Comparative Advantage and the Gains from Financial Trade: A Reappraisal

Emerging market crises have suggested that a national benefit‐cost assessment of external financial liberalisation could well prove unfavourable. This paper re‐examines the principle of comparative advantage in its application to financial trade to seek guidance on measures that might permit a fuller realisation of the potential benefits involved. Drawing a parallel with Balasubramanyam's work on the gains from FDI and international migration we distinguish between those arising in financial trade from the net transfer of capital, and those deriving from the contemporaneous exchange of financial claims or services of equivalent value. In the first interpretation a country's comparative advantage is manifested by its role in ‘intertemporal’ trade (as a borrower or lender). Our alternative emphasis is on the contractual risk‐return characteristics of the financial claims exchanged. This perspective is applied firstly to portfolio diversification gains arising from further international stock market integration. Secondly, price risk management for developing countries in international primary commodity trade is discussed. Both applications imply the need for significant institutional development but could realise approximately contemporaneous gains reminiscent both of those involved in merchandise trade and in the skills and product (or service) flows that Balasubramanyam has emphasised in relation to FDI and international migration.     

Regionalism Within Multilateralism: The WTO Trade Policy Review of Canada

The World Trade Organisation published a Trade Policy Review of Canada in 2003. In this paper, we discuss the WTO Review and augment the discussion by presenting original data and reviewing the empirical literature. The WTO concludes that Canada's trade regime is open and transparent but maintains barriers in a few important sectors. We subject this claim to empirical scrutiny, comparing Canada's actual imports to a multilateral benchmark based on the gravity equation. We show that Canada imports about what should be expected given the size of its economy and its location. In a second benchmarking exercise, we show that Canada's anti‐dumping initiations are in proportion to its imports and that Canada's exports are targeted less by other countries’ anti‐dumping investigations than what might be expected based on Canadian export levels. Like many other countries, Canada has pursued trade liberalisation through the World Trade Organisation while simultaneously signing multiple regional trade agreements. Our summary of the recent literature indicates that Canada's regional trade agreements have generated more trade creation than trade diversion. Canada has also spurred imports from the least developed countries by unilaterally eliminating tariffs and quota barriers on 48 of the world's poorest countries in January 2003. We also discuss Canadian progress in opening its agriculture and clothing industries. Overall, we conclude that Canada appears committed to advancing globalisation through multilateral trade liberalisation supplemented by unilateral and bilateral initiatives.     

Measuring International Trade Costs

The costs of international trade have become an increasingly important item in trade negotiations (under the heading ‘trade facilitation’) and element of trade theory, but definition and measurement of trade costs remain in their infancy. This paper argues that the most conceptually appropriate measure is the gap between cost‐insurance‐freight (cif) and free‐on‐board (fob) values of traded goods, but that this must be measured on a consistent volume of trade. Such data are only available for a few countries. We calculate cif–fob gap values for the three largest trading nations that report such data (Australia, Brazil and the USA). These values provide plausible estimates of ad valorem trade costs for the three importing countries and for all countries’ exports. The estimates indicate that although trade costs have fallen over the last two decades, average trade costs now exceed the average tariff rate on imports into the USA and Australia. Country rankings by the cif–fob gap values differ significantly from those by commonly used proxies for trade costs, such as the indicators of time and cost in the World Bank’s Doing Business database, and analysis based on such proxies is likely to produce misleading results.     

Does Religious Similarity Matter in International Trade in Services?

Impacts of religion on trade in services were examined using gravity models with two estimation methods: Poisson pseudo‐maximum likelihood (PPML), to correct for heteroscedasticity and bias due to the exclusion of zero trade flow, and standard Heckman correction to compensate for sample selection bias. We found that religious similarity contributes to increased international trade in services by establishing ‘trust‐related institutions’. Second, religious pluralism (variety) fosters trade even more than religious similarity, suggesting that in facilitating trade, religious openness matters more than religious similarity. Third, a strong dominant religion discourages trade in services, whereas the presence of religious minorities encourages trade in services. A highly significant inverse Mill's ratio (IMR) result indicated the presence of sample selection bias, indicating that controls are necessary to prevent estimation bias. This study concluded that religion is an important determining factor for trade in services, positively affecting interpersonal trust and thereby reducing institutional distance between countries.     

