Non-Technical Summaries of CIES Seminar Papers
Seminar Paper 95-09
The Labour Market Consequences of the Canada-US Free Trade Agreement
Noel Gaston and Daniel Trefler
Nothing has undermined the position of free traders more than the dismal performance of Canadian manufacturing employment since implementation of the Canada-U.S. Free Trade Agreement. Calls for the renegotiation and abandonment of the Agreement enjoy popular political support in Canada, support that erupted in the comprehensive 1993 electoral defeat of the Conservative party who engineered the Agreement. Looking forward to the North American Free Trade Agreement era, Canadian job losses are being held up as a harbinger of things to come for both Canadian and U.S. workers.
The impact of the Canada-U.S. Free Trade Agreement (FTA) on earnings and employment continues to be the subject of considerable political speculation. Unfortunately, little is known about the empirical relationship between labour market outcomes and trade protection. One specific goal of this paper is to evaluate the impact of the cuts in tariff rates on Canada's recent employment and earnings experience. While the tariff cuts are not the only aspect of the FTA that may have impacted labour market outcomes, the cuts themselves have certainly been the focal point in the debate over freer trade. More generally, we examine other factors that have been proposed as important determinants of Canadian employment and earnings during the FTA period. These include the recession, the Bank of Canada's fight against inflation that led to high interest rates and a strong Canadian dollar, deindustrialization, and deteriorating labour productivity and rising labour costs in Canada relative to the United States.
The data are a panel for the period 1980-93. By the "FTA period" we will mean the 5-year period 1989-93. Industries in the panel account for 96 percent of non-agricultural employment in the tradeables (i.e., goods- producing) sector. Tradeables is the relevant sector since by definition it is the only one with tariffs and merchandise trade. Our conclusions fall into 4 groups.
1. The FTA was expected to create trade by promoting specialization: tradeables-sector industries with a comparative advantage would expand employment, tradeables-sector industries with a comparative disadvantage would contract employment. This did not occur. Employment contracted in every tradeables-sector industry throughout the FTA period. Real exports and imports contracted for most of the FTA period.
2. The primary explanation for these events is the recession on both sides of the border. Two questions remain. (1) To what extent was the FTA responsible for the Canadian recession? We argue that it was not the primary force behind the recession. (2) Putting aside any recessionary implications of the FTA, how large was the impact of the FTA-mandated tariff cuts on employment and earnings? We argue that it was small, accounting for only 9-14 percent of the lost jobs.
3. Wages changed little during the FTA period. In addition, the tariff cuts do not explain why wages did not rise more.
4. There have been winners and losers from the Agreement. Winners include less-unionized industries, losers include those that are sensitive to a Canada-U.S. interest rate spread and a strong Canadian dollar.
From around 15 million tonnes per annum at the end of WW2, the total global catch of marine fish has grown fairly consistently to peak at around 90 million tonnes in 1989. However, in the period since, annual harvests have decreased and threaten to continue as such. Almost all of the world's commercial fish stocks are considered to be already fully exploited. The majority of which are described as being 'heavily depleted', thus only able to sustain reduced harvests. Many examples exist of fisheries being virtually wiped out through overfishing leading to significant stock depletion. It has been largely only due to discoveries of unexploited fish stocks that has allowed the global harvest to continue to increase despite the depletion of known stocks. It is apparent that the ocean fisheries are facing a crisis with more and more boats catching less and less fish.
Fish in the sea represent a renewable natural resource and the
pattern of their exploitation to date is consistent with the current
economic theory of renewable resource exploitation. In this, the
ocean fishery faces two dilemmas; 1) exploitation, to be sustainable,
is constrained to the natural rate in which the resource stock can
renew itself in any period, and 2) access to ocean fish stocks is
open to all. Under open access conditions fishermen cannot afford
to consider how their current harvesting affects the resource stock
and thus future harvests. Efficient management of a resource stock
is impossible when fishermen are powerless to restrict access to
the stock. The result is economic overexploitation - too many boats
- invariably leading to stock depletion and thus declining yields.
The main problem for traditional fishery regulation lies in its expense. The requirements for effective management - detailed biological and economic data, a non-distortionary instrument of regulation, and, most importantly, enforcement - are often prohibitively costly in light of the vastness and complexity of the ocean environment. It might be concluded that, in the face of continuing economic growth, the supply of fish will continue to decline with wild stocks, eventuating perhaps in the virtual extinction of commercial fish species.
This paper, however, presents a wholly more optimistic conclusion - for both the plight of ocean stocks and fish supply, and the potential for effective ocean fishery management. A conclusion that stems from the acknowledgment of an alternative source of fish supply - that from aquaculture.
It is significant that as global marine harvests have declined,
the supply of fish through aquaculture has rapidly grown - to the
extent that, in some species (for instance, marine shrimp), aquacultural
output represents a significant proportion of total supply.
Ocean capture and aquaculture represent two competing technologies of fish production. As such, both are fundamentally interrelated. Through an extensive exploration of this relationship, this paper shows, in theory, that aquaculture of a species is an inevitable consequence of continual ocean stock depletion. Moreover, once aquacultural production commences, its presence is shown to have a significant restraining influence upon the further exploitation of the ocean stocks and thus on ocean fish supply. This influence is found to be somewhat akin to traditional fishery regulation. The emergence of aquacultural production increases the total supply of fish beyond that from the ocean fishery. It thus restrains the increase in price that would have otherwise occurred in its absence. Ocean fishing effort is thus also restrained resulting in a social gain attributable to the presence of aquaculture.
Extrapolating from this logical analysis, it is argued that if the presence of aquaculture were created or increased via the subsidisation of aquacultural production or research, then that influence aquaculture exercises upon the ocean fishery may be manipulated for the purpose of fishery management. The subsidy to aquaculture becomes thus an alternative option for ocean fishery regulation. As an alternative, it is shown that, due to the peculiar nature of the ocean fishery supply curve, an aquacultural subsidy may achieve social gains beyond those possible under other more direct management schemes. It is further argued that as an aquacultural subsidy needs none of the enforcement and other requirements necessary of traditional (and restrictive) fishery regulation, it then represents a realistic policy alternative.
Seminar Paper 95-11
Interpreting Empirical Evaluations of Exchange-Rate Models
David N. DeJong and Steven Husted
Following the collapse of the Bretton Woods system in 1973, much effort has been devoted to building and testing models of exchange rate behaviour. In order to attempt to capture the seemingly chaotic movement of exchange rates through time, this research program has concentrated on treating exchange rates as asset prices which move in response to changes in both economic fundamentals such as the money supply as well as expectations of future economic conditions. One of the first and still most prominent of these asset market models is the monetary approach to exchange rate determination (MAER). The MAER makes strong predictions about the relationship between the exchange rate and movements in fundamentals that readily lend themselves to empirical testing. For instance, it predicts that a country's currency will depreciate with an expansion in the domestic money supply and appreciate with a rise in domestic output.
The MAER has been tested extensively, using several alternative procedures. Structural form tests involve a linear regression of the exchange rate as a function of domestic and foreign money supplies, output levels, and interest rates. Initial tests, using data from the 1970s, tended to be supportive of the model in that the parameter estimates had the right signs and appropriate magnitudes. However, as more and more data have become available, the performance of the model has deteriorated dramatically. Parameter estimates now often have the wrong sign and may be statistically significant.
As noted above, the MAER includes in its structure the idea that expectations about future economic conditions can influence the current value of an exchange rate. It is possible to test this feature of the model. Such tests, called rational expectations tests, are more restrictive than the structural form tests described above in that they incorporate additional assumptions about how people form expectations and about how financial markets are linked globally. Thus, if tests of this version of the model were negative, one could not tell if this were evidence against the model itself or against the additional hypotheses required to implement the tests. Such tests have been conducted using data sets spanning almost the entire post-Bretton Woods era. Almost uniformly, these tests provide overwhelming support for the model. Thus, a puzzle exists. Why do the two types of tests give such contradictory results? The goal of this paper is to resolve this puzzle.
In order to understand better these contradictory results we conduct extensive Monte Carlo experimentation. This involves construction of multiple versions of various data sets, some we know to be consistent with the model and some that violate one or more of the model components. We then use these artificial data sets to undertake repeated tests of both the structural form and the rational expectations versions of the model. Such repeated testing provides information about the consistency of the results from the two types of statistical tests employed in this context. Our experiments provide the following results:
1. Using data that are consistent with the model, rational expectations tests consistently support the model. In the parlance of statisticians, these tests appear to have good size.
2. However, using data that are inconsistent with the model, rational expectations tests fail to reject the model. In parlance of statisticians, these tests appear to have low power. In this setup, the tests cannot differentiate between true and false data. Power problems are especially bad when the exchange rate data are highly serially correlated, as they tend to be in the real world.
3. Using data that are consistent with the model, structural form tests tend to reject certain aspects of the model structure. Thus, structural form tests may have poor size, they exhibit bias against the model. These tests do have good power. Using data that are inconsistent with the model, these tests uniformly reject the model.
Based on these results, our principal conclusion is that one should be careful in interpreting statistical evidence from either type of test of the MAER. Both tests have certain undesirable properties. Developing new tests that might provide a clearer picture of the overall validity of the model remains a challenge to researchers in the area.
Seminar Paper 95-12
The Political Economy of Pollution Taxes in a Small Open Economy
Per G. Fredriksson
The purpose of this paper is to study how the tax rate on pollution from production is set in small open economies. Moreover, the effects on total pollution of a subsidy on inputs into pollution abatement is analyzed. The model used has an industry lobby group and an environmental lobby group. These groups seek to influence the government's environmental policy choice with the help of prospective campaign contributions. The government is assumed to maximize the probability of remaining in power by the maximization of aggregate campaign contributions and aggregate social welfare.
First, in a model without pollution abatement the equilibrium tax rate is shown to depend on lobby group membership, the relative importance of lobbying activities, and the tax elasticity of pollution. Second, the effect on the equilibrium tax rate and on total pollution of changes in the world market price of the polluting good and the marginal pollution intensity are investigated. I find that the pollution tax rate is decreasing in the world market price and that total pollution is increasing in world market price. The effect on total pollution of a change in the pollution intensity depends on the relative size of the supply elasticity and the pollution elasticity of price.
Third, pollution abatement and a pollution abatement subsidy are introduced in order to investigate the effects of this type of subsidy on total pollution. I show that total pollution may be increasing in the pollution abatement subsidy rate. This effect arises because the equilibrium pollution tax rate may be decreasing in the subsidy rate due to altered equilibrium political influence of the lobby groups. In particular, the subsidy reduces the marginal cost of production for the industry, and supply increases. It then becomes more important for the industry lobby group to lobby for a lower tax rate. Simultaneously, the environmental lobby group reduces its political pressure for a higher tax rate since the marginal pollution falls. These two effects on the equilibrium tax rate may be sufficient for total pollution to increase in the pollution subsidy rate.
This paper forms the basis for a new chapter in the second edition of Corden, Trade Policy and Economic Welfare, to be published in late 1996 by Oxford University Press. It discusses the interaction of environmental policies with trade policies. Section I considers environmental effects that stay within a country, and where the country is small.
Section II allows for interactions between countries where at least one country is large, but environmental effects still stay within a country. Section III introduces environmental effects that cross borders directly and thus are truly international. Finally section IV introduces international capital mobility and the possibility of capital controls.
Seminar Paper 95-14
Capital Mobility, Pollution Taxes, and Environmental Federalism
Per G. Fredriksson
The purpose of this paper is to analyse and compare decentralised and centralised authority over pollution tax policy in a federal system. What are the implications for efficiency of these two arrangements? This is an important question since federalism is gaining ground in many regions of the world. The model used has many small jurisdictions each populated with workers and environmentalists. The national capital stock is fixed but mobile between jurisdictions, whereas workers and environmentalists are immobile. Workers prefer a low pollution tax rate in order to attract a large local capital stock which implies a high wage rate. The workers in each jurisdiction are consequently engaged in interjurisdictional capital competition. Environmentalists prefers a high pollution tax rate in order to discourage pollution.
Three models of government are used; a local social planner, a central social planner, and a model with worker and environmental lobby groups influencing the incumbent local government. In the latter model, the lobby groups influence the local government's policy decision by offering higher campaign contributions in return for a more favorable pollution tax policy. The government trades off aggregate campaign contributions with aggregate social welfare in order to maximize the probability of victory in an implicit election. I show that a welfare maximising local government can set either an inefficiently low or and inefficiently high pollution tax rate, and hence that the level of pollution may be excessively high or low. The equilibrium outcome depends on the relative size of tax and capital elasticities, and the effect of the tax on the wage rate. The welfare maximising central government unambigouosly sets an inefficiently low tax rate in order to reduce the negative effect on workers of falling wages. In an extension, an exogenous capital tax is introduced. The capital tax induces the local governmnent to lower the pollution tax in equilibrium. This is because it raises the cost of a capital outflow in terms of tcrms of capital tax revenue. Furthermore, we find that the introduction of lobby groups may increase efficiency. This is because the political pressure of lobby groups may reduce or cancel the pressure from capital competition. One source of inefficiency hence mitigates another. This may be the case both when the original tax rate was inefficiently low or high.
Seminar Paper 95-15
Trade Liberalisation, Exports and Economic Growth: A Bayesian
Raymond G. Riezman, Peter M. Summers and Charles H. Whiteman
This paper examines the effects of trade reform episodes on the dynamic relationship between export growth and GDP growth. We analyse data for seven countries (Argentina, Colombia, Greece, New Zealand, Pakistan, Portugal, and Spain) which were part of a large-scale World Bank study on the effects of trade reform policies. Using a vector autoregression (VAR) framework, we find little support for unidirectional causal orderings between export growth and GDP growth, either before or after trade liberalisation. This result is in line with work by Greenaway and Sapsford (1994a,b), who find little or no evidence for export-led growth in countries which have undertaken trade liberalisation policies. However, it does appear that there is a stronger relationship between export growth and income growth after the liberalisation episodes.
We also find that GDP growth is associated with higher rates of import growth in the post-reform period, for all seven countries. One explanation for this result could be that, as part of the process of reducing anti-export incentives, the efforts to liberalise foreign trade had the effect of lowering import barriers. If the export sector is dependent on imported capital, raw materials and/or intermediate goods, then improved access to those goods through lower import barriers would result in increased export incentives, other things equal.
