19.6 per cent of its goods exports.  Other countries taking hits over five percent: St. Lucia, Belize, St. Kitts and Nevis, Guyana, Fiji, Dominica, Seychelles, Jamaica, St. Vincent and the Grenadines, Albania, Swaziland, and Serbia and Montenegro.

And the problems were heavily concentrated on two commodities - sugar and bananas.  "Vulnerability to preference erosion is determined overwhelmingly by a country's export dependence on three products, namely sugar, bananas, and - to a far lesser extent - textiles..."  and  "Sugar and bananas alone explain three-quarters of the current preference margin of countries that have a total margin greater than 5 percent of the value of their exports."

So what?

Too much weight shouldn't be put on the exact percentages; these results are meant to be suggestive, rather than precise.

Alexandraki and Lankes note,

"The discussion of preference erosion, for example in the context of theWorld Trade Organization (WTO), has rarely relied on numerical estimates of the size of the problem.  A majority of WTO members benefits from preferential market access in the Quad.  This has allowed the impression to prevail that vulnerability to preference erosion is a significant concern shared by a broad range of countries.


The results of this study suggest that the problem is in fact heavily concentrated in a sub-set of products and preference beneficiaries.  Reforms in Quad preference regimes for just two products - sugar and bananas - may leave only a fraction of the current preference margins of some of the most vulnerable preference beneficiaries.  Accordingly, assistance to help countries cope with preference erosion can be closely targeted at the countries at risk.  Many of these are small island economies that may have serious difficulties to adjust."

Revised April 28: This post originally reported the estimate of the loss from preference erosion for Bangladesh as $22 million.  This is an error; the actual number is $222 million.  The error has been corrected in the post.  My thanks to Mr. Wasel Bin Shadat, of the Centre for Policy Dialogue Bangladesh, for pointing this out.

What Lamy said about the Amazon

In an interesting article on Brazilian contingency planning for the defense of the Amazon, Angus MacSwan cites comments by European Union WTO candidate Pascal Lamy: "Brazilian Army Worries Foreign Powers May Eye Amazon". (Reuters, April 10)

"The perceived threat that lurks at the back of many Brazilians' minds is that outsiders covet the Amazon, a fear fanned whenever a foreign politician talks about the forest and its waters as an international resource.

Indeed, former EU Trade Commissioner Pascal Lamy, now a candidate to head the World Trade Organization, in February proposed the Amazon should designated "global public goods" and be administered by the international community -- a proposal that drew a sharp rebuke from Brazilian government."

I don't have a transcript of Lamy's remarks, and I don't know the context in which he made them.

Electing the Next Pope

J.T. Toman explains the voting procedures used by the College of Cardinals to choose the new Pope, and analyzes historical voting patterns: "The Papal Conclave: How do Cardinals Divine the Will of God?.

via Alex Tabarrok at Marginal Revolution.