Putting Canada in the penalty box: Trade and welfare effects of eliminating North American Free Trade Agreement

Three years ago, very few economists would have imagined that one of the newest and fastest growing research areas in international trade is the use of quantitative trade models to estimate the economic welfare losses from dissolutions of major countries' economic integration agreements (EIAs). In 2016, "Brexit" was passed in a UK referendum. Moreover, in 2019, the existence of the entire North American Free Trade Agreement (NAFTA) is at risk if the US withdraws—a threat President Trump has made if the proposed US–Mexico–Canada Agreement is not passed by the US Congress. We use state‐of‐the‐art econometric methodology to estimate the partial (average treatment) effects on international trade flows of the six major types of EIAs. Armed with precise estimates of the average treatment effect for a free trade agreement, we examine the general equilibrium trade and welfare effects of the elimination of NAFTA (and for robustness US withdrawal only). Although all the member countries' standards of living fall, surprisingly the smallest economy, Mexico, is not the biggest loser; Canada is the biggest loser. Canada's welfare (per capita income) loss of 2.11% is nearly two times that of Mexico's loss of 1.15% and is nearly eight times the US' loss of 0.27%. The simulations will illustrate the important influence of trade costs—international and intranational—in contributing to the gains (or losses) from an EIA's formation (or elimination).     

Myth,Sin and Redemption in Capital Account Liberalisation

The Fund's argument that capital account liberalisation in developing countries might appeal for justification to the recognised gains from free trade in goods and services was seriously undermined by the Asian financial crisis. Perhaps the most remarkable critique in view of his pre‐eminence in the development of international trade theory and policy was a short paper by Jagdish Bhagwati in which the Fund's parallel was described as a ‘myth’. Taking up the argument he advanced, this article explores further the underlying weakness of the Fund's case. Jagdish emphasised the discrepancy between the nebulous long‐term benefits from capital flow liberalisation and the painful consequences of the crises that they had recently occasioned. The relevance of the ‘original sin’ hypothesis in determining the magnitude of these costs is therefore discussed here with attention drawn to country inability to borrow readily in their own currencies as a reason for their acute exposure to exchange rate speculation. ‘Redemption’ for borrowers is then sought through an identification of sources of genuine comparative advantage in financial trade. Net flows of finance are not required for the realisation of these gains and a final section argues that there should be no presumption that net transfers improve welfare – just as Jagdish claimed.     

Trade Barriers as Bargaining Outcomes

Whether bilateral trade barrier data conform with the Grossman‐Helpman (1995) model's predictions about ‘trade talks’ is examined in this article. A simple form of the prediction from the model is tested. Bilateral US‐Japan and US‐EU data from the 1990s are employed. The results are the first in the literature.     

Trade and Innovation in Services: Evidence from a Developing Economy

Studies on innovation and international trade have traditionally focused on manufacturing because neither was seen as important for services. Moreover, the few existing studies on services focus only on industrial countries, even though in many developing countries services are already the largest sector in the economy and an important determinant of overall productivity growth. Using a recent firm‐level innovation survey for Chile to compare the manufacturing and ‘tradable’ services sector, this paper reveals some novel patterns. First, even though services firms have on average a much lower propensity to export than manufacturing firms, services exports are less dominated by large firms and tend to be more skill intensive than manufacturing exports. Second, services firms appear to be as innovative as – and in some cases more innovative than – manufacturing firms, in terms of both inputs and outputs of ‘technological’ innovative activity, even though services innovations more often take a ‘non‐technological’ form. Third, services exporters (like manufacturing exporters) tend to be significantly more innovative than non‐exporters, with a wider gap for innovations close to the global technological frontier. These findings suggest that the growing faith in services as a source of both trade and innovative dynamism may not be misplaced.     

Canada's Anti‐dumping and Safeguard Policies: Overt and Subtle Forms of Discrimination

Like many countries in the international trading system, Canada repeatedly faces political pressure from industries seeking protection from import competition. I examine Canadian policymakers’ response to this pressure within the economic environment created by its participation in discriminatory trade agreements such as the North American Free Trade Agreement (NAFTA). In particular, I exploit new sources of data on Canada's use of potentially WTO‐consistent import‐restricting policies such as anti‐dumping, global safeguards and a China‐specific safeguard. I illustrate subtle ways in which Canadian policymakers may be structuring the application of such policies so as to reinforce the discrimination inherent in Canada's external trade policy because of the preferences granted to the United States and Mexico through NAFTA.     