Finally, our results indicate a high degree of variability among the countries studied. Few general patterns emerge from our analysis, suggesting that it may be misleading to treat trade reform policies, or their effects, as generic.
The Asia Pacific Economic Cooperation (APEC) group consists of eighteen economically diverse members. Its membership includes highly developed economies such as the United States, Japan, Australia, Canada and New Zealand, as well as developing and newly industrialising economies. With such a diverse membership there is some question about defining APEC as a region. Another interesting question related to APEC is the rapid structural change that has been experienced by some of its members. The purpose of this paper is to explore the trade and investment patterns of APEC and its members between 1980-1993. The paper also studies some of the intra and extra - APEC trade and investment linkages.
The paper breaks down the volume of international transactions into merchandise trade, factor services, non-factor services and foreign direct investment. Dividing these figures by GDP gives us an indication of the growth of international transactions relative to output. The results show that APEC as a group has experienced substantial growths in each category and that this growth outstripped Europe and the rest of the world.
An analysis of structural changes in the pattern of trade, using revealed comparative advantage indexes for five categories (human capital intensive, labour-intensive, capital-intensive, technology intensive and agricultural-intensive) shows a strong shift by the Newly Industrialising Economies (NIES) away from labour-intensive products. This shift is complemented by a strengthening of the ASEAN comparative advantage in these products. Developed economies continue to show a strong comparative advantage in technological, human capital and capital intensive products. Australia, New Zealand, Canada and Chile are shown to have a clear comparative advantage in agricultural products.
Trade intensity indexes were used to study the pattern of trade for any geographic bias. This analysis differs from other studies which focus on intra-regional intensities with narrower definitions of regions, such as East Asia and North America. This study uses APEC's membership as the definition of a region and found that both the intra-regional import and export intensities for commodity trade have declined since 1980.
The study also breaks new ground by calculating intensity indexes for foreign direct investment. The indexes are calculated using stock data, as opposed to approval data. The results indicate a high sub-regional investment intensities. Firstly, within the three Chinas (mainland China, Hong Kong and Taiwan) and secondly, within North America (Mexico, Canada and the U.S.). China's phenomenal development as a host to FDI is also illustrated in the result. It is now the second largest recipient of FDI flows behind the United States.
Since the 1950s Australia's trade patterns have shifted dramatically, with Europe declining in importance as a trading partner and Asia's share of Australian trade increasing dramatically. This paper examines the Australian experience with exporting to Asia and seeks to explain the growth in these exports. It also asks whether there are any lessons for Canada, an ostensibly similar high income economy with a comparative advantage in primary products.
In the early 1950s 63% of Australian exports went to Europe and 60% of imports came from Europe. By the early 1990s Europe was buying 16% of Australian exports and supplying 26% of imports. Meanwhile East Asia's share of Australia's exports grew from 14% to 56%, and the import share from 9% to 37%. Thus, the geographical reorientation has proceeded most rapidly on the export side. In the 1950s and 1960s this mainly reflected exports to Japan, but since the late 1960s Japan's share has been stable and the rapid growth has been in Australian exports to other East Asian countries. By 1994 Japan and South Korea were Australia's two largest export markets.
The composition of Australian exports has also changed markedly, with agricultural and pastoral products declining in relative importance. The biggest shift was due to the boom in minerals exports in the 1960s, and minerals have become Australia's dominant export. The share of manufactured exports increased in the 1950s but has not changed greatly since 1960. Service exports have grown steadily to account for about a fifth of exports of goods and services in the 1990s.
The geographical pattern of Australian trade in the 1990s is characterized by large bilateral imbalances with all countries except Canada. The signs of these imbalances are consistent: Australia runs trade surpluses with Asian countries and trade deficits with European countries and the USA. This is remarkable in light of the large aggregate trade surplus of Japan and large aggregate trade deficit of the USA.
Composition and pattern are closely linked. Australia exports natural resource based products to East Asia and imports manufactured goods from the old industrialized countries.
Australia's trade policies for most of this century have been characterized by high levels of protectionism for domestic industry. In contrast to Canada, which has participated in the GATT-based liberalization of trade since 1947, Australia retained protective trade barriers through the 1950s and 1960s. Despite an initial step in 1973, sustained trade liberalization only really occurred after 1983. Today Australian tariffs have been substantially reduced and protection will soon be eliminated for all sectors apart from autos and textiles, clothing and footwear. Australia does, however, still have interventionist policies on the export side, and the various export promotion schemes have been proliferating.
What role have trade policies played in Australia' trade performance? Liberalization helped the traded goods sector, and primary producers were undoubtedly penalized under the pre-1983 trade regime. Trade liberalization cannot, however, explain the shifts which occurred in the 1950s and 1960s. This paper argues that success in exporting to Asia has primarily been driven by supply-side forces which made Australia a competitive supplier of coal, alumina, and various minerals for which demand was growing in Asia.
What about manufactured exports? It is difficult to evaluate the array of export promotion policies because they are so sector-specific. Overall, manufactured exports have, however, clearly not been a major component of Australian export growth, and a significant part of manufactured exports consists of resource-based products such as aluminium or steel. Examination of representative export promotion policies, such as the use of aid to promote exports or the export facilitation scheme applied to the car industry, suggest that the policies may have increased exports, but at a high cost. The evidence on the impact of export promotion policies is patchy, characterized by biassed analysis, and unconvincing in showing any net welfare gain.
The lessons drawn from Australia's relatively success in exporting to East Asia are twofold. First, Australia was fortunate in its resource endowment and in the technological change which enabled key resources to be exploited. Second, targeted industrial policies to promote manufactured exports can increase exports but their economic effects are on balance likely to be negative.
Service exports may have more lessons for other countries. Two big growth areas have been tourism and educational exports. Substantial measurement difficulties complicate analysis, and both categories involve price and non-price competition. Economic liberalization has contributed to Australian competitiveness in these areas, but the relative importance of non-price factors such as koalas or proximity is uncertain.
Seminar Paper 96-02
China's Food Economy to the 21st Century: Supply, Demand
Jikun Huang, Scott Rozelle and Mark Rosegrant
This paper attempts to create a comprehensive, transparent, and empirically sound basis for assessing the future growth of China's food supply and demand balances. A supply and demand projections model is developed, based almost entirely on econometrically estimated parameters. In this model, a series of important structural factors and policy variables are accounted for explicitly, including urbanization and market development on the demand side, and technology, agricultural investment, environmental trends, and institutional innovations on the supply side. After reviewing the baseline assumptions and forecasts, the results of the baseline projections are presented. Alternative scenarios are examined under different rates of growth in income, population, and investment in research and irrigation.
Food grain consumption in China is projected to hit its zenith in the late 1980s and early 1990s. From a baseline high of 225 kilograms, food grain consumption per capita falls over the forecast period. In contrast, per capita demand for red meat (and feed) is forecast to rise sharply throughout the projection period. When considered with the projected population rates, the projected per capita demands for food and feed grain imply that aggregate grain demand in China will reach 450 MMT by the year 2000, an increase of 17 percent over the level of the early 1990s. Although per capita food demand is falling in the later projection period, total grain demand continues to increase through 2020 mainly because of population growth and the increasing importance of meat, poultry, and fish in the average diet. Baseline projections of the supply of grain shows that China's producing sector gradually falls behind the increases in demand. Aggregate grain supply is predicted to reach 410 MMT (with rice counted in milled form) by the year 2000. Production is expected to rise somewhat faster after 2000, mostly as a result of the resumption of investment in agricultural research during the forecast period. Under the projected baseline scenario, total grain consumption rises at 1.72 percent per year, while grain production during this period grows only 0.64 percent annually.
The projections show that China's imports will rise steadily throughout the next decade. By 2000, imports are expected to reach 40 MMT, a level nearly 3 times higher than their historic high. Increasing imports arise mainly from the accelerating demand for meat and feed grains, as well as by the continued slowing of supply due to reduced investment in agricultural research in the late 1980s. However, after 2000, grain imports are expected to stabilize, as demand growth slows due to increasing urbanization and declining population growth rates; and supply growth recovers from increased investment in research and irrigation.
There is considerable range in the projections. Different rates of agricultural investment create some of the largest differences in expected imports. While there are a few scenarios where projected levels of imports are somewhat large, there are factors which may keep China from becoming too large a the player in the world market: rising world grain prices; foreign exchange constraints; and a number of political economy factors that will make China's leaders react to increasing grain shortages.
The rapid growth of China's share in world trade and dominance of markets such as toys or travelbags has been viewed as a miracle. This paper argues that China's trade performance since the economic reforms of the late 1970s has been outstanding but not miraculous. Even in the 1990s China is still less trade-oriented than other large developing economies such as Indonesia, and its share of world trade has only just recovered its peak level from the 1920s. China's export growth has been among the most rapid in the 1980s and early 1990s, but not uniquely so.>
China's outstanding export performance has been the result of favourable conditions and effective policies. China had an exploitable abundant resource in its large pool of literate low-wage labour, and especially after the agricultural reforms of the late 1970s this labour could easily be released from agriculture into labour-intensive manufacturing activities. After several decades of isolation from the world economy, the main obstacle to realizing rapid export growth on the basis of its abundant labour was lack of knowledge of how to produce and market labour-intensive manufactured exports. China's good fortune was that at the crucial moment in the early 1980s entrepreneurs from neighbouring newly industrialized economies were willing to provide the crucial missing input (as well as appropriate equipment) because labour-intensive manufactures from their home territory had become uncompetitive.
China's policymakers were flexible in responding to the needs of these entrepreneurs. They were willing to modify policies towards foreign investors and foreign exchange, and by the mid-1980s to leave alone the small-scale investors who would drive the boom in labour-intensive manufactured exports.
Trade policies were also reactive rather than proactive. Imports remained subject to high tariff and non-tariff barriers as the planners sought to control both the total and the composition of imports. In economic theory a restrictive import policy should be harmful to exporters, but this was not the case in China for three reasons. First, exporters received import duty exemptions so that they could purchase imported inputs at world rather than domestic prices. Second, and probably most important during the mid and late 1980s, exporters gained access to restricted imports, which substantially increased the value of their foreign exchange earnings. Third, the incentive for production of traded goods was maintained by a controlled but substantial real exchange rate depreciation.
Thus the government took advantage of favourable circumstances to implement a successful export-led growth strategy. China's trade policies were conducive to export-led growth, although they took the form neither of free trade nor of successful export targetting. On the other hand, the discretionary approach to imports is not conducive to economic efficiency; it has impeded the transition to a market-based economy as well as China's accession to the World Trade Organization. China's experience and performance differ from that of the formerly centrally planned economies of Central and Eastern Europe both in initial conditions and in the primary goal. For China the goal was export-led growth, rather than trade liberalization as a key component in the transition to a market-based economy, and the goal has been achieved in the 1980s and 1990s.
Seminar Paper 96-04
Finding Common Ground: Mining, the Environment and Indigneous
Edited by Kym Anderson
Last year the Centre for International Economic Studies was asked if it would convene a group to provide a briefing to the board of Vattenfall Bransle, the nuclear power generator of half of Sweden's electricity, on the relationships between mining, the environment, and Australia's indigenous people. Three of the papers from that seminar have since been revised for this publication. They provide perspectives from the viewpoint of a resource and environmental economist, a lawyer specializing in energy issues, and an Aboriginal person engaged as a consultant by Aboriginal groups seeking assistance in their dealings with mining companies and government.
Ben Smith's paper summarizes the current property rights situation and its impact on incentives for potential miners and aboriginal people to reach agreement on mining. While those incentives have been improved somewhat with the passage of the Native Titles Act in 1993, they remain far from optimal. The paper argues for local Aboriginal groups (traditional occupiers of land under consideration) to have more say in, and reward from, land use decisions. Legislation attempting to prevent mining from having adverse effects on the natural environment also have resulted in gross inefficiencies. That applies especially with respect to National Parks, where mining and even exploration currently are prohibited. Among other suggestions, the paper argues for various classifications of areas within National Parks, with bans applying only in the areas considered of highest conservation value.
Adrian Bradbrook's paper covers similar issues from a legal viewpoint. It stresses the need for a clear and stable legal management regime if mining investments are to be encouraged, and points to three factors that have undermined that stability in Australia: uncertainty as to the relevant powers contained in the Constitution coupled with frequent disagreements between the Commonwealth and the States on policy directions and goals, clashes between developmental and environmental considerations, and the issue of native land title. On the latter the paper argues that the Mabo decision, which led initially to extreme scaremongering, may well offer an improved outcome for all concerned rather than a discouragement to mining development.
John Moriaty's paper lays to rest the myth that Aboriginal people are homogeneous and different from non-Aboriginal Australians. He also describes the relationship between an area of land and its traditional occupiers, pointing out that Aboriginal law provides no rights to Aborigines not related to that land area. Hence he sees the need to phase out the use of Aboriginal Land Councils in negotiations with mining companies, and instead allow mining companies to deal directly with traditional occupiers and their chosen representatives.
Seminar Paper 96-05
Asia-Pacific Food Markets and Trade in 2005:
A Global, Economy-Wide Perspective
Kym Anderson, Bettina Dimaranan, Tom Hertel and Will Martin
The past year has seen a dramatic rise in international grain prices and a drop in per capita world grain stocks to near record low levels. That, together with concerns about the erosion of agriculture's resource base, and in particular the projections by the Worldwatch Institute suggesting massive grain imports by China in the 21st century, has called into question the long-term prospects for the world food situation. By contrast, other recent studies suggest food will continue to be abundantly available for the foreseeable future so long as investments in agricultural research are maintained. Which of these sets of projections is more likely? What if the global slowdown of agricultural research investments during the past decade lowers farm productivity growth? What do these projections imply about food production, consumption, and self-sufficiency levels in rapidly industrializing East Asia and elsewhere? Who will supply the food-deficit countries? How will the latter pay for their food imports?
The present paper addresses these questions by first reviewing
existing food sector projections and then taking an economy-wide
perspective using projections to 2005, based on the global CGE model
known as GTAP. After showing the impact of implementing the Uruguay
Round, we explore the effects of slower global agricultural productivity
growth and of slower GDP growth in China. As well, several policy
shocks are examined. They include the entry of China (and hence
Taiwan) into the World Trade Organization, and the failure to fully abolish the bilateral quotas on textiles and clothing trade as promised under the Uruguay Round. A slowdown in farm productivity growth could be very costly to the world economy, as could slower economic growth in China. Failure to honour Uruguay round obligations to open textile and clothing markets in OECD countries is shown to reduce East
Asia's industrialization and thereby slow its net imports of food. On the other hand, the trade reform that is likely to accompany China's WTO membership would greatly benefit the economies of China and the world. It would boost exports of manufactures and strengthen food import demand by not only China but also its densely populated neighbours with whom its intra- and inter-industry trade in manufactures would intensify.
