Trade adjustment in the WTO system: are more safeguards the answer?

For countries to engage successfully in the international tradingsystem, their industries, firms, and workers must respond continuallyto new conditions of competition. The continuing need to adjustarises both from policy changes approved in multilateral negotiations—e.g.implementation of trade liberalization commitments, preferenceerosion, or adverse terms-of-trade consequences of export subsidyelimination—and from ongoing changes in competitive pressuresinherent in a liberal trading system—e.g. effects on comparativeadvantage of changes in technology or factor supplies. But thepolitical response to a situation calling for adjustment isoften a call for ‘safeguards’—whether as anex ante provision in negotiated agreements or as an ex postmeasure once the agreement has been signed and the reality ofnew conditions takes shape. This paper examines the range ofadjustment problems confronting the current and future internationaltrading system, the economic arguments for intervention to dealwith these problems, the adjustment environment as set out inthe current World Trade Organization (WTO) Agreements, and proposalsfor reform. While the adjustment problems we discuss apply toboth rich and poor WTO member countries, we highlight the issuesof adjustment especially relevant for developing countries.     

Entrepreneurship and intra-industry trade

Entrepreneurship and Intra-Industry Trade. — The paper introduces entrepreneurs into the theories of intra-industry trade and investigates the role of a country ’s “entrepreneurship” in international trade. It is shown that therelative entrepreneurship between countries determines the terms of trade but the welfare effects are not obvious. Among other things, it is found that (1) an increase in exports improves the terms of trade and (2) an increase in country size is not always beneficial.     

Preferential trade agreements and their role in world trade

This paper investigates the effects of preferential trade agreements (PTAs) on bilateral trade using a comprehensive data base of PTAs in force and a detailed matrix of world trade. Total trade between PTA partners is a poor proxy for preferential trade (trade in tariff lines where preferences are likely to matter): while the former was one-third of global trade in 2000–2002, the latter was between one-sixth and one-tenth. Gravity model estimates indicate that using total trade to assess the impacts of PTAs leads to a significant downward bias in the PTA coefficient: the semi-elasticity of trade with respect to PTA membership rises from 87% for total trade to 119% for preferential trade. Product exclusions and long phase-in periods significantly limit preferential trade; the marginal impact of South-South agreements on preferential trade is much higher than North-South PTAs, while the effect of North-North agreements is insignificantly different from zero.     

Destructive Trade and Its Effects on the Global Economy

This lecture was offered in honor of Professor Robert Mundell; a most fitting coincidence since the speaker was his classmate at MIT in 1955, exactly 55 years ago, and the topic emanated from our joint study with Professors Kindleberger and Samuelson at that time. The essence of the presentation can be summarized in its significant conclusions. The theory of comparative advantage as applied to real-world phenomena—and its practical free-trade recommendations—must be rejected or at least questioned, especially when it comes to trade between the advanced and the developing economies. The more realistic, even if less elegant mathematically, theory of Destructive Trade—explained in the lecture—should be a better guide in defining world trade solutions and leading us in the long run out of the present global crisis.     

Internationale Combinatie in de Ijzer-Industrie

„Gold is for the mistress—silver for the maid! Copper for the craftsman cunning at his trade.” „Good!” said the Baron, sitting in his hall, „But Iron—Cold Iron—is master of them all!” (From „Cold Iron”, by Rudyard Kipling.) Vele gegevens en getallen, in dit stuk voorkomende, zijn onder meer ontleend aan: Ministry of Reconstruction, Report of Committee on Trusts, London 1919,—George R. Carter, The Tendency towards Industrial Combination, London 1913,—Dr. H. Levy, Monopoly and Competition, London 1911,—H. W. Macrosty, Trust Movement in British Industry, London 1907,—J. M. Keynes, The Economic Consequences of the Peace, London 1920,—Balansen U. S. Steel Corporation,—P. de Roussiers, Les Syndicats industriels de producteurs en France, Paris 1901,—de leener, Les syndicats industriels en Belgique, Bruxelles 1904,—Et. Martin Saint Léon, Cartells et Trusts, Paris 1909,—Dr. H. Mannstaedt, Konzentration in der Eisenindustrie, Jena 1906,—Prof. Dr. A. Binz, Kohle und Eisen, Leipzig 1919,—Dr. L. D. Pesl, Das Dumping, München 1921,—J. Singer, Das Land der Monopole, Berlin 1913,—Prof. Dr. R. Liefmann, Kartelle und Trusts, Stuttgart 1920,—Dr. J. Grünzel, Ueber Kartelle, Leipzig 1902,—Th. Vogelstein, Organisationsformen der Eisenindustrie, Leipzig 1910,—Dr. W. Morgenroth, Die Exportpolitik der Kartelle, Leipzig 1907,—Ir. Landsberg, Ijzer en staal, Amsterdam 1919.     