What's the Point of Reciprocal Trade Negotiations? Exports,Imports, and Gains from Trade

This paper explains why trade‐policy makers may prefer reciprocal trade negotiations (RTN) to unilateral tariff reductions (UTR) for economic reasons. It answers puzzles like ‘Why WTO reciprocity?’ and strengthens the unnecessarily weak case made for the WTO by those who downplay or dismiss benefits from foreign tariff reductions (FTR). RTN is superior to UTR because it provides economic benefits that UTR cannot – namely, FTR benefits which are clearer than potentially important UTR benefits: Whereas each policy offers efficiency gains, any terms‐of‐trade effect of UTR generally detracts from these gains, while any terms‐of‐trade effect of FTR is typically beneficial (especially for a small price‐taking country) with this benefit augmenting FTR's efficiency gains. Moreover, benefits from reductions in foreign barriers may come from several sources; they are not solely the result of terms‐of‐trade improvement – or economies of scale (the two benefits already noted in the literature, though often dismissed). For example, with foreign NTB elimination, possible home benefits are shown even with rising costs and terms‐of‐trade deterioration. RTN is also superior to UTR because, by eliminating protection in either NTB or tariff form, RTN provides an escape from not only a terms‐of‐trade prisoners’ dilemma, but many other previously unrecognised prisoners’ dilemmas, including one in international rent transfers, and several others with no economies‐of‐scale or terms‐of‐trade motivation. Of course, if superior RTN is not an option, UTR may well be desirable. If reciprocity is an option, but only in a narrower CU or FTA form, such reciprocity may still be superior to UTR, or it may be inferior; theory cannot unambiguously rank these.     

China Trade Policy Review: A Political Economy Approach

Chinese trade policy has experienced ‘great reversal’ in the year of 2008. A series of constraining measures taken previously have been loosened eventually. We investigate this situation using a political economy approach. Unlike in democratic countries, where interest groups play a crucial role in trade policy change, in China, given the political reality, leaders’ will and trade partners’ pressure are the determinant factors. We call this top‐down and outside‐in trade policy. Actually the idea of ‘harmonious society’ and ‘scientific development’ emphasised by top leaders in October 2006 paved the road for the following trade policy adjustment: i.e. reducing tax rebate, limiting processing trade, compressing the catalogue for foreign investment, etc. However, with the shock of a global financial tsunami, these measures get coastal areas relying on foreign trade heavily into trouble. The economic downturn in Pearl River Delta even astonished the decision‐making body, calling on a quick reversal in foreign trade policy. If interest groups had been allowed to express their demand formally and adequately from the very start, the cycle of ‘taking up first but giving up last’ in policy design would have not taken place. In other words, the bottom‐up and inside‐out trade policy should be more stable. Although flexibility is necessary in the face of uncertainty, frequent and discretionary trade policy change usually produces effects of ‘pro‐government’ not ‘pro‐market’. This is unfavourable for the transformation in China. The constraining trade policy in mid‐2007 to mid‐2008 has been a part of the government’s desire to seek healthier development. However, with the inside and outside surroundings getting worse, the structural adjustment (long‐run objective) has had to concede to the economic growth (short‐run objective).     

Trade in services: its treatment in international forums and the problems ahead

When the General Agreement on Tariffs and Trade (GATT) was concluded in the late 1940s, there was hardly any mention of international transactions in services. At that time, the issue of international trade in services was of minor importance. In addition, attention was initially focused on measures hampering trade at the border. With the principal output of the majority of the sub-sectors of the service industry being “nontangible”, trade impediments relevant for the international exchange of services are of a more subtle nature. These impediments gained importance as the volume of international transactions in this sector increased considerably during the last decade—a development paralleled by the mushrooming of non-tariff barriers in the field of merchandise trade.     

The Macroeconomic Effects of the Canada–US Free Trade Agreement on Canada: A Counterfactual Analysis

We evaluate the macroeconomic effects of the Canada–US Free Trade Agreement (FTA) on Canada's economy using a counterfactual analysis. We exploit the dependence of GDP growth (labour productivity and unemployment, respectively) among different economic entities and construct the counterfactuals using data from countries other than Canada. We find that in the adjustment period from 1989:Q1 to 1992:Q1, Canada's economy bore the short‐run adjustment costs of the FTA with a decline of the annual real GDP by 2.56 per cent and a decline of the labour productivity by 0.62 per cent. After the adjustment period, the FTA had a positive and permanent effect of 1.86 per cent on Canada's annual real GDP growth and raised the labour productivity from 1992 to 1994 by 2.39 per cent on average. Moreover, the FTA increased Canada's annual unemployment rate by 1.81 per cent in the period 1989–94.     

Agricultural Trade Reform and the Doha Development Agenda

This paper examines the extent to which various regions, and the world as a whole, could gain from multilateral trade reform over the next decade. The World Bank's Linkage model of the global economy is employed to examine the impact first of current trade barriers and agricultural subsidies, and then of possible outcomes from the WTO's Doha Round. The results suggest moving to free global merchandise trade would boost real incomes in sub‐Saharan Africa and Southeast Asia (and in Cairns Group countries) proportionately more than in other developing countries or high‐income countries. Real returns to farmland and unskilled labour, and real net farm incomes, would rise substantially in those developing‐country regions, thereby helping to reduce poverty. A Doha partial liberalisation could take the world some way towards those desirable outcomes, but more so the more agricultural subsidies are disciplined and applied tariffs are cut, and the more not just high‐income but also developing countries choose to engage in the process of reform.     