The concluding section draws out several trade and policy implications. The first relates to China's grain trade. In our base case projection, China's annual net imports of grains increase by 33 million metric tons between 1992 and 2005. However, when measured in value terms, this pales next the projected increases in imports of other crops, livestock products and processed foods: grains account for only one-eighth of China's total net food imports in our 2005 projection, assuming no policy changes in China. Of course, if China were to increase barriers to imports of livestock products, the latter would be lower but grain imports would have to be greater to feed China's larger number of animals.
A second point relates to the commonality of interest between farm and food producers in North America and elsewhere on the one hand, and manufacturers in East Asia on the other. We show that measures such and the Multifibre agreement (MFA), which restrict the OECD's imports of manufactures. indirectly penalize OECD exports of food and agricultural products. Trade in a two-way street, and obstacles to industrial exports from Asia will necessarily reduce agricultural and other exports to that region.
A third point is that slower economic growth in China has an adverse impact on all of China's main trading partners in the Asia-Pacific region -- including its natural competitors. This is because slower growth in China means higher prices for Chinese products and lower demand for China's imports. However, the trade impact of halving the GDP growth rate in China is smaller than the opposite impact of China's accession to the WTO.
Finally, all but one of these alternative scenarios have little impact on national grain self sufficiency levels in 2005. Certainly there are some changes to be expected between 1992 and 2005 as the Uruguay Round agreements are implemented and as East Asia's industrialization continues at a rapid pace. But grain self sufficiency ratios vary little with the shocks considered (with one exception), suggesting that world food markets are quite capable of handling even substantial shocks of the kind considered in this paper. The one scenario considered where grain self sufficiency does change significantly is the case of slower GDP growth in China. Consistent with earlier studies, the latter is shown to raise China's grain self sufficiency -- mainly because livestock product demand grows less rapidly, hence there is less need for imported feedgrains.
This paper reviews the reforms to the trade policies of Australia and New Zealand over the last thirty years, including the Closer Economic Relations Agreement between the two countries. Since undertaking unilateral reforms of trade policies in the 1980s, Australia and New Zealand have a style of trade policy which is quite distinctive. Among the common elements are a fast rate of unilateral reductions in barriers to trade with other nations, a sharp movement away from reliance on quantitative restrictions and other non-tariff instruments of trade restriction, membership in a regional trading arrangement which has achieved virtually complete freedom of bilateral trade and has deepened the integration of the two economies, and a strong commitment to multilateralism.
Nominal and effective rates of assistance are reported for the two countries. In the case of Australia these date from 1968/69 and include series of the variance of the nominal and effective rates in both the manufacturing and agricultural sectors. They also include the first estimates for Australia of the Trade Restrictiveness Index. The TRI estimates show that the available measures of average nominal assistance have understated the costs of protection in Australia. However, these costs have now been greatly reduced with the unilateral reforms of tariff and non-tariff barriers in the 1980s and 1990s.
In the case of New Zealand, the reforms have been even more rapid and widespread. Since the reforms began in earnest in 1984, New Zealand has eliminated all non-tariff restrictions, lowered tariffs drastically and eliminated most subsidies on agricultural as well as non-agricultural commodities. It has now one of the least restrictive and most transparent trade regimes in the world.
CER, the Closer Economic Relations agreement between Australia and New Zealand, replaces an earlier free-trade agreement. It has widened its coverage of commodities and extended the range of instruments which have been liberalised and harmonised to include many non-border policies, such as subsidies and standards and competition policy. CER is now second only to the EU in the extent of integration of partner economies, and it is the cleanest and simplest in terms of rules and institutions.
Some suggestions are put forward to explain the triumph of anti-protectionist forces over protectionist forces in the two countries -- both of which had heavily protected their manufacturers for over 50 years. In Australia this may be explained largely by the increased transparency of the system under the Industry Commission and its predecessors and the steady drip of analysis of the costs of differential assistance which has come from academics and the bureaucracy. In New Zealand, the trade policy reforms were part of a broader range of economic reforms brought on by a national financial crisis.
Seminar Paper 96-07
Is East Asia Less Open than North America and the EU?
Sumana Dhar and Arvind Panagariya
Two inter-related issues which have attracted much attention of policy makers and economists in recent years are (i) Is there intra-regional bias in trade flows of countries in Europe, North America and East Asia, and (ii) Are markets in East Asia and the European Union relatively closed to outsiders. We subject these issues to an econometric analysis using country-specific gravity equations. The paper obtains the following results. First, if there is intra-regional bias in trade, it is to be found more in North America and the founding members of the European Union (i.e. the EEC) than East Asia. Canada, the United States and all countries in the EEC show intra-regional bias in exports as well as imports. In East Asia, exports of 6 out of 9 countries have a statistically significant bias away from East Asia. Second, using 27 countries outside North America, EEC and East Asia as the control group, there is no support for the hypothesis that East Asian markets are closed to outside countries. Third, in the same vein, ceteris paribus, for countries outside the EEC, exports to the EEC are larger than to countries in the control group. Most surprisingly and contrary to the conventional wisdom, for all countries in the EEC, exports to North America are less than to countries outside the three regions! Finally, the paper makes a strong case that the gravity equation should be estimated at the country level rather than by pooling data across countries. The hypothesis of equality of coefficients across countries, implicit in the equation using cross-country data, is rejected unequivocally.
A common feature of most countries' trade restrictions is that they are based on laws that are infrequently altered whereas implementation of these laws through administrative practices is adjusted on a daily basis. Trade laws set tariff rates and impose limits on the discretionary power of administrators. Administrators can employ non-tariff trade barriers within these limits, as well as adjust the degree with which they enforce all laws and regulations pertaining to foreign trade.
The general objective of this paper is to shed light on the relationship between legislated and administered protection when governments write and implement trade laws with the goal of maximizing political support from consumers and industries. It is explicitly assumed that tariff laws can be adjusted only over the long run, while non-tariff measures and enforcement budgets can be varied in the short run as well. At issue is what protection responses the government will adopt when a domestic industry's competitiveness is threatened.
The paper assumes that the government maximizes political support. A political support function is specified, where account is taken of the political costs associated with expansion of the government's discretionary power. When a domestic industry's competitiveness declines temporarily, and the government's instruments are limited to non-tariff measures and the enforcement budget, it is shown that the government will use only one or the other of these measures but not both. As long as the legal restrictions on the use of non-tariff measures are not binding, responses to temporarily declining world prices are exclusively conducted through raising non-tariff trade barriers, with no changes in the enforcement budget. Only when non-tariff trade barriers can no longer be raised will the trade law enforcement budget be adjusted as an imperfect substitute for the primary instrument of non-tariff trade barriers. When a domestic industry's competitiveness declines more permanently, the government will revise its trade laws. The government will pass trade laws that are more protectionist, both in terms of higher tariff rates and in terms of allowing more discretionary power with respect to administrative actions. It is shown that uncertainty about future world prices, combined with the inability to change legislation from day to day, is the reason that governments employ both tariffs and administrative measures of protection.
In the presence of debt limits and resistance to spending cuts or tax increases, a trade liberalizing government faces an active tradeoff along its budget constraint. In contrast, trade policy analysis has proceeded on the simplifying assumption that tariff revenue is passively redistributed in a lump sum. This paper takes up the case of an active government budget constraint in which tradeoffs among distortionary instruments are analyzed. The elements of the analysis differ fundamentally from those of a passive budget constraint, in ways not previously appreciated in the trade literature or in the related public finance literature.
The analysis offers simple and useful sufficient conditions under which trade reform matched by revenue neutral spending cuts or tax increases will raise welfare. The key concept is the Marginal Cost of Funds (MCF) of a given class of taxes, which is compared to the marginal benefit of the funds in terms of goods and services so financed, or in terms of the MCF of other taxes which may be reduced. The MCF is a very useful summary index number of the properties of tariff and tax systems and is operational with estimates based on simulations of Computable General Equilibrium (CGE) models. An example of the Korean economy in 1963 is provided.
The formal propositions are: (i) trade liberalization is welfare decreasing if paid for with cuts in already undersupplied public goods, (ii) it is efficient to lower discrimination between foreign and domestic supply of identical products provided a substitutability condition is met (a gradual reform version of the Diamond and Mirlees (1971) optimal commodity tax theorem), and (iii) with differentiation between home and foreign goods, it will always pay to tax trade at least a bit ( the ëwider baseí or Ramsey principle).
Seminar Paper 96-10
Emulative Development through Trade Expansions: East Asian Evidence
Pham Hoang Van and Henry Y. Wan, Jr.
The sustained, rapid growth of the East Asian economies is based upon foreign technology and not the fruits of domestic research efforts. Typically, individuals in these economies start to work either as employees or as sub-contractors for foreign firms to supply products demanded in foreign markets but not affordable by their local buyers. Under the tutelage of foreign businesses, they acquire much information about the developed world: what do other people need, how do other people work, and how to make their own products accepted. They acquire the ability to produce at high efficiency, low cost and reliable time schedule. This allows them to gradually produce better goods at better prices, and sometimes under their own brand name. Indispensable to this type of development are foreign technology, foreign markets as well as foreign businesses both as role models and as partners in the market. Thus, the free market is especially beneficial to the developing economies in such development, as history has demonstrated in economy after economy and industry after industry. Close association and cooperation with the private businesses in the developed world is the key element for such success stories of development.
Where such a scenario breaks down, typically it is due to the inappropriate policy or institutions of the developing economy. Either restrictions on imported inputs make it impossible to produce goods of exportable quality, or trade policy is such to encourage domestic businesses to sell to the enfeebling home market under protection and away from the invigorating worldwide competition, or else, the local individuals are denied the opportunity to earn money with what they can learn from foreigners so that the reduced earning potential cools their learning zeal.
It is interesting to observe that typically the pace of learning by the developing economies is not so rapid to threaten the foreign investors so as to inhibit the investment flow.
The individuals in the developing economies remain somewhat less knowledgeable than their counterparts in the developed economies, as long as the former do not overtake the latter in research efforts. Such `non-threatening' situation assures that those in the developed lands would continue to invest and trade, thus, offering more opportunities to be observed. But by the very fact that everyone faces similar situations and those less knowledgeable know by repeated (past) observation what the more knowledgeable would do in various occasions, they can function very effectively well `by emulation'. The gap in knowledge is likely to close over and only over the very long term.
Overall, export opportunities, technology diffusion and the vigorous investment flow induced by such earning prospects are what make Japan, Korea, Taiwan, Hong Kong and Singapore such showcases for development. The recent successes of Malaysia, Thailand and Indonesia demonstrate that such a path of opportunity is far from closed and the cases of Chile and Mauritius prove that the economics driving such type of development is not limited by spatial or historical confines.
During the debates over both the NAFTA and the Uruguay Round, concern was voiced over the impact of trade liberalization on the environment. In particular, some environmentalists and policymakers in industrial countries feared that freer trade would cause comparative advantage in "dirty" industries to shift from industrial countries to developing countries--a loss of "competitiveness" on the part of the industrial countries. In addition some argued that these dirty industries would actually relocate to developing countries. These concerns and others eventually led to the environmental side-agreement to the NAFTA and a new WTO committee on trade and environment.
The fears mentioned above are based on the premise that industrial countries have, on the whole, relatively stringent environmental regulations compared to developing countries. This is assumed to imply significant increases in costs of production of goods which are pollution-intensive, i.e. goods whose production processes have a relatively large negative effect on environmental quality. If this is true, then lenient environmental regulations should imply a cost advantage on the part of developing countries. However, there has been very little empirical testing of this hypothesis. Two of the existing studies have found that pollution abatement costs have no significant effect on trade flows. A third study found evidence that poor countries which grew rapidly, experienced cleaner growth if they were more open to trade. Thus trade appeared to shift production toward cleaner, not dirtier, production.
The purpose of this paper is to develop a method of testing the impact of trade liberalization on the environment which recognizes that the links between the two are both static and dynamic. Freer trade raises income levels, and may also increase income growth. Some studies argue that as income rises, environmental damage eventually slows. i.e., that there is an inverted U relationship between income growth and environmental quality. Thus, trade may have a beneficial effect on environmental quality via its effect on income growth.
This paper begins with a review of the methods and results of existing econometric studies of the links between freer trade and the environment. Following this, a more general framework is laid out, which explains how trade liberalization may affect environmental quality through present comparative advantage, and how it may alter comparative advantage via its effect on growth. Emphasis is put on the fact that growth effects environmental quality and vice versa. A two-equation framework is proposed to capture these simultaneous relationships, and to pick up the effect of trade liberalization on both of them. With such an approach, one may test whether the short run effects of freer trade actually differ from the longer run effects.
Discussions of the world food situation receive significant attention from the world's press only if there is a claim of forthcoming disaster. This point is well illustrated by the amount of attention given to a wild statement that China may starve the world because it is likely to annually import from 200 million to 300 million tons of grain within the next few decades. Three competent professional and independent studies of the world food situation came to the very different conclusion that world food supply would grow at least as rapidly as world food demand yet these studies received almost no attention in the popular press anywhere in the world.
Thomas R. Malthus has been a victim of the belief that bad news sells and good news doesn't. In the first edition (1798) of his An Essay on the Principles of Population he presented a very gloomy picture of the future prospects of mankind. He emphasized that population growth would continuously press against the available food supply and population could be held in check only by vice and misery. But in the second edition, published five years later, he significantly revised his views. He did so in two ways. First, he concluded that "...fewer famines and fewer diseases arising from want have prevailed in the last century than in those that preceded it." Second, the future prospects "...are far from being entirely disheartening and by no means preclude the gradual and progressive improvement in human society..." Nearly all the references are to the gloomy Malthus of the first edition; the relatively optimistic second and subsequent editions are seldom if ever noted.