Measuring Restrictiveness of Bilateral Trade Policies: A Comparison between Developed and Developing Countries

This paper compares the degree of openness to trade of three developed countries markets—the European Union, Japan, the United States—with that of three middle-income countries, namely Brazil, India, and China. A theoretically consistent protection measure—the Mercantilistic Trade Restrictiveness Index (MTRI)—is employed to average tariffs at different levels of aggregation. The computation relies on a comparative static applied general equilibrium model (Global Trade Analysis Project—GTAP) featuring imperfect competition as well as on the bilateral applied tariffs included in the most recent version of the GTAP database. Results provide a different picture from what could have been expected given the widely publicized diffusion of preferential schemes supposedly favoring developing countries exports. JEL no.  F17, C68, Q17     

Implementation and imbalance: dealing with hangover from the Uruguay Round

The Uruguay Round agreements impose bound obligations to implement,but provide only unbound promises of assistance—is therea legal solution within the WTO legal system, i.e. can implementationassistance be made a legal obligation? The author concludesthat the Doha negotiations on trade facilitation and on aidfor trade demonstrate that such a legal arrangement cannot beconstructed. This is not, however, a problem; the internationalcommunity has provided extensive trade-related assistance throughbilateral and multilateral development agencies. Regarding theoverall Uruguay Round imbalance (developing countries gave morethan they got), failure of the international community to acknowledgethat the imbalance stems in major part from the WTO agreementon intellectual property (TRIPS) has retarded a general making-up.     

U.S. Antidumping Enforcement and Macroeconomic Indicators Revisited: Do Petitioners Learn?

We contribute to the literature on the political economy of U.S. antidumping enforcement through an analysis of the pattern—and macroeconomic determinants—of country-specific antidumping petitions filed by U.S. firms against 15 countries between 1981 and 1998 (examining quarterly data). We reconcile some seemingly inconsistent results from the prior literature by suggesting that “learning” by petitioners about the administration—in practice—of the U.S. trade laws has led to changes in the roles of the macroeconomic determinants over time. JEL no. F13     

Regional Economic Integration and the Location of Multinational Firms

A theoretical model of international location is applied to a process of regional economic integration in which a set of countries mutually removes barriers to trade and investment, thus overcoming the traditional ‘hub and spoke’ setup of regional agreements. The theoretical results are matched with actual trade and foreign investment data from a sample of some 4,200 multinational firms who have invested in Central and Eastern Europe over the 1990–1999 period. Controlling for the effects of the reduction in trade barriers through a proper specification of a gravity model, it is found that the conventional outcome of an agglomeration of economic activities in the centre of the integrating area does not necessarily hold. Multilateral regional integration agreements can act as an important dispersion force significantly driving the location of multinational firms. A panel probit econometric exercise confirms the findings. JEL no. F12, F15, F21     

New borders: Evidence from the former Soviet Union

New Borders: Evidence from the Former Soviet Union. — We study the effects of trade barriers and the persistence of past linkages on trade flows in the former Soviet Union (FSU). Estimating a gravity equation on 1987–1996 trade between nine Russian regions and fourteen FSU republics, we find that Russian regions traded nearly twice as much with each other as with republics in the reform period (1994–1996). In contrast, they did not trade significantly more with each other than with republics in the prereform period (1987–1990). Our results suggest that the bias towards domestic trade in the reform period is primarily a result of tariffs. We also find that past linkages, such as infrastructure, production and consumption chains, and business networks, have limited the reorientation of trade.     

Labour-market effects of intra-industry trade: Evidence for the United Kingdom

Labor-Market Effects of Intra-Industry Trade: Evidence for the United Kingdom. — According to the “smooth adjustment hypothesis”, the labor-market adjustment costs entailed by trade liberalization are lower if trade expansion is intra-industry rather than inter-industry in nature. In this paper, we study the link between trade and labor market changes in UK manufacturing industries during the 1980s. We use industry-level measures of unemployment duration and wage variability as proxies for adjustment costs, and we relate them to various measures of intra-industry trade. Our evidence offers some support for the smooth adjustment hypothesis.     

On trade creation and regional trade agreements: does depth matter?

Regional trade agreements (RTAs) are usually classified according to their form into four broad categories: preferential arrangements, free trade agreements, customs unions and common markets. This paper investigates whether the form/depth of RTAs matters concerning their effect on trade. I use a proper specification of the gravity model with panel data on the 1960–2000 period, which specifically control for self-selection into agreements. Results show that creating any kind of RTAs providing trade preferences to their member countries significantly increases bilateral trade. Nevertheless, their average treatment effect on bilateral trade does not significantly differ according to the depth of agreements.