Making EU Trade Agreements Work: The Role of Rules of Origin

A key element of the EU's free trade and preferential trade agreements is the extent to which they deliver improved market access and so contribute to the EU's foreign policy objectives towards developing countries and neighbouring countries in Europe, including the countries of the Balkans. Previous preferential trade schemes have been ineffective in delivering improved access to the EU market since only a small proportion of the available preferences have actually been utilised. The main reason for this is probably the very restrictive rules of origin that the EU imposes, coupled with the costs of proving consistency with these rules. If the EU wants the ‘Everything but Arms’ agreement and free trade agreements with countries in the Balkans to generate substantial improvements in access to the EU market for products from these countries then it will have to reconsider the current rules of origin and implement less restrictive rules backed up by a careful safeguards policy..     

Singapore and the New Regionalism: Bilateral Trade Linkages with Japan and the US

Free Trade Areas (FTAs) have recently become an integral part of Singapore trade policy. This paper discusses the reasons behind Singapore's recent embracement of ‘new regionalism’ with particular reference to the proposals to form FTAs with Japan and the US. The paper goes on to examine various aspects of Singapore's trade linkages with the two economic superpowers in some detail. Popular discussion of FTAs gives one the appearance that such a trade policy is entirely benign. The paper sounds a cautionary note, highlighting some reasons to be concerned with Singapore's recent embracement of the ‘new regionalism’.     

Misalignment of the Baht and its Trade Balance Consequences for Thailand in the 1980s and 1990s

This paper examines Thailand's pre‐crisis exchange rate policy, focusing on the degree of the country's real exchange rate misalignment pre‐crisis and its consequent effects on Thailand's trade balance with its two large trading partners, the US and Japan, in the 1980s and 1990s. Defining misalignment as the difference between actual and ‘equilibrium’ exchange rates, we estimate three key ‘equilibrium’ exchange rates of the Thai baht: (a) the real effective equilibrium exchange rate of the Thai baht against its twenty‐two major trading partners; (b) the bilateral real equilibrium exchange rates of the baht against the US dollar; and (c) the bilateral real equilibrium exchange rate of the baht against the Japanese yen.     

Declining Distance Effects in International Trade: Some Country‐Level Evidence

Technical progress can be expected to reduce transport costs over time, yet most studies of bilateral trade based on the gravity model find distance effects to be increasing rather than decreasing. We investigate countries' openness to international trade (the ratio of exports plus imports to GDP). We find that trade decreases with geographical remoteness, land area and lack of access to the sea, all of which are likely to be correlated with transport costs. In contrast to the results obtained with log‐linear models of bilateral trade, distance effects (remoteness and land area) have declined over time. Trade decreases with population density and increases with improvements in the terms of trade, investment and a more liberal trade policy.     

Innocent or Not‐so‐innocent Bystanders: Evidence from the Gravity Model of International Trade About the Effects of UN Sanctions on Neighbour Countries

This paper examines two hypotheses about the effects of UN sanctions on trade flows between land neighbours of the target country and the rest of the world. First, there have been claims that sanctions hurt neighbour countries by cutting off trading routes, increasing transportation costs and disrupting established trading ties. We would expect that a neighbour's trade with the rest of the world would fall, as a result. Second, there is extensive evidence that neighbours have been involved in smuggling. Consequently, neighbours should trade more with the rest of the world during UN trade embargoes, because now they also trade on behalf of the target. I employ the gravity model of international trade to show that, overall, a neighbour's trade with the rest of the world tends to fall during UN sanctions episodes. This confirms the first hypothesis above: on a net basis, land neighbours have been ‘innocent bystanders’ hit by UN sanctions.     

What Drives India's Surge in Service Exports?

India's prowess in the service sector has been recognised the world over. Sustaining services exports is important not only to sustain India's high growth rate but also to compensate for a consistent deficit in merchandise trade and to maintain stability on the external sector. In this context, we analyse the factors of India's performance in services exports over the past three decades. The results reveal that endowment factors such as human capital, improvement in physical infrastructure and financial development are key drivers for India's surge in services exports along with world demand, exchange rate and manufacturing exports. While factors such as institutions, R&D expenditure, telecommunication, foreign direct investment and financial development significantly impact the export of modern services, traditional services exports are more dependent on infrastructure development, manufacturing exports, world demand and exchange rate. India's economic reforms in the financial sector, FDI, communication so far have helped the services exports, but India needs to focus on supply‐side factors to improve the competitiveness – and thereby volume – of services exports.