The Custom-House

Inshoring and Offshore Outsourcing

Runjuan Liu and Daniel Trefler estimate the impact of U.S. offshore outsourcing with the Chinese and Indians, and U.S. service inshoring (U.S. sales of services abroad) to them, on U.S. labor markets (Much Ado About Nothing: American Jobs and the Rise of Service Outsourcing to China and India). Overall, "We precisely estimate small positive effects of inshoring and smaller negative effects of offshore outsourcing. The net effect is positive." However, the effects tend to be negative for the less educated or less skilled.  

But, we're talking about small impacts.  From the abstract:

To illustrate how small the effects are, suppose that over the next nine years all of inshoring and offshore outsourcing grew at rates experienced during 1996-2005 in business, professional and technical services i.e., in segments where China and India have been particularly strong. Then workers in occupations that are exposed to inshoring and offshore outsourcing (1) would switch 4-digit occupations 2 percent less often, (2) would spend 0.1 percent less time unemployed, and (3) would earn 1.5 percent more. These are not annual changes – they are changes over nine years – and are thus best described as small positive effects.

Some bad advice from Ha-Joon Chang

Ha-Joon Chang, an economist at Cambridge, makes The case for forward-looking protectionism in the US in yesterday's Financial Times. The key paragraph reads,

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

He would complement forward-looking protectionism (the infant industry argument) with enhanced welfare and adjustment assistance programs.

This doesn't sound like a good idea to me.  I don't think U.S. politics can produce the subtle, economically sophisticated, disinterested outcomes that "forward-looking" protectionism calls for - or even a rough approximation to them.  Special interests will be all over this like ants on sugar:

"Sugar production constitutes an extreme but illustrative case of the lengths to which governments have been persuaded to go in supporting domestic agricultural production. It also illustrates why the notion of deep proportional reductions in support would face strong interest group opposition even in the United States. In chapter 1 we saw that the sugar industry involved an iron triangle of interest group, Executive bureau, and congressional committee. In 1981 President Reagan agreed to impose quotas on sugar imports in order to effectuate a congressional decision to set a minimum domestic price for raw sugar at a level more than twice the world price. The beauty of the quota arrangement from the standpoint of each angle of the iron triangle...was that domestic sugar growers would have their incomes enhanced without the necessity of appropriating any funds. The resulting sugar program added "another $3 billion a year to American consumers' grocery bills," according to a 1988 Commerce Department study. A General Accounting Office study found that in 1998 the direct gain to the sugar industry was $1.6 billion. But the impact is more complicated than appears because the sugar program generated a further implicit subsidy to corn farmers, who were able to sell more corn for use in high-fructose corn syrup, "which is profitably sold to soft-drink bottlers because domestic sugar prices are propped up so much." Thus, the sugar program acquired a second domestic constituency and further diminished the efficiency of both domestic agriculture and international trade."

Kenneth Dam, The Rules of the Global Game, page 111).  I know Chang is thinking of manufacturing and not agriculture, but this is still indicative of the world in which his proposal would operate.

Jonathan Dingel and Simon Lester do a good job identifying other problems with Chang's argument.

Outsourcing Child Care Overseas

From The Onion via Youtube

Support the Columbian Agreement to Advance Human Rights...

...argues Susan Aaronson of George Washington University: Free Trade Improves Human Rights:

Critics need to rethink how we can help Colombia continue its positive momentum. The agreement has provisions to bolster both the supply and demand for good governance. Here's how: First, the free trade agreement encourages public participation in trade policymaking. Citizens in both countries gain the right to challenge trade rules. Second, the agreement gives Colombian workers the right to petition the U.S. government to take action. If the Colombian government is found to have violated labor provisions, it may lose trade benefits. In this regard, the agreement is both a carrot and a stick.

Finally, empirical studies link expanded trade with improvements in particular human rights such as freedom from arbitrary imprisonment and extrajudicial killing. Thus, the agreement could help advance the very human rights that need reinforcement in Colombia.

It's important to encourage democracies such as Colombia to maintain human rights progress and the best way to do that is to provide them with real incentives. The free trade agreement does that.