A new look at the impact of U.S. import barriers on corporate profit expectations

A New Look at the Impact of U.S. Import Barriers on Corporate Profit Expectations. — The notion that industries benefit from protection is firmly grounded in trade theory. However, previous “event studies” measuring the impact of trade restrictions on stock prices reveal that shareholders expect no improvement in industry profits from protection. The implication is that barriers designed to promote industry adjustment are considered ineffective by equity holders. This investigation of U.S. “Escape Clause” cases shows that shareholders do expect protection to enhance profits, but not universally. Outcomes are linked to the type of trade measure selected, with industries protected by tariffs or global quotas faring better than those shielded by nonglobal “Orderly Marketing Agreements.”     

Gravity model: An application to trade between regional blocs

The objective of this paper is to evaluate the determinants of bilateral trade flows among 47 countries and, particularly, the effects of preferential agreements between several economic blocs and areas: European Union (EU), North-American Free Trade Area NAFTA), Caribbean Community (CARICOM), Centro-American Common Market (CACM), and other Mediterranean countries (MEDIT). The period under study is from 1980–99. The authors estimate a gravity equation that allows the comparison of the weight of the influence of preferential agreements and also, infers the relevance of other determinants of bilateral trade flows such us geographic proximity, income levels, population, and cultural similarities. The analysis is undertaken for each year of the sample in order to capture the temporal evolution of the impacts on trade of the different variables considered. Using the estimation results as a base, trade potentials resulting from new free trade agreements are calculated.     

Does Gravity Matter in a Service Economy?

This paper estimates gravity equations for bilateral services trade in a sample of 28 countries. It finds that the standard gravity variables of economic size and geographic proximity are significant factors in services trade. It also reveals positive effects of linguistic ties on services trade. There is evidence of a positive link between regional trade arrangements and services trade. Much of that effect appears to reflect the impact of bilateral goods trade on services trade. This implies that efforts to enhance goods trade—bilateral or multilateral—should lead to more services trade as well. JEL no. F13, F15, L80     

Estimating the wage costs of inter- and intra- sectoral adjustment

Estimating the Wage Costs of Inter- and Intra-Sectoral Adjustment. — The proposition that labour market adjustments to intra-industry trade are less costly than adjustments to inter-industry trade is a widely-held belief amongst trade economists. If there are significant sector-specific skills, then this ‘smooth adjustment hypothesis’ seems intuitive. Direct evidence relating to this issue remains largely anecdotal. In this paper we estimate the returns to tenure within jobs, industries and occupations in order to predict the costs, in terms of wage losses, of moving jobs between and within sectors. We find no compelling evidence that wage costs of moving between industries are larger than the costs of moving within industries.     

Trade Specialization in Latin America: The Impact of China and India

This paper examines the extent to which the growth of China and India in world markets is affecting the patterns of trade specialization in Latin American (LA) economies. We construct a measure of Revealed Comparative Advantage (RCA) by 3-digit ISIC sector, country, and year. This RCA accounts for both imports and exports. The empirical analyses explore the correlation between the RCAs of LA and the two Asian economies. Econometric estimates suggest that the specialization pattern of LA—with the exception of Mexico—has been moving in opposite direction to the trade specialization pattern of China and India. Labor-intensive sectors (both unskilled and skilled) probably have been negatively affected by the growing presence of China and India in world markets, while natural resource and scientific knowledge intensive sectors have probably benefited from China and India’s growth since 1990. JEL no.  F10, F14     

Intra-industry trade of India: Trends and country-specific factors

Intra-industry Trade of India: Trends and Country-Specific Factors. — The analysis in this paper confirms that trade liberalization biases trade expansion towards intra-industry trade (IIT) in India. The increased level of IIT is largely exportled, that is, caused by a faster growth of exports than of imports. India’s IIT is more intense with high-income countries and is characterized by a greater extent of complementarity. Further, certain country-specific factors which are found to be crucial in the models of vertical IIT are pertinent in influencing the pattern of India’s bilateral IIT.     

Preferential trade agreements and the structure of international trade

In this paper we examine the impact of membership in preferential trade agreements (PTAs) on trade between PTA members. Rather than considering the impact of PTA membership on the volume of trade we consider the impact of membership on the structure of trade. For a large sample of countries over the period 1962–2000 we find that membership in a PTA is associated with an increase in the extent of intra-industry trade. Our results indicate that this is especially the case for PTAs formed between richer countries, with the effects of PTAs between poorer countries found to be smaller.     

Collusive intra-industry trade in identical commodities

Collusive Intra-Industry Trade in Identical Commodities. — A homogenous-goods Cournot model with two countries and two firms is analyzed. Firms may collude by monopolizing their domestic markets, but they may also engage in collusive intra-industry trade. It turns out that, though such trade is costly because of transportation costs, firms might indeed trade since this enlarges the scope of successful collusion. Hence, intra-industry trade in homogenous goods is not a reliable indicator of competition.