The last two centuries have seen greater improvement in the wellbeing of the world's people than in all prior history. There are many appropriate measures of wellbeing - life expectancy, infant mortality, incidence of famines and plagues, per capita food consumption, measures of height and weight and real per capita incomes. Each shows great improvement in the last two centuries, mostly in the current century in the developed countries and the last half century in the developing world. Throughout history prior to 1600 life expectancy at birth was about 25 years; it is now about 75 years in the developed countries and more than 60 years in the developing countries. The decline in infant mortality has been remarkable - from more than 20 percent of infants dying before age one in Sweden at the beginning of the Nineteenth Century to an average of just 6 percent in all low income countries today. Population is an unimportant factor in determining wellbeing. The period during which there have been enormous improvements in wellbeing has been a period of the most rapid growth in population in the history of the world. Prior to the middle of the 18th Century, the annual rate of population growth did not exceed 0.5 percent. But from 1950 to 1980 when developing countries achieved a high rate of growth of real per capita incomes, the annual population growth rate was 2 percent - more than four times the rate from 1850 to 1920 when there was little improvement in real incomes or in other measures of wellbeing.
The last three decades have witnessed major increases in food availability in the developing countries. Per capita food increased by 30 percent after decades of near stagnation. During these three decades the real prices of grain fell drastically indicating that consumption was constrained by demand and not by supply.
The growth of demand for food in the world will be significantly slower during the next three decades than during the past three. The decline in demand growth will be due primarily to a decline in the projected rate of population growth of more than 30 percent. Consequently the needed increase in world food supply over the coming three decades will be much less than what was actually achieved over the past three decades. It is likely that world grain and food prices will decline over the next few decades, a continuation of past trends.
It is possible that China will become a significant grain importer in the next century - perhaps 40 to 50 million tons annually. But this is unlikely to have a significant impact on world grain prices. The changes that have occurred in the former USSR have already resulted in a large decline of grain imports from 40 million tons annually in the late 1980s; if the area has a good grain crop this year there may be few or no net grain imports. The inefficiencies and wastes in the socialist system were so great that substantial increases in available supplies can be achieved even without an increase in grain production in the field. In addition, livestock products were heavily subsidized and with the removal of the subsidies combined with the decline in real incomes, meat production has already declined by more than 40 percent. This has greatly reduced the amount of grain used for feed. Even as real per capita incomes increase in the future per capita meat consumption is likely to remain at least a third below what it was in the past. Thus the territory of the former USSR may become a major grain exporter as the transition to a market economy is completed.
The concluding point is that there is little prospect that the long term decline in real world prices for grain and food will be reversed over the next quarter century. While this is clearly good news for urban consumers, it will put great pressure on farm people to continuously adjust to the declining prices.
Seminar Paper 96-13
Economic Growth and Policy Reform in the Asia-Pacific: Trade and
Welfare Implications by 2005
Kym Anderson, Betina Dimaranan, Tom Hertel and Will Martin
Numerous unilateral, regional, and multilateral economic reforms in the Asia-Pacific and elsewhere are under way at present or are scheduled over the next decade or so. This paper examines the likely impacts of key trade reforms affecting the APEC region, and does so by taking an economy-wide perspective using projections to 2005, based on the global CGE model known as GTAP.
The paper begins by showing that the empirical impact of implementing the Uruguay Round depends significantly on how China and Taiwan are treated. If the latter are allowed to enjoy the accelerated access to OECD markets promised WTO members under the Agreement on Textiles and Clothing to phase out the Multifibre Arrangement, the global economic welfare benefits from the Uruguay Round are 40 per cent greater than if China and Taiwan get no additional access. The paper then explores the market implications of a one-fifth slowdown in total factor productivity growth in China's non-farm sectors. If that were to be the consequence of excluding China from the WTO and from greater export opportunities arising from MFA reform, the modelling results suggest this would be not only a huge loss to China but also a considerable loss to its East Asian neighbours with which it trades intensely.
As well, several policy shocks are examined. They include the failure to fully abolish the bilateral quotas on textiles and clothing trade as promised under the Uruguay Round, and further MFN trade liberalization by APEC countries. Failure to honour Uruguay Round obligations to open textile and clothing markets in OECD countries is shown also to reduce East Asia's industrialization and thereby slow its net imports of primary and other products. On the other hand, the trade reform that is likely to accompany China's WTO membership would greatly benefit the economies of China and the world. It would boost exports of manufactures and strengthen primary import demand by not only China but also its densely populated neighbours with whom its intra- and inter-industry trade in manufactures would intensify.
Further MFN trade liberalization by APEC members, as promised in the declaration following the APEC Leaders' Summit in Bogor in November 1994 and confirmed in Osaka a year later, would add even more to the growth and structural changes expected in the region and beyond over the next decade. In our analysis of that scenario, we assume that China has joined the WTO and the Uruguay Round has been implemented by 2005, and examine the effect of all APEC economies liberalizing trade beyond their Uruguay Round commitments to the extent of a further 50% tariff cut. A key finding is that the results depend very heavily on whether agriculture is included in the reform (as demanded by the APEC food-exporting countries but contrary to what APEC's Northeast Asian members want). Specifically, the welfare gains from this regional liberalization when all goods markets are liberalized are two-thirds greater than when agriculture is excluded. (Services trade liberalization is ignored for want of reliable estimates of services protection rates.) If agriculture is included, this further reform by APEC economies would add one-third to the global welfare gains from the reforms under the Uruguay Round. It would also boost world trade in all products by an additional 6% (over and above the 10% boost due to the Uruguay Round plus the additional 4% boost due to China and Taiwan's WTO accession). Agricultural trade would be only 2% greater by 2005 if farm products are excluded from the APEC reform, but would be 18% greater if included. What this clearly indicates is that distortions to agricultural trade in the APEC region remain very large, and that a further reform in the region that excludes farm products will be missing a large part of the gains that remain to be reaped from trade liberalization.
Seminar Paper 96-14
Soil Degradation and Agricultural Change in China and Indonesia
Peter H. Lindert
What is well known about trends in soil degradation is not well based. What pass for trend estimates lack any data before the present. Raising the standard of evidence requires a more careful empirical design. Fortunately, new data on soil conditions in China and Indonesia since the 1930s allow us to test broad assertions about soil degradation. Soil organic matter and nitrogen appear to have declined on cultivated lands in both countries. Total phosphorus and potassium have generally risen. Alkalinity and acidity have fluctuated, with no overall worsening. The topsoil layer has not gotten thinner. Some of these mixed trends have more effect on yields than others. China's patterns show that the decline in soil organic matter and nitrogen makes little difference, presumably because fertilizers can substitute for the soil endowment. More relevant are pH and total potassium, for which the trends are better. While the growth of poor rural populations degrades the soil, economic development may improve the soil in three ways explored here: (1) Taking all soil-farming feedbacks into account, the shift in food demand away from staples toward legumes and animal products is likely to replenish soil nutrients. (2) Development means cheaper capital and clearer property rights, which improve conservation. (3) Urbanization and industrialization raise the productivity of soils at the urban fringe. Data from China suggest that this effect is strong enough to cancel the loss of farm soil endowment from urban encroachment.
Regionalism has returned as a phenomenon in global trade. Since the late 1980s a "new regionalism" has run rampant, with dozens of new regional integration initiatives coming on the scene. As a result, well over a hundred regional arrangements, involving most nations, now exist.
Trade theorists have investigated two questions concerning regionalism. The first is: Will the formation of regional trading blocs raise or lower welfare? Answers are mixed. The second is: Will regionalism help or hamper multilateral efforts for trade liberalization? Answers to this question are more negative, but still basically mixed.
Two features have been prominent in these investigations: the treatment of regional integration as exogenous, and a Vinerian perspective on regional integration as a combination of trade creation and trade diversion. The Vinerian perspective was developed in response to the emergence of the "old regionalism" after World War II. But the international environment greeting the "new regionalism" differs from that experienced by the old regionalism of the 1950s and 1960s in two critical ways. One is that the multilateral liberalization of trade in manufactured goods among the industrial countries is much more complete now than it was then; the other is that scores of developing and formerly planned economies have abandoned the basically autarkic, anti-market policies they followed during the days of the old regionalism and are now actively trying to join the multilateral trading system. As a result, there may well be a qualitative distinction between the old regionalism and the new. For example, the Vinerian paradigm of trade creation versus trade diversion drove analysis of the former, but it is by no means clear that it should drive analysis of the latter.
This paper treats regionalism as endogenous, and models several ways in which it might emerge in a world characterized by past multilateral success and by extensive current reform attempts. Three common messages emerge from the various models. First, regionalism is an endogenous response to and hence a direct result of the successful development of the multilateral trading system, so treating it as exogenous is misleading. Second, the primary purpose of regionalism is not to foster regional integration and trade diversion. Rather it is a means by which new countries enter the multilateral system and a means by which small countries already in it continue to exploit its success. And third, regionalism is creating new industrial groups with an interest in preserving the liberal trade order.
Of course, any change-and regional initiatives are no exception-can offer protectionists new scope for their efforts. An argument that regional initiatives reflect causes much more benign than a tendency to divide the globe into several highly protected blocs does not establish that the latter will not in fact be the ultimate result. But this paper suggests that the new regionalism reflects the success of multilateralism-not its failure.
Seminar Paper 96-16
The Multilateral Trade Agenda: Uruguay Round Implementation and
Joseph Francois and Bradley McDonald
With the creation of the WTO, its Members agreed to hold bi-annual Ministerial Conferences, the first of which is scheduled for Singapore in December 1996. The Singapore Ministerial provides Members the opportunity to assess the progress of Uruguay Round implementation and the WTO institutions and to define the coming multilateral agenda.
Ministers meeting in Singapore must both address the agenda of the Ministerial Conference itself, which is broad and far-reaching, and set the multilateral work programme for the coming years. The Conference agenda includes not only what we call "traditional" matters, but also several new issues, which will be raised either formally or informally. These include trade and the environment, trade and employment, and trade and competition. One challenge facing Members is how to strike a balance between new issues and traditional issues, like further agricultural and services liberalization, industrial tariff reductions and the monitoring of Uruguay Round commitments.
In this paper we provide a quantitative reminder of the important work that remains in "traditional" GATT/WTO areas, as a counterpoint to the body of recent literature on newer issues. Hence, we emphasise issues like further industrial tariff liberalization, related aspects of agricultural trade liberalization, recent proposals for free trade in information technologies, and an expanded Agreement on Government Procurement (AGP), along with the expected benefits of fully implementing the Uruguay Round Agreements. We assess the relative magnitudes of various liberalization proposals using a computable model of the global economy, and conclude by discussing the benefits of liberalization initiatives in these traditional market access areas. We argue that given the limited supply of trade negotiating capital, there will be by necessity a tradeoff between those scarce negotiating resources devoted to new issues, and those devoted to further progress toward liberalization in more traditional GATT/WTO areas. While many of the new areas are important, the potential benefits of further progress in traditional market access areas are also substantial.
Our results indicate that the recent initiative to eliminate all remaining tariffs on information technology products would not only be an important gesture by Ministers at Singapore, but in fact would be a major trade liberalization act in its own right. (A gain of roughly $72 billion in annual world income, measured in 1992 dollars). However, the further liberalization of industrial product tariffs should not, in the longer term, be limited to an initiative on information technology products. Even after the Uruguay Round, substantial tariff-induced trade distortions still cover much of the world's trade in industrial products, and our analysis indicates that further reductions in remaining industrial product protection would result in substantial economic welfare gains. For example, a 50 percent reduction in remaining industrial tariffs would yield approximately $720 billion in global income (welfare) gains per year. The extent to which these gains are realized by developing countries hinges directly on whether they participate actively in such a liberalization initiative.
We also argue that a formula approach should at least be considered for future industrial tariff liberalization. In addition to easing the negotiating process, across the board tariff cuts, if done through some formula-based variation on a percentage cut, could also be designed to address dual developing country concerns about tariff escalation and peak protection in OECD markets. Post-Uruguay Round protection across the OECD and developing country regions exhibits a pattern of uneven protection. These peaks (for example textiles and clothing in both the United States and South Asia) often correspond to sectors of particular export interest to the least developed countries. Formula cuts can be used to bring peak rates closer to the average, and to reduce tariff escalation (measured as the difference between tariffs on finished products and those on primary and semi-processed products).
Finally, we also argue that the relative merits of broad and sectoral negotiations need to be examined. Recent experience with the GATT and WTO suggests that sectoral negotiations, at least in a WTO context, progress better when packaged with other negotiations. Since several sets of market access negotiations are coming up anyway (industrial goods, services and agriculture), a combined initiative to promote liberalization in these areas may offer a better opportunity for progress than if sectoral negotiations were all handled concurrently but separately.
Seminar Paper 96-17
Trade and Trade Policy in Endogenous Growth Models: A Review and
suggestions for Research
M. Scott Taylor
The first goal of this paper is to synthesize the major theoretical results from the new growth theory linking international trade and trade policy to permanent and lasting effects on growth rates. The paper first defines and reviews the scale, redundancy, spillover and allocation effects that international trade may have on growth rates. It then illustrates the importance of these effects by selecting examples from the literature on trade policy and growth. The second goal of the paper is to study how the consequences of on-going endogenous growth may affect the incentives nations have to restrict international trade. By reviewing a recent paper in this area, the paper shows that, as growth changes the production structure in countries, it alters the incentive governments have to use trade policy at any point in time and restricts the set of self-enforcing trade liberalizations that are supportable over time.
This review concludes that while the current work has extended our understanding of the links between trade policy and growth, there is still much left to be done. The most consistent finding is that our assumptions regarding knowledge spillovers are often critically important to our answers to questions such as: how does trade affect growth? or how does trade policy affect growth? At one level this conclusion should be obvious, since intertemporal spillovers are the driving force behind continual innovation and growth in these models. But at another level it is somewhat disturbing that so much appears to hang on so little. In the discussion of integration effects, the impact of goods trade on growth is shown to depend on whether knowledge flows are integrated or not. In the allocation section, it is shown how the impact of trade policy can rely quite sensitively on whether knowledge diffuses slowly over time or instantaneously. In the spillovers section, the extent of knowledge spillovers is again shown to be critical, because it could lead to hysteresis. Finally, the extent of spillovers is also shown to have a large impact on both the one-period incentive to restrict trade and the viability of self-enforcing trade liberalizations.