Technological change, globalization, and income inequality

Florence Jaumotte, Subir Lall, and Chris Papageorgiou conclude that increasing income inequality in the world's countries has more to do with technological change than with globalization: "We find technological progress as having a greater impact than globalization on inequality."  (Rising Income Inequality: Technology, or Trade and Financial Globalization?).  See the extracts from the abstract and conclusions below. 

But that doesn't seem to me to entirely jibe with the actual content of the report.  While the conclusions hold for their developing countries and overall, the situation for the advanced countries looks very different.  Here's their Figure 7:

This is a decomposition of the change in the Gini coefficient for advanced countries.  The average annual percentage change in the Gini coefficient for these countries over the time period 1981-2003, was 0.6.  Their estimate of the contribution of globalization to inequality exceeded the contribution of technology.  Both were offset somewhat by the contribution of other factors in the analysis.  I'm assuming the contribution of globalization is the joint impact of trade and financial globalization and that - based on other comments in the text - the impact of trade tended to reduce inequality.  If that's the case, the impact of financial globalization was quite strong.

Benefits of Trade for the Poor in the U.S.

Trade has reduced the prices, and increased the selection, of goods disproportionately consumed by the poor.  Christian Broda and John Romalis find that when the different inflation rates for the poor and the well-to-do are taken into account, apparent rising U.S. income inequality between 1994 and 2005 disappears:  Inequality and Prices: Does China Benefit the Poor in America? (working draft dated March 26, 2008).  Imports from China have been especially important:

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

Specifically:

First, ratios of the 90th to 10th percentiles of the US income distribution have grown by 6 percent from 1994 to 2005, roughly a third of the total rise in inequality since 1984.1 When income-group specific inflation rates are used to estimate the change in inequality, 90th/10th ratios have risen only 2 percent in this period. Moreover, if inflation rates are corrected for new-goods bias using the methodology in Broda and Weinstein (2007) we find that inequality has been unchanged since 1994. Using the impact of China on US non-durable consumer prices and given that the share of Chinese goods in total US imports have risen from 6 to 17 percent over the 1994 – 2005 period we estimate that the price effects of the increased imports from China alone can offset around 30 percent of the rise of conventional inequality measures over this period.

This is one of several interesting looking papers under discussion at a conference at Princeton this weekend: IES Summer Workshop

Hat tip to Paul Krugman: Wes Clark

Note, July 3:  Borda summarized the argument at VoxEU on July 3: China and Wal-Mart: Champions of equality. Mark Thoma looked critiqued it here (Inexpensive, Low-Quality Goods and Inequality, Economist's View, May 20, 2008) and here ("The Free-Trade Paradox," Economist's Voice, May 19).

Enforcement of Labor Provisions in U.S. FTAs

Both Clinton and Obama want to see the labor provisions of US FTAs toughened.  Mary Jane Bolle of the Congressional Research Service (CRS) gives an idea of what they have in mind in this short, new paper: Overview of Labor Enforcement Issues in Free Trade Agreements (February 29, 2007). 

Bolle identifies four patterns or models for labor provisions in past U.S. FTAs. Then she looks at the issues they raise with respect to enforcement of the labor provisions:

Those EPI job loss estimates

Both Clinton and Obama have based dramatic claims about trade-related job loss on Economic Policy Institute (EPI) analysis (Where are these numbers coming from?).

Where are these numbers coming from?

On the 24th, at National Gypsum Company in Ohio, Obama said (Remarks for Senator Barack Obama: National Gypsum in Lorain, Ohio),

One million jobs have been lost because of NAFTA, including nearly 50,000 jobs here in Ohio.

Where did these numbers come from, and how significant are they as a proportion of jobs in Ohio?

Baucus's New Condition for Approving Trade Agreements

Max Baucus, the Chairman of the Senate Finance Committee, said that he would not take up any of the three bilateral trade agreements (with Columbia, Panana, and South Korea) without action on expanded and reauthorized Trade Adjustment Assistance.  The Chairman of the Senate Finance Committee is in a position to make a very credible threat.

Baucus was speaking to a gathering at the Peterson Institute in Washington; here's the transcript of his remarks: Remarks Before the Peterson Institute Regarding Trade Adjustment Assistance (January 30, 2008):