The Custom-House

What do Americans think about free trade?

Matthew Benjamin reports on a new Bloomberg/Los Angeles Times poll: Americans Souring on Free Trade Amid Optimism About Economy (Jan 19):

More Americans are expressing doubts about the economic payoff from free trade even as optimism about the economy hits a five-year high.

By a margin of 68 percent to 31 percent, respondents in a new Bloomberg/Los Angeles Times poll said the economy is doing well -- the highest percentage since 2001. At the same time, 41 percent agreed that free trade has hurt the economy, versus 28 percent who said it's helped....

Public sentiment on trade has reversed from 10 years ago, when almost 4 in 10 Americans said it helped the economy and 3 in 10 said it hurt....

The poll of 1,344 adults was taken Jan. 13 to Jan. 16 and had an error margin of plus or minus 3 percentage points.

Opinions on trade varied more, both by income and party affiliation. While only 18 percent of Democrats said free trade has helped the economy, 41 percent of Republicans agreed, and more than twice as many respondents earning more than $100,000 said trade helped as those earning less than $40,000. 

CFIUS reform, on the move again

Gregg Hitt reported Wednesday that Congress is taking up reform of the process of security vetting foreign investments in the U.S. (centered in the interagency Committee on Foreign Investments in the United States - CFIUS) again: Lawmakers Look Again at Foreign-Investment Reviews (Wall Street Journal, Washington Wire, Jan 17):

Do PTAs do more good than bad? or vice versa?

The first Peterson Institute (for International Economics) working paper of 2007 is out, a look at the whether preferential trade arrangements (PTAs) are predominately trade creating, or trade diverting: The Trade Effects of Preferential Arrangements: New Evidence from the Australia Productivity Commission (Dean A. DeRosa, WP-07-1, January 2007).

PTAs are agreements between two or more countries to offer each other lower tariffs than they offer to non-members.  Trade creation takes place when the reduction in trading costs between the participants increases the volume of trade between them.  This increases the welfare of the countries that get access to lower priced goods.  On the other hand, trade diversion shifts a participant's trade from low cost suppliers outside the agreement to higher cost suppliers within the agreement, reducing the importer's welfare. 

So which effect dominates in PTAs?  There is recent evidence that PTAs are primarily trade diverting:

This paper critically examines “new” evidence from the gravity model that indicates the majority of preferential trading arrangements (PTAs) today are predominantly trade diverting. This new evidence on trade diversion was presented in a recent Australia Productivity Commission (APC) working paper.

The Australian Productivity Commission paper is The Trade and Investment Effects of Preferential Trading Arrangements - Old and New Evidence, by Adams, Dee, Gali, and McGuire (Staff Working Paper, 2003). 

However, DeRosa finds something else:

Although no major faults are found in the methodology of the APC study, the present analysis finds the opposite conclusion—that the majority of current PTAs are predominantly trade creating—when a variant of the gravity model formulated by Andrew Rose is applied to upto-date regression data using a variety of econometric methods, including the Tobit regression method employed by the APC study.