When small assumption changes yield large changes in a model's predictions, the theoretically inclined researchers typically suggest changes that make endogenous those formally rigid aspects of the model. Here that would mean moving away from assumptions where knowledge is either local or global to models where knowledge flows are endogenously determined within the system. The problem remains, however, as to how this should be done. Should we model the process as being under the direct control of economic agents or not? For the answer to this question we will need to look to empirical work to give us direction. Recent work by Coe and Helpman along these lines is a good start but, until we have a good understanding of how knowledge flows across national boundaries, the implications of endogenous growth theory for trade policy will remain unclear.
Measures of innovative activity show it to be concentrated in a small number of countries. Yet the benefits of innovation are experienced broadly. International trade is one conduit through which the benefits of innovation in one country can flow abroad. In this paper we develop a model of technology and trade to explore the role of trade in spreading the benefits of innovations. We use the theory to derive an empirical model of bilateral trade that, on the surface, looks like the gravity specifications derived from models of monopolistic competition. Not surprisingly, these specifications are quite successful at capturing the volume and pattern of trade in manufactured goods among OECD countries. Stocks of knowledge influence patterns of trade in the way predicted by the theory.
Seminar Paper 96-19
Regionalism and Multilateral Tariff Cooperation
Kyle Bagwell and Robert W. Staiger
We consider a three-country world in which each country's import market is served by competing exporters from its two trading partners. We assume that weak multilateral enforcement mechanisms prevent governments from implementing efficient trade policies through a multilateral agreement that requires tariffs to conform to the most-favored-nation (MFN) principle. We then ask whether exceptions from MFN for the purpose of forming preferential agreements can lead to lower external tariffs, and thereby to a more efficient tariff structure under the multilateral agreement. We identify three opposing effects of preferential agreements on the multilateral tariff structure in this setting: the tariff complementarity effect, the punishment effect and the discrimination effect. The former effect suggests that regional agreements lead to lower external tariffs, but the latter two effects carry the opposite implication. The relative strength of these three effects determine the impact of a preferential agreement on the tariff structure under the multilateral tariff agreement. Our findings suggest that preferential agreements can have their most desirable effects on the multilateral system when the degree of multilateral cooperation is low.
The dramatic growth of Chinese manufactured exports since 1985 has come predominantly from the southern coastal regions, and foreign-invested enterprises have played a prominent role in that growth. Less well known is the fact that export-oriented enterprises operate in a trade policy regime very different from the regime faced by most Chinese firms. Export-oriented firms operate in an extremely open policy setting that can be characterized as an export promotion regime, while the rest of the economy operates under what is still best characterized as an import substitution regime with very substantial barriers to trade.
China's bifurcated trade regime is described in the first part of the paper, using available data on the relative size and performance of the two different trade sectors. There it is argued that trade regime is at least as important as ownership or region in analyzing China's export success. The second part of the paper examines China's current and future trade liberalization prospects in light of the descriptive framework advanced in the first part. Concentrating on the demands of the WTO, three challenges are discussed: national treatment, exchange rate management, and unification and liberalization of the tariff system.
The dual trade regime framework helps explain the differential performance of different ownership systems, and the enthusiasm which Chinese firms show for joint ventures and "round-trip" investments through Hong Kong. It is a superior analytic framework to one based on "entrepreneurial firms" which implies that microeconomic characteristics related to ownership are sufficient to explain differential success without reference to the differential access to trading opportunities which vary systematically by ownership. It is also superior to interpretations that see China as an emerging neo-mercantilist power. The latter see the combination of import restrictions and export promotion as indicating a regime in which the government systematically builds trade surpluses and protects strategic domestic industries. This viewpoint gives insufficient importance to the fact that the Chinese system -- unlike those of Japan or Korea in their rapid growth periods -- relies on foreign-invested enterprises to play a crucial role not only in producing exports, but also in importing and exporting commodities and, increasingly, in producing for the Chinese market. The government in some respects has less control over physical trade flows than was the case in these earlier-developing East Asian economies. It makes more sense to see the coexistence of export promotion and import protection in the Chinese case as a transitional stage, designed to open an economy that was initially highly distorted, than as the opening stage of a emerging neo-mercantilist state.
China's movement toward an integrated, more liberal trading regime, must obviously proceed from within the context of the existing dual trade regime. Outside observers of China need to monitor progress in a number of different ways. At the current stage of reform in China, reductions in nominal tariffs are less useful as a benchmark than reductions in non-tariff barriers, and especially the dismantling of monopolies on imports.
China's development of a more integrated trading regime may not initially be accompanied by an across-the-board increase in the openness of the economy, particularly if much stress is put on scaling back the privileges that foreign-invested enterprises enjoy under the export promotion regime. In addition to the usual interest groups that seek the maintenance of protection, there are groups expressing resentment at the special privileges enjoyed by foreign investors and coastal regions. Demands for a "level playing field" will make the impetus for an integrated trade regime stronger, but also make it harder to predict the degree of openness that will result. The most desirable outcome from an economic standpoint would come from a political alliance between groups favouring a level playing field and groups confident that they can exploit opportunities in the world market.
Seminar Paper 96-21
Do Two Wrongs Make a right? Export Incentives and Bias in Trade
Richard G. Harris and Nicolas Schmitt
A well known implication of the small open economy competitive production model is that it is possible to achieve a free-trade equivalent outcome by offsetting the distortions induced by import substitution with the correct set of export incentives. This is one of those relatively rare examples in economics where "two wrongs make a right". These policies while individually sub-optimal are jointly optimal. This paper provides two important exceptions to this argument by departing in each case from the classical assumptions of the small open economy model. This analysis may be particularly relevant for East Asian and other small open economies in which both export promotion and import substitution are a prominent feature of the trade policy regime.
The first exception is based on the observation that protection in small open economies produces increased concentration, including possible monopolisation, of the domestic market. The general equilibrium impact of a monopoly market structure under tariff protection is shown, in quite general circumstances, to result in market closure. The domestic producer chooses to supply all of the domestic market. There are two important general equilibrium implications of this. First, import substitution produces export promotion. The demand side of the market dominates and increased rates of tariff protection can result in a reduction of resources allocated to the protected sector. In a model with a two-sector supply side this results in an increase in the size of the export sector. Second, export incentives will not succeed in reversing the effects of this policy. The basic reason is that relative producer costs do not determine resource allocation in this type of model. Export incentives change factor prices and monopoly sector profitability but do not affect relative demand prices; it is the latter which determines the allocation of resources in the economy with market closure. In general, ignoring the demand side when domestic markets become closed due to protectionist policies can lead to erroneous assessments of the net impact of export incentives.
The second qualification stems from the discretionary and contingent nature of the administration of many export incentive schemes. Export 'policy' is modelled as a regime in which incentives provided for investment by foreign multinationals in export capacity are set endogenously by export authorities with less than full general equilibrium knowledge. They are however motivated by domestic welfare considerations and provide export incentives according to an approximate cost-benefit test. The net outcome of this type of administered export incentive regime is quite interesting. In one particular case it results in a strong optimality result--a national trade policy optimum is achieved. However, in other plausible scenarios, the use of inappropriate cost-benefit indicators with weights which depend on the degree of protection in the economy, produces export incentive policies which tend to over-compensate for tariff protection and to induce an excessive allocation of resources to exports. Both sets of results suggest caution in assessing the bias of trade regimes in which both protection and export promotion are quantitatively important.
The purpose of this paper is twofold. First, we show that pollution abatement subsidies, defined as subsidies on the inputs to pollution abatement, are inefficient instruments for pollution control. Whereas these types of subsidies are used in practice, the existing literature analyses only subsidies to reductions in pollution from a base level. Second, we show how pollution abatement subsidies arise endogenously in a model with environmental and industry lobby groups, although an efficient pollution tax is feasible for the government. We predict the political equilibrium abatement subsidy and pollution tax levels, and argue that pollution abatement subsidies serve primarily as methods of redistribution.
The paper employs a menu auction model developed by Bernheim and Whinston (1986) and Grossman and Helpman (1994). Industry and environmental lobby groups offer the government prospective campaign contributions corresponding to different tax-subsidy policies in order to influence the policy outcome.
The intuition for how a positive equilibrium subsidy may arise despite being inefficient is the following. Imagine that we begin with the social optimum; a Pigouvian tax and a zero subsidy. If total pollution is decreasing in the subsidy rate, the subsidy benefits the environmentalists. The industrialists always gain from receiving the subsidy. The remaining groups in society pay a share of the subsidy, but derive no utility from it. Total welfare declines when we move away from the social optimum, but aggregate payoffs of the lobby groups and the government rise. Thus, the political equilibrium involves a positive subsidy. If, on the other hand, pollution is increasing in the subsidy the environmentalists are still better off if this is combined with a higher pollution tax, and cleaner production, than otherwise would emerge. However, the more distorting is the subsidy, the lower is the amount transferred in the political equilibrium.
Seminar Paper 97-02
The Political Economy of Trade Liberalisation and Environmental
Per G. Fredriksson
The global trading system is currently undergoing another round of trade liberalization (the Uruguay Round), and regional economic integration is occurring in several parts of the world (e.g., EU, NAFTA). A surge in the interest in the environment has made the trade-environment link a part of trade talks. Following trade reform, it has become commonplace that industry representatives argue that less stringent environmental regulations in LDCs give these countries a comparative advantage in pollution intensive commodities, and that industries with high abatement costs will migrate to LDCs. This prediction is a political pressure on industrialized countries' environmental regulations in order to restore "competitiveness". Environmentalists argue that international differences in environmental laws and regulations may be reduced to their lowest common denominator through industry political pressure. This is thus not a fear of trade liberalization itself but of the effects of lower trade barriers on the political determination of environmental regulation.
This paper focuses on the political economy effects of trade regime on environmental tax policy. First, we show that the politically determined tax may be inefficiently high or low depending on the relative political pressures in equilibrium. A positive tariff tends to increase the tax rate, since this increases tariff revenues. Second, we show the effects of trade liberalization on lobbying incentives. Both lobby groups are found to reduce their lobbying. This is because the marginal returns to a change in the tax fall. Thus, the lobby groups' political polarization on the environmental tax policy issue is reduced through tariff liberalization. Next, if the pollution tax falls sufficiently, pollution increases through the political channel. Forth, we study the effect of tariff liberalization on pollution tax revenues. Several OECD countries are considering implementing or increasing pollution taxes in order to raise revenues. Tax revenues may fall due to political economy effects on the pollution tax rate. This implies that the environmental policy reforms proposed may lead to lower revenues than expected if the support from environmental lobby groups decreases faster than the opposition from industry interests. Furthermore, we find that pollution may increase simultaneously as tax revenues decrease. Finally, we discuss the case when the polluting good is exported, and is subject to an export tax. A reduction in the export tax increases the political polarization between the lobby groups, and depending on the relative increase in lobby group pressures, the pollution tax rate, pollution and pollution tax revenues may increase or decrease.
An implication is that tariffs do not only distort domestic consumption and production, but also stimulate lobbying activities in other areas such as environmental regulation. Our findings also have a policy implication. Multilateral trade agreements that incorporate restrictions on changes in environmental policy would make it harder for domestic policy makers to mitigate the effects of trade liberalization. Environmental regulation would then not become a trade policy tool.
Empirical evidence suggests that economies well endowed with natural resources relative to other factors of production have grown slower than other economies over the long term. This paper explores why that might be so and whether their fortunes might be changing with the increasing demand for environmental regulations. Proposed explanations for their relatively poor growth record, such as declining terms of trade and rising restrictions to primary product markets abroad, on closer inspection are unconvincing. The most likely reason is their own distortionary policy regimes, whose recent reforms in some resource-rich economies are already yielding growth dividends. Why it should be that their policy regimes had been more distortionary than those of other economies, and why they are currently being reformed in some but not other resource-rich economies, are moot points which have been addressed only in a cursory way to date.
The paper also examines the impact of the greening of world preferences and politics on the prospects for resource-abundant economics. While this development has the potential to boost resource-rich economies more than others, there is a considerable risk that the environmental policies adopted (including at the global level) will be far from first-best, so thwarting this potential opportunity. Looking for free-lunch policy outcomes should be a priority: removing rather than adding a policy could improve the economy and the environment simultaneously. The example at the multilateral level of removing coal import barriers as a means of lowering carbon emissions is but one reform that would help energy exporters directly as well as the rest of the world.
More typically, though, there is an economic cost to improving
the environment. In those cases, care is needed to avoid excessive
regulation, taking into account indirect as well as direct effects.
The example of quarantine restrictions may well be a case where
Australia's interests are being harmed by its own heavy regulation
- a point economists have largely ignored. Lowering some of its
excessive quarantine import restrictions may well be justified economically
on the grounds that consumers and exporters would gain more than
import-competing producers might lose - even in cases where an industry
is eliminated by import competition in the wake of higher disease-prevention
costs. Such reform would help Australian exporters indirectly in
three ways: via the standard general equilibrium effects of reduced
protectionism at home, via the exporting of economically enhanced
risk assessment procedures that ultimately could lead to less-excessive
quarantine restrictions to our export markets abroad, and via the
strengthened position of Australia's trade negotiators who could
argue in bilateral talks against excessive barriers to our potential
export markets without appearing hypocritical.
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Seminar Paper 97-04
Environmental and Labor Standards: What Role for the World Trade
While social policies, particularly environmental and labor standards, are not new to trade policy fora, they are likely to have a more prominent role in the years ahead for the new World Trade Organization. Many developing countries perceive the entwining of these social issues with trade policy as a threat to both their sovereignty and their economies, while significant groups in advanced economies consider it unfair, ecologically unsound, even immoral to trade with countries adopting much lower social standards than theirs. This paper examines why these issues are becoming more prominent, why they are being entwined with trade policy, why this is a concern to liberal traders, and what roles if any the World Trade Organization (as compared with other multilateral fora) should play in providing the international rules and other institutional support needed for ensuring adequate environmental and labor standards.
The perceived need for international rules and institutions to address environmental and labor concerns arises from two sources. One is the long-standing problem that, since cross-country differences in standards affect the international competitiveness of firms, they give rise to claims of `unfair' trade. Such claims can undermine support for the GATT/WTO rules-based global trading system unless those rules are widely perceived to be well designed for today's circumstances. The other source of concern has to do with international spillovers. Examples of international physical spillovers abound with respect to the environment (eg, ozone, greenhouse). In addition, many would claim that other considerations also are worthy of attention, and with respect to not only the environment (eg, animal welfare) but also labor standards (eg, workers' rights). When people want to influence the actions and policies of other countries for the sake of the environment or to improve workers' conditions, a considerable degree of complexity is added to international relations, not least because that motive can be used to disguise a traditional commercial motive for trade intervention.
The paper assesses the above concerns and their implications for
the WTO and other multilateral institutions. It examines the need
for altering WTO rules or at least promoting the appropriateness
of existing rules to ensure that the global trading system is perceived
as `fair'. It argues that the role for the WTO is very limited,
especially with respect to labor standards, but again that there
is a need to make it much more widely known as to why. The International
Labour Organization is a more appropriate body to address labor
market concerns, notwithstanding its difficulties with enforcement.
Likewise, even in the absense of a World Environment Organization
there is ample scope for solutions to international environmental
problems via single-issue multilateral environment agreements. To
encourage membership and compliance, such agreements have sometimes
included trade provisions (eg, the Montreal Protocol on CFCs and
the CITES agreement on endangered species). An important role for
the WTO is to establish firm guidelines for the inclusion of such
provisions and to be involved in the negotiating of such agreements
to ensure they do not reduce welfare through undermining the global
trading system, including via the settlement of disputes.
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Seminar Paper 97-05
Recovery from the 1890s Depression: Australia in the Argentine
Ian W. McLean
The 1890s depression in Australia was both deeper and more prolonged than those in Argentina, Canada or New Zealand. In the Australian literature the severity of the depression is explained as resulting from the magnitude and speculative nature of the preceeding boom and the impact of a severe drought. Drawing especially on Argentine experience, it is suggested here that additional factors should be considered. First, a trend effect disguised by the drought is that the limits of extensive farming were reached earlier than in Argentina (and Canada), restricting the scope for rapid recovery after world commodity prices turned up in the mid-1890s. Second, the growth of GDP in Australia prior to 1890 may have been based to a greater degree than in the other economies on unsustainable rates of consumption of the stock of natural resources. Third, the unwillingness or inability of Australian governments to reschedule their foreign debt burden or to depreciate the exchange rate (both of which were undertaken in Argentina) resulted in a policy-induced exacerbation of the slump.
Seminar Paper 97-06
International Capital Mobility and the Feldstein-Horioka Paradox:
Evidence from the Settler Economies in the Gold Standard Era
How do we know whether capital is more internationally mobile in
some periods than in others or for some countries rather than others?
Economists normally look at prices when examining market integration,
but for capital markets it is difficult to test the law of one price
with interest rates for identical assets in a common currency. To
overcome the data constraint, Feldstein and Horioka (in Economic
Journal, 1980) used quantity data to estimate the equation:
I/Y = a + b. (S/Y) + e
If capital is immobile investment must equal domestic saving, ie. b=1, and if investment is unrelated to domestic saving then b=0. Using data from OECD countries 1960-74, Feldstein and Horioka (FH) obtained values for b not significantly different from unity. The finding was seen as a paradox, because capital markets were considered to be integrated in the 1960s.
Subsequent studies have generally confirmed the FH paradox. Values of b tended to be higher in the 1930s than before 1914 or after 1960 and they tended to be lower in time series studies, but always significantly different from zero. The value of b has been interpreted as a measure of the degree of international capital mobility, bounded by zero and one. By contrast FH tests for internal capital mobility (within US states or UK regions) have found b=0, which has been interpreted as showing that the FH test is an appropriate measure of capital mobility.
This paper revisits the FH paradox, by running the equation for three countries known to have been integrated into international capital markets: Argentina, Australia, and Canada in the pre-1914 gold standard era. Only Argentina passes the classic FH test of capital mobility, yet the other two countries clearly had mobile capital because a>0. The point is that b can take any value and be consistent with capital mobility; the highest estimated coefficient (b=2) is for Canada 1896-1914, where international capital mobility was amongst the highest ever.
The only absolute test possible with the FH equation is to test for capital immobility, with the null hypothesis of b=1 and a=0. If b differs significantly from unity, then capital must be mobile. Most studies since FH's original paper have indeed found b to differ significantly from unity and thus are evidence of capital mobility; there is no paradox.
On the other hand, the value of b can give no clear guide to the
degree of capital mobility. A value of b=1 is a necessary but not
a sufficient condition for capital immobility. Capital can be mobile
and b=1, or indeed b could equal any value. A value of b=0 is a
sufficient, but not a necessary, condition for mobility. Using the
range 0<b<1 as a guide to the degree of international capital
mobility is both logically fallacious and, as the settler economy
evidence indicates, empirically unsound.
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Seminar Paper 97-07
Reducing Coal Subsidies and Trade Barriers: their Contribution
to Greenhouse Gas Abatement
Kym Anderson and Warwick J. McKibbin
International negotiations for an agreement to reduce the emission of greenhouse gases are unlikely to produce concrete and comprehensive policies for effective emission reductions in the near term, not least because the policy measures being considered are economically very costly to major industries in rich countries and are unlikely to prevent 'leakage' through a re-location of carbon-intensive activities to poorer countries. An alternative or supplementary approach that is more likely to achieve carbon and methane emission reductions, and at the same time generate national and global economic benefits rather than costs, involves lowering coal subsidies and trade barriers.
Coal policies have encouraged excessive production of coal in a number of industrial countries and excessive coal consumption in numerous developing and transition economies - when the opposite policies are what are needed to overcome the environmental policies associated with coal mining and burning. These distortionary are currently under review by numerous governments, and in some cases reforms have already begun. This paper documents those distortions and outlines the circumstances under which their reform could not only improve the economy but also lower greenhouse gas emissions globally. It also provides modelling results which quantify the orders of magnitudes that could be involved in reducing those distortions. The effects on economic activity as well as global carbon emissions are examined using the G-Cubed multi-country general equilibrium model of the world economy.
Both the gains in economic efficiency and the reductions in carbon dioxide emissions that could result from such reforms are found to be substantial. Even if just Western Europe and Japan were to gradually remove their coal production subsidies and import restrictions by 2005 (let alone raise their currently relatively low tax on coal use and impose a tax on the environmental damage from coal mining), that would lower OECD emissions of carbon dioxide by 13 per cent and global CO2 emissions by 5 per cent. If in addition the currently low domestic price of coal in major non-OECD countries were gradually to be raised to the level in international markets, that would lower their CO2 emissions by 4 per cent and global emissions from these combined reforms by 8 per cent below what would otherwise be the case. More specifically, with the combined reforms global CO2 emissions would rise from 22 billion tonnes in 1990 to a projected 27 instead of almost 30 billion tonnes in 2005.
The impact of these reforms on national output and income levels are complicated because, in addition to efficiency gains, removing price distortions stimulates terms of trade changes and international capital movements. Western European countries, as net importers of coal, turn their terms of trade against themselves when they reform, which benefits Australia and the coal-exporting transition economies of Eastern Europe, the former Soviet Union and China while harming as a group the net coal-importing other developing countries. Both transition and developing economies are projected to be better off when their coal markets also are reformed.
The environmental gain from coal market reform is achieved with gains in economic efficiency rather than economic costs - a 'no regrets' outcome or win-win Pareto improvement for the economy and the environment that contrasts markedly with many of the costly proposals currently being advocated to reduce greenhouse gases. Both gains would be even greater if Western European countries raised also their low coal consumer tax rates as they phase out their coal producer subsidies, since those consumer taxes are currently relatively low (presumably to lower the cost to electricity utilities or requiring them to use lower-quality locally mined coal). And both gains would also be enhanced if countries taxed domestic coal production optimally so as to ensure coal mining enterprises compensate society for the pollution they cause.
Thankfully the process of lowering coal subsidies and trade barriers
has already begun, with some EU economies (most notably Belgium
and the UK) already advanced in dismantling their coal production
subsidies and others (France and Germany) beginning to do so. And
in some transition economies the low prices of coal (and also oil
and gas) are gradually being raised. For example, in China many
state-owned coal mines are being transferred out of the hands of
the state and gradually subjected to domestic market forces. The
results in this paper suggest these reforms should be applauded
as a positive contribution to the reduction of greenhouse gas emissions,
and countries should be encouraged to complete the process.
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Seminar Paper 97-08
Carbon Taxes and the Global Trading System
Mustafa H. Babiker, Keith E. Maskus and Thomas F. Rutherford
This paper evaluates the economic impacts of two important international policy initiatives: the Uruguay Round (UR) of multilateral trade negotiations and the Framework Convention for Climate Change (FCCC). While these agreements are not directly linked, they interrelate in subtle but important ways that are the focus of our investigation.
The UR reform should result in significant global gains in efficiency and welfare, although these gains would be distributed differently across nations. Layering the emissions-reduction commitments over the UR agreements significantly affects the potential for those gains to be realized.
Carbon taxes shift some energy-intensive production to non-OECD countries and also influence the terms of trade between the OECD and non-OECD groups. We consider how lobbying by energy-intensive producers in the OECD could result in a decision to limit energy-intensive imports from non-OECD countries. Considering the market power of the OECD, it is likely that these border interventions could even be welfare-improving for the implementing nations, effectively passing some of the abatement costs onto the non-participating countries. We illustrate the relative magnitude of these effects using a 26-region, 13-commodity general equilibrium model.
Overall, our results indicate that, on its own, the carbon-tax
initiative could offset a large share of gains from the UR. Offsetting
"fair" trade interventions further reduce global efficiency and
are particularly harmful for developing countries, but generate
net gains for specific developed nations.
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Seminar Paper 97-09
Intellectual Property Rights, Licensing, and Economic Growth
Guifang Yang and Keith E. Maskus
Recent theoretical studies of the implications of stronger intellectual property rights for the international diffusion of knowledge are pessimistic. In these papers, technology is transferred from innovative countries ("the North") to developing countries ("the South") through simple imitation, in which firms in the latter nations copy the new technology or product. In this context, the effect of stronger patent rights in the South is to raise the costs of imitation, thereby raising the short-run returns to R&D and raising innovation, while limiting the amount of technology transferred. In the long run, however, innovative countries find it more advantageous to devote more labour to the production of existing goods (against which there is less imitation risk) and, in consequence, the global rate of innovation slows down. Overall, the South suffers lower economic welfare and growth, the North gains from higher economic rents to existing products but loses from diminished growth, and the world is also made worse off. These results emerge in dynamic general-equilibrium models of technology transfer through imitation, where the channel of imitation is either international trade or foreign direct investment.
In this paper we show that this result is unduly pessimistic when the model is extended to cover another form of technology transfer, arm's-length licensing of know-how. We develop a dynamic general-equilibrium model of a Southern economy in which one firm type devotes resources to licensing new technologies for producing higher-quality goods from the North and another firm type expends resources to imitate those technologies. The licensee firm shares in the temporary monopoly rents with the Northern firm and faces imitation risk from other Southern firms. One direct effect of stronger patent rights in the South is to raise the costs of imitation, thereby expanding the instantaneous monopoly profits. However, another effect is to reduce the share of rents accruing to the licensee because stronger patents allow the Northern licensor to pay smaller rents in order to deter defection from the contract. As a result, there is an ambiguous impact in the model on key variables, including labour devoted to licensing and imitation, aggregate technology transfer, and growth. The crucial parameter on which we focus is the elasticity of the licensee's rent share with respect to a strengthening of patents. An inelastic rent share is akin to a weak expansion of IPRs, which could expand imitation and growth. An elastic rent share is akin to a strong expansion of IPRs, which could reduce imitation but expand licensing efforts.
Overall, impacts on technology transfer and growth are ambiguous,
which is a more optimistic message than that contained in prior
literature. However, numerical simulations over reasonable parameter
ranges still point to the likelihood that the strengthening of IPRs
in the South, as envisioned by new global agreements, would tend
to reduce Southern growth. This result is sensitive to the contracting
model employed, however, and a fuller analysis of licensing could
reverse it. Such analysis will be the subject of future work.
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Seminar Paper 97-10
Measuring trade Impediments to Services within APEC
Malcolm Bosworth, Christopher Findlay, Ray Trewin and Tony Warren
The research reported in this paper had its genesis during a Survey of Impediments to Trade and Investment in the APEC Region undertaken in 1995 (PECC 1995). It was shown in this Survey that although the service sector was growing rapidly in APEC, there was a high level of trade and investment impediments affecting service industries within the APEC region. This was the situation despite significant moves in some economies at the time to deregulate and liberalise certain service industries in a bid to improve levels of efficiency and quality.
The importance of these impediments to services trade and investment within APEC led to the development and funding of an Australian Research Council proposal to investigate the issue for major Australian service industries. The study involves international comparisons and thus has international relevance. In conjunction with developing a general approach to measuring the impact of impediments to trade in services, it is planned to examine in detail three service industries per year during the project. Currently the important input service industries of telecommunications, aviation and finance are being examined. The first of these industries is used as a case study of the general approach to measuring these impediments in this paper.
Before discussing the telecommunications case study, the preferred approach to measuring services impediments is developed in this paper. Early sections discuss in turn the chosen broad definition of a service impediment, the identification of a comprehensive listing of such impediments, and approaches to measuring and analysing the impact of impediments to services trade. There is a focus on the preferred approach of a price-impact measure developed from the 'bottoms up', that is impacts allocated to specific impediments. This approach is distinct from a 'tops down' approach where unidentifiable price differences between the services examined and a 'benchmark' service are not attributed to specific impediments. The impact of Foreign Direct Investment (FDI) restrictions on services trade is also discussed.
The measurement of impediments is undertaken in seven steps, namely:
defining the service industry to be analysed;
identifying the specific impediments to trade;
making explicit the theoretical link between the impediment and 'prices';
determining the relevant price wedge;
identifying the appropriate benchmark market to measure the impact of the impediments;
decomposing the wedge; and
incorporating the price-impact data into a general equilibrium model.
A case study based on the Australian telecommunications sector
works through the seven steps identified in measuring trade impediments
to services. This case study illustrated that there are many difficulties
in working through the seven steps but that such an approach leads
to progress in measuring trade impediments to services.
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The provision of rights to own intellectual assets generates both benefits and costs for society, stemming from well-known tradeoffs between static and dynamic efficiency requirements and from rent-seeking. In conjunction with various public-goods characteristics of information, these issues imply the need for regulation. Intellectual property rights - patents, trademarks, copyrights, and related devices - are the means by which society defines boundaries within which agents are provided exclusive rights to exploit their intellectual assets. Regulations consists of defining and enforcing the rights, on the one hand, and ensuring that the rights-holders do not extend their power beyond intended limits, on the other hand.
By legal tradition, intellectual property rights (IPRs) are territorial in nature, leaving such decisions to individual nations or regions. The paper presents clear evidence that protection for IPRs varies strongly across countries. For example, patent rights tend to become weaker as countries move beyond the poorest stages into development levels in which they have strong imitative capacities. Patents become markedly stronger as countries become producers of new technologies and products.
The exploitation of intellectual assets has become increasingly central to the international competitive strategies of innovative firms. The growing incongruence between territorial application of IPRs and commercial needs for stronger rights internationally underlies considerable unilateral, regional, and multilateral change in the global system in the last decade. By far the most significant change is the Agreement on Trade-Related Intellectual Property Rights (TRIPS), negotiated as a founding component of the World Trade Organisation. The paper reviews the major new requirements for stronger minimum standards required of most developing countries under terms of TRIPS. Implementation of these requirements will be phased in over a period of five to ten years.
The main question analysed is whether TRIPS makes sense as a global regulatory device. To this end, the paper first discusses potential effects of stronger minimum standards on international trade, foreign direct investment (FDI), and technology licensing. In theory, all of these effects are ambiguous because of the inherently second-best nature of IPRs. However, there is empirical evidence that stronger patents are associated with greater trade flows, particularly in high-technology goods exported to large, middle-income developing economies. Because such goods embody new technologies and additional competition, there could be a follow-on positive impact on technology learning and growth. However, there is little evidence of such impacts in small, low-income countries, who may experience slower trade growth and higher import prices.
Regarding FDI, the paper provides new econometric evidence that the international distribution of investment by American firms is sensitive to variations in patent regimes. Thus, stronger global patent rights could expand such investment via a scale effect, but also reallocate it across destination nations via a substitution effect. Finally, survey evidence indicates that the quality of technologies licensed is strongly and positively affected by IPRs.
The paper also considers prospects for additional innovation and diffusion. Global innovation should rise with TRIPS, though by an uncertain amount. Diffusion will be slowed by rising costs of imitation but could be enhanced by additional patent disclosures and licensing. A final observation is that a movement toward international harmonisation of IPRs could reduce the relative attractiveness for FDI of smaller economies with strong prior systems.
TRIPS is also assessed as a regulatory device. For example, to the extent that limited IPRs persisted in many countries because of inadequate incentives in the previous system to recognise collective interests in strengthening them, the agreement secures a cooperative solution. Further, it could improve the allocation of R&D programs into areas with stronger global demands. However, it also markedly shifts the balance of gains to innovative firms and provides additional market power, which raises concerns about potential abuses in setting terms of access and licensing.
While such concerns are often overstated, countries that must strengthen
their IPRs systems would be well-advised to implement and enforce
the TRIPS requirements in a manner that promotes dynamic competition
in their markets and more widely. A number of such implementation
strategies are discussed in the paper. However, the observation
points also to the need to consider the intimate linkages between
stronger IPRs and competition policies.
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Seminar Paper 97-12
Commercial Links Between Western Europe and East Asia: Retrospect
Kym Anderson and Joe F. Francois
This paper first examines historical intra- and extra-regional trade and foreign investment data to trace the pattern to date of bilateral trade and investment flows between Western Europe and East Asia. With that as background, it then explores empirically the total and bilateral trade growth prospects of those regions over the period to 2010.
The historical data show that despite the spread of regional integration agreements, extra-regional trade as a percentage of GDP has risen for most regions and has not fallen even for Western Europe. Both trade and investment flows between Europe and East Asia have been growing. However, they are only about two-fifths what one might expect given the importance of each region in global goods trade and FDI, suggesting considerable room for growth in the intensity of their bilateral relationship.
Several prospective developments will influence future trade outcomes. One is Uruguay Round implementation. Another is the accession to the WTO of China and hence Taiwan. A third is a (now less likely) trans-Atlantic free trade agreement (TAFTA), A fourth is the challenge of delivering further MFN trade liberalization in the Asia-Pacific through the APEC process. And finally there is the prospect of a new multilateral round of WTO-sponsored reform early next century. Each of these issues is addressed empirically in the second half of the paper. The analysis is conducted in the context of on-going global economic growth. A modification of the latest forward-looking version of the global CGE model known as GTAP is used to provide those projections.
The effects of implementing the Uruguay Round by 2010 are shown first without and then with China and Taiwan participating as WTO members, to show just how much difference their accession could make to the world economy. Assuming sanity on that issue prevails and both join the WTO soon, the scenario involving their membership and full implementation of the Round is taken as the modified base case in 2010, and it is compared with three alternative scenarios. These examine the effects of a TAFTA, of full MFN liberalization of trade in the APEC region, and of a global trade liberalization involving a further 50 per cent cut in post-Uruguay Round tariffs. All are shown to have a substantial effect on trade and welfare not only in East Asia but also in Western Europe and elsewhere.
Several conclusions are worth highlighting from those projection exercises. First, both the Uruguay Round and the continuing rapid growth of East Asia's developing economies ensure those economies will continue to increase their shares of Western Europe's trade. By contrast, the share of East Asia's trade with Western Europe grows little, because East Asia's importance in world trade keeps rising and hence so too does the share of its trade that is intra-regional.
Second, if a TAFTA is formed, the gains are relatively small to North America and Western Europe and they are at the expense of rest of the world. By contrast, if the remaining barriers to goods trade in APEC countries following the Uruguay Round's implementation were to be removed by 2010 and on an MFN basis, trade between Europe and APEC would be substantially larger and virtually all (including non-APEC) regions would gain.
Finally, the scenario in which another multilateral round of tariff cuts is implemented early next century shows that there will still be very substantial room for further trade reform following the Uruguay Round's implementation. As with all projections exercises, several caveats are in order. One is that these results are very much lower-bound estimates, especially because services trade reform is not modelled and endogenous growth is not built in. Nor are policy interdependencies taken into account: if the Uruguay Round is fully implemented, China joins the WTO, and APEC does liberalize by 2010, the world economy and especially the economies of the APEC region would almost certainly grow faster, and even more so if a further WTO-sponsored Round were to be concluded.
Several implications can be drawn from these results. First, the
importance of fast-tracking the WTO applications for the former
centrally planned economies and especially China is clear. Second,
strengthening the multilateral trading system's capacity to facilitate
the continuation of rapid economic growth in East Asia and its positive
spillover effects to regions such as Europe is also important (eg,
by keeping issues peripheral to trade, such as labour standards,
off the WTO's agenda). And third, the current low degree of European-East
Asian integration suggests there will remain ample room over the
next decade or so for the ASEM process to contribute to trade and
FDI growth between the two regions.
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Seminar Paper 97-13
Joint Trade Liberalization and Tax Reform in a Small Open Economy:
The Case of Egypt
Denise Konan and Keith E. Maskus
Trade liberalisation programs take place against a backdrop of economies characterised by distortions such as intersectorally variable factor taxes and commodity taxes. Applied general-equilibrium models rarely have accounted for the implications of such distortions for the gains (or losses) from reforms in trade policy. We argue that the extent of such gains is dependent both on the structure of underlying distortions and on any endogenous changes in tax policy that may emerge in response to liberalisation. Thus, standard models that simply compute the gains from trade reforms without incorporating distortions and their interactions with tariff cuts are, at best, conditional measures. In fact, such gains are misstated if they are attributed solely to changes in trade policy and are misleading about the true gains available from trade liberalisation in the face of tax distortions. These points are demonstrated analytically with a two-sector general equilibrium model that allows tariffs and sectorally differentiated taxes.
This paper investigates the importance of such interactive effects with a computable general equilibrium (CGE) model of trade liberalisation developed for Egypt. The model is used to simulate different potential trade reform measures, including tariff unification, a free trade agreement (FTA) with the European Union, and unilateral free trade on a global basis. The simulations are performed against an idealised backdrop of lump-sum taxation and against the existence of two types of intersectorally distortionary taxes, one on capital use and one on consumption of commodities. Further, the taxes are subject to individual or joint reform, either via sectoral unification of tax rates or removal, in all scenarios, allowing a comparison of welfare impacts.
A key element of the approach is to allow the tax instruments to vary endogenously within the model to replace lost government revenues when trade is liberalised or taxes are reformed. It is crucial in applied settings to permit endogenous tax responses because governments engaged in policy reform are concerned about implications for fiscal revenues and the follow-on need to raise taxes for replacement purposes.
With this technique, it is possible to decompose total welfare changes from policy reform into a pure trade-reform effect, a tax-reform effect, and an interaction term representing the joint inefficiencies of the two regimes in the combined system. The interaction term reflects the fact that either reform alone will produce some gains that overlap those of the other reform. For example, consider an importable commodity that is subject to a tariff and a consumption tax levied on the tariff-inclusive domestic price. Removal of the tariff alone generates both a consumer-surplus gain and higher consumption-tax revenues produced by additional imports. Removal of the consumption tax alone generates a different consumer-surplus gain and higher tariff revenues. The sum of these effects double-counts some overlapping welfare gains and overstates gains from joint reform. However, there are net efficiency gains from joint reform that are unavailable from either individual policy change, implying that the interaction term could be positive or negative.
The CGE model contains 39 sectors with all products and services serving as both final goods and intermediates. Traded goods and services are differentiated by region, including the European Union, countries of the Middle East and North Africa, the United States, and the rest of the world. The model is calibrated with data on production, consumption, trade flows, tariffs, and tax rates in 1994. The model is static in nature and computes long-run changes in outputs, trade, welfare, the real exchange rate, and real factor prices assuming intersectorally mobile labor and capital.
To summarise briefly the many simulation results, the model indicates that different tax reforms and trade reforms promise different levels of welfare gains and that these gains are dependent on responses in tax rates. The capital tax is highly distortionary, so that any policy change that would result in higher capital taxes significantly limits welfare gains or actually makes the economy worse off. A corollary result is that, since the consumption tax is less distortionary, its use for revenue replacement provides the largest gains in most scenarios. However, some policy reforms, such as tariff unification, raise tariff revenues and allow a reduction in capital taxes or commodity taxes, thereby markedly increasing the gains to liberalisation. For any tax system, Egypt tends to gain the most from unilateral free trade, second-most from tariff unification, and least from an FTA among the trade-reform options. For the given set of trade distortions, Egypt tends to gain most from jointly reforming the capital and commodity taxes, second-most from reforming the capital tax, and least from reforming the consumption tax.
The decomposition exercises indicate that both trade reform and
tax reform are important for raising Egyptian efficiency and welfare.
For example, joint tax reform taken alone (with an idealised lump-sum
replacement tax) would raise welfare by 1.09% of initial consumption
(using an equivalent-variation measure), while unilateral free trade
taken alone would raise welfare by 0.89%. If these policies were
performed together, however, the welfare gain would be 1.63%, which
is less than their sum. Thus, taxes and trade distortions interact
to reduce their individual inefficiencies in the economy by some
0.35% of aggregate consumption.
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Seminar Paper 97-14
China's WTO Accession: Financial Services, Intellectual Property,
State Trading, and Anti-Dumping
Edited by Kym Anderson
In late 1995 the University of Adelaide established a Graduate Diploma in International Economics (GDIE) to offer training for trade policy analysts and diplomats interested in furthering their economics skills and their understanding of the global trading system. The papers in this collection were presented as term papers by four groups of students in the 1997 class. All relate to China's attempt to seek membership to the World Trade Organisation.
The first, on "Incentives and Initiatives: China Facing Financial Services Liberalisation" by Chang Chen, Jingxin Huang, Sarinee Kitisatthathik, To Lao and Lei Yuan, makes clear that while China has begun to open up its financial sector and reap rewards from doing so, there are many restrictions still in place. Removing those remaining impediments is bound up with the need to reform the state-owned enterprise system, both of which require attention as China seeks accession to the WTO.
The second paper is on "Intellectual Property Protection in China", by Lin Fu, Cuiping Zhang and Li Zheng. It too demonstrates that China has made great strides since the reforms began in 1978, in this case in strengthening laws to protect intellectual property rights (IPRs) especially of foreigners, but points to the difficulties being encountered in enforcing those laws especially outside the big cities. Given the tension this issue causes in relations between China and the United States in particular, further substantial progress on IPR protection is needed urgently if China wishes to join the WTO.
"State Trading and China's Trade Policy Reforms", by Xiaodong Wang, Jianhua Zhang and Changsheng Zuo, is the topic of the third paper. In it the authors argue that massive progress has been made in transforming China's trade away from being dominated by a few huge state trading enterprises (STEs). A number of strategic commodities remain under strict state control, however. Some of the agricultural ones may well continue to be controlled to some extent after China's WTO accession, since other WTO members also continue to use STEs as part of their tariff rate quota administration to fulfil import market access commitments under the Uruguay Round's Agreement on Agriculture. But other commodities still subject to state trading in China will need to be liberalized in the lead-up to China's WTO accession.
The final paper is on "Anti-Dumping and the WTO: Implications for
China", by Yi Dong, Huijun Xu and Fang Liu. Establishing an anti-dumping
regime is not a requirement for WTO accession, but neither is it
GATT-illegal. In the face of numerous anti-dumping actions by WTO
members against China, it is not surprising the China has responded
by establishing its own anti-dumping authority. This paper suggests
China should use this new legislation cautiously and sparingly,
and it offers administrative suggestions aimed at minimising the
risk of economic welfare losses from imposing anti-dumping duties.
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Seminar Paper 97-15
Uzbekistan:Welfare Impact of Slow Transition
Richard Pomfret and Kathryn H. Anderson
Uzbekistan is typically seen as one of the slowest reformers among
the countries in transition from central planning to a market-oriented
economy. This paper evaluates the welfare impact of gradual transition
in Uzbekistan, asking whether it has avoided the short-term disruption
associated with more rapid transition while remaining on course
for long-term economic success. By the usual output criteria Uzbekistan
has performed well relative to other former Soviet republics. To
some extent this reflects favourable initial conditions and absence
of military conflicts, but the lack of radical change contributed
to the limited output decline. Whether slow reform will thwart long-term
economic success is more problematic, but Uzbekistan has undertaken
some reforms and these are generally in the desirable direction
- unlike its neighbour Turkmenistan which has tried to avoid reforms,
at least up until 1996, and is in a far less promising situation.
The most interesting aspect of Uzbekistan's transition strategy
has been the explicit concern with the welfare impact on those members
of society least able to deal with the shift to a market-oriented
economy. The paper examines the labour market, social expenditure
and institutional reform strategies adopted to protect disadvantaged
individuals. Although some of these measures have been ineffective
(e.g. unemployment assistance) and others contain long-term dangers
(e.g. the generous pension arrangements), together the social protection
measures have softened the impact of transition on disadvantaged
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Seminar Paper 97-16
Strengthening Intellectual Property Rights in Asia: Implications
Keith E. Maskus
The last decade has been the period of greatest change in international protection of intellectual property rights (IPRs) in history. These changes have come about both because of external pressure on developing countries to strengthen their systems and because of evolving domestic interests in doing so. The East Asian developing economies have been the greatest focus of pressure and the area of most significant change. These countries have enacted numerous unilateral improvements in their laws. They also are working to meet the minimum standards required in the multilateral Agreement on Trade-Related Aspects of Intellectual Property Rights.
In this paper I discuss the meaning of these higher standards and how they might affect economic activity in East Asia and Australia. As the standards are strengthened, it is important for the countries involved to adopt mechanisms for ensuring that they promote effective and dynamic competition in the region. In addition to stronger rights protection and enforcement, appropriate limitations on those rights and sensible competition rules are in order.
As systems are strengthened in the region, the Australian economy should be affected in a number of ways. For one, more rapid Asian growth should increase the demand for Australian exports, perhaps by as much as $350 million per year. Export gains could be particularly experienced in wines, food products, films, and computer software. For another, Australian consumers could gain from imports of higher-quality Asian products. Australian firms also have an emerging comparative advantage in supplying technologies, designs, and services to Asian partners, which should expand with stronger IPRs.
However, there may be some costs as well, including higher regional
prices of protected products, which might spill over into Australian
markets, and additional competition for inward foreign direct investment.
Thus, Australia would be advised to improve its attractiveness as
a location for investors. Australia also has an interest in maintaining
effective competition in its own market as IPRs are strengthened
regionally. One mechanism for doing so is import deregulation of
good protected by copyright, such as books and compact disks. Australia
should also take a leading role in fending off attempts by the United
States and Europe to erect excessively protectionist new standards
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One of the great traditions in the analysis of international trade is the use of canonical models: Ricardian, Ricardo-Viner, and Heckscher-Ohlin-Samuelson. Furthermore, each of these models has a simple graphical representation, useful for both intuition generation and for pedagogical purposes. Over the last fifteen years, two additional classes of model have joined the big three. These are strategic trade models and division of labor models. The strategic trade models entered the literature with simple graphical representations developed in the industrial organization literature, while the division of labor models have proven to be considerably more resistant to simple representation.
The recent specialization literature leans on special models built around specific functional forms, and often involves numeric simulation. Even so, a set of general results (low level equilibrium traps, catastrophic adjustment, agglomeration effects) does stand out from this somewhat diverse collection of special models. Because our starting point in this paper involves examination of this class of models in the context of relatively general functional forms and technologies (linear homothetic, concave, etc.), we are able to offer a generalized treatment that links this pattern of results to the general properties of models with increasing returns due to specialization. In the process, we demonstrate that important results in the recent literature depend critically on the stability and transformation properties that characterize the general framework highlighted here. These properties are closely related to those explored in the context of scale economy models by an earlier generation of trade and development economists.
We begin with two versions of national production externality (NPE)
models. In the first, a closed-economy version of the model, we
develop the basic elements of the Ethier-type division of labor
model in the simplest environment. Even in this simple context,
we are able to illustrate basic mechanisms that have been highlighted
in the literature on endogenous growth and development. From there
we develop a NPE model of trade in final goods only, and demonstrate
that this model is operationally identical to standard models of
trade with national external economies of scale. The greatest conceptual
and analytical difficulties emerge with international production
externalities (IPE), which surface once trade in differentiated
goods is permitted. The graphical analysis makes the locus of this
difficulty clear. In addition, we develop a new graphical apparatus
that is directly analogous to the Baldwin envelope for the case
of division of labor models. The general treatment of IPE models
is followed by an examination of trading costs (an important issue
in the recent literature) in Ricardian and Heckscher-Ohlin versions
of the IPE model.
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Seminar Paper 98-02
On the Need for More Economic Assessment of Quarantine/SPS Policies
Sallie James and Kym Anderson
Quarantine policy reviews are becoming more sophisticated following the Uruguay Round's Agreement on Sanitary and Phytosanitary (SPS) Measures and, in Australia's case, following also the 1996 Nairn Report. Yet they still focus primarily on the effects of restrictions on import-competing producers while ignoring the effects on consumers of the product concerned and exporters of other products. A fuller analysis that includes the latter demonstrates that even if imported diseases were to wipe out a local industry, the gains to consumers and to producers in other industries could exceed the losses to import-competing producers from removing a ban or severe restriction on competing imports.
This paper provides the simplest partial-equilibrium framework for thinking more about the economics of quarantine policy measures, including the options of allowing pre-shipment inspection, pre-arrival isolation for a period, and/or selective imports from disease-free areas. It shows how externalities caused by disease importation, and in particular the risk and uncertainty associated with importing carrier products, is shown to complicate the standard economic policy analysis.
An empirical analysis of Australia's ban on imports of bananas is used to illustrate the methodology (after adding the complexity of marketing margins). Our study suggests the removal of that import ban may well cause a major contraction of banana growing in Australia, simply because of the high economic protection provided by the current ban. Despite that, the economic welfare gains to consumers are shown to almost certainly outweigh the losses to local banana producers.
The paper concludes by arguing that there is a need for a comprehensive
economic review of Australia's quarantine restrictions (which currently
affect more than 150 plant products as well as most animal, bird
and aquatic products). As with the review of Australia's myriad
import tariffs in the 1970s, the direct and indirect benefits from
reforms that could follow such a review would be very considerable.
The biggest indirect gainers would be exporters of other farm products.
This is because while ever Australia is perceived by its trading
partners as being overly protective via quarantine, that harms its
argument that other countries should provide greater market access
for farm products and weakens its credentials to lead developments
in the WTO's SPS Agreement (which comes up for review at the end
of this decade). It also makes Australia vulnerable to legal action
under the WTO's SPS Agreement.
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Seminar Paper 98-03
North-South Trade in Recyclable Waste:
Economic Consequences of Basel
During the 1980s, domestic landfill sites in some advanced industrialised countries (the 'North') began to reach their limit and countries turned to international trade to solve their wastes disposal problems. The growth in North-South waste trade led to concern over the dumping of hazardous wastes in developing countries (the 'South') resulting in the UNEP mandating the Global Convention on Transboundary Movements in Hazardous Wastes. The Basel Convention provided for a system to monitor and control the transboundary movements of hazardous wastes. It was unanimously accepted by the 116 states represented on the 22 March 1989.
Further developments to the Basel Convention gave rise to numerous controversies. A number of developing countries were refusing to tolerate the use of their countries as dumping grounds for the hazardous wastes of the North. Meanwhile, industrialised countries were not willing to accept measures that would adversely affect their trade in hazardous wastes with other industrialised countries, especially in cases where that waste material had an economic value. UNEP adopted the position that a complete ban on the international trade in hazardous wastes would not be the best solution from an environmental viewpoint, since it would preclude cases where waste disposal in a country other than the country of origin was more environmentally sound. In March 1994, the Conference adopted Decision II/I2, which bans immediately all traffic in hazardous wastes destined for final disposal from OECD to non-OECD countries, and provided for the phase-out of traffic in hazardous wastes destined for recycling or resource recovery from OECD to non-OECD countries by 31 December 1997.
Taking the used lead battery market as a case study, this paper provides an analytical framework for examining the global and regional implications of the ban now in place on recyclable waste trade between the North and South. It shows that, when considering standard economic welfare, the acceptance of Decision II/I2 necessarily reduces global welfare. However, once environmental externalities associated with resource recovery and the dumping of used batteries in landfill are taken into account, global welfare results are less clear. The North necessarily loses economic welfare as a result of the Decision while the South may gain or lose welfare. Global welfare is enhanced if and only if the environmental welfare gains in the South more than offset the standard welfare loss in the South plus the combined standard and environmental welfare losses in the North.
The paper concludes by arguing, firstly, that the international
ban on North-South trade should be removed as international trade
is not the source of the environmental externalities associated
with recyclable hazardous wastes and could be reducing rather than
raising global social welfare. Secondly, recyclable waste importing
countries should be able to determine their individual solutions
to national environmental externalities based not on a globally
enforced ban, but rather on their national economic challenges,
environmental conditions, resource endowments and social preferences.
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Seminar Paper 98-04
Will Trade Liberalization Harm the Environment? The Case of Indonesia
Anna Strutt and Kym Anderson
Most-favoured-nation (MFN) trade liberalizations will always improve global economic welfare even in the presence of environmental externalities, provided optimal environmental policies are in place. However, in a world in which national environmental standards differ markedly between countries and international environmental spillovers are significant, globally optimal environmental policies will differ from nationally optimal ones. That, plus the fact that in many (especially developing) countries the enforcement of environmental policies is often less than optimal even from a national viewpoint, raises in some people's minds the question of whether liberalizing trade between rich and poor countries is desirable. To reduce the risk that this concern leads to excessive opposition to trade liberalization initiatives, empirical studies of the environmental and resource depletion effects of such reforms are needed.
This paper provides a methodology for doing that. It is illustrated with a case study of Indonesia, a large newly industrializing country that is rich in natural resources and committed to taking part in major multilateral and regional trade liberalizations over the next two decades. A modified version of the global CGE model known as GTAP is used to project the world economy to 2010 and 2020 without and with those reforms. (This long-run view allows us to abstract from the (hopefully only short-run) disruptions of the current financial and political crisis.) An environmental module is attached to the Indonesian part of that global CGE model so as to measure the effects of changes in economic activity on air and water pollution. The proportional contributions to environmental indicators of changes in the level and composition of output, and changes in production techniques, are identified. A base case projection without trade reform is compared with alternative scenarios involving (a) full global implementation of Uruguay Round commitments by 2010, and (b) the additional move to MFN free trade by APEC countries by 2020. The paper concludes with a summary of results and suggestions for further research.
The main conclusion from this case study of Indonesia is that,
at least with respect to air and water, trade policy reforms slated
for the next two decades would in many cases improve the environment
and reduce the depletion of natural resources and in the worst cases
would add only slightly to environmental degradation -- even without
toughening the enforcement of existing environmental regulations
or adding new ones, and even if the reforms stimulate a faster rate
of economic growth. In particular, the damage that trade liberalization
might cause is estimated to be only a tiny fraction of the damage
that normal economic growth and structural change would cause by
2020 if trade and environmental policies did not change. The conventional
economic gains from the trade reforms and the scope for adopting
well-targeted environmental policies to reduce any serious damage
are such that social welfare almost certainly is going to be improved
substantially by these liberalizations to which Indonesia and many
other countries are committed.
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Seminar Paper 98-05
Testing the Knowledge-Capital Model of the Multinational Enterprise
David L. Carr, James R. Markusen and Keith Maskus
The knowledge-capital model of the multinational enterprise (MNE) relies on insights from new trade theory about joint inputs, increasing returns to scale, and international costs of investing and exporting. The model includes three main assumptions. First, the services of knowledge-based and knowledge-generating activities, such as R&D, may be geographically separated from production and supplied to production activities at low cost. Second, these knowledge-intensive activities are skilled-labor intensive relative to production. These characteristics give rise to vertical MNEs, which fragment production and locate activities according to factor prices and market size. Third, the services of knowledge-based and knowledge-generating activities have a partial joint-input characteristic, in that they may be supplied to additional production facilities at low or zero cost. This characteristic gives rise to horizontal MNEs, which produce the same goods or services in multiple locations.
The model underlying the theoretical work in this paper was developed
by Markusen (1998). We capture the characteristics of MNEs noted
above by a series of assumptions about factor intensities of six
firm types in two countries (home and foreign). These firm types
include two strictly national firms, which maintain a single plant
and headquarters in one country, two horizontal MNEs, which maintain
plants in both countries and headquarters in a parent
country, and two vertical MNEs, which maintain headquarters in the parent and a single plant in an affiliate nation. Vertical MNEs sell in affiliate markets and also export back to the parent country.
The general-equilibrium model assumes that one sector is perfectly competitive, while the other is subject to increasing returns associated with the joint-input characteristic of headquarters services. The model supports numerical computations that make theoretical predictions about the industrial regimes that will be active in two countries at various combinations of country sizes, differences in factor endowments, and costs of investing abroad and exporting between markets. These predictions are rich and complex, but may be summarized as follows. First, national firms are the dominant type active in a market if the country is both large and skilled-labor abundant: if home and foreign are similar in size and relative endowments, and transport costs are low; or if foreign investment barriers are high. Second, horizontal MNEs tend to be dominant if home and foreign are similar in size and relative endowments but transport costs are higher, in which case firms prefer to penetrate markets through FDI rather than trade. Finally, vertical MNEs tend to be dominant if the parent country is small and skilled-labor-abundant, while transport costs are fairly low. In this case the firm takes advantage of low wage costs abroad and exports back to the parent country.
These predictions have not been subjected to systematic econometric study in the literature. We do so here by using extensive data on operations of foreign manufacturing affiliates of U.S. firms and on operations of U.S. affiliates of foreign firms. The dependent variable in our specifications is the real volume of affiliate sales, as suggested by the theory, rather than FDI levels or employment. Data on sales are combined with information on real GDP levels, relative skill endowments, measures of investment costs and protectionism in each country, and distance from the United States. The data comprise a panel of observations for 36 countries and the United States over the period 1986-1994.
We specify the econometric model in a way that captures some of the complex non-linearities that emerge in the simulation analysis. For example, the impact of trade costs in the affiliate country depends on the extent of endowment differences, so we interact trade costs with squared differences in skill ratios. Similarly, the effect of skill differences depends on the relative sizes of the parent and host countries.
Results from the panel estimation (corrected for heteroskedasticity) provide strong support for the theoretical model. Coefficients on all variables have the hypothesized signs and all are significant except the trade-cost measures. However, when we introduce distance into the model, trade costs in the affiliate country become significantly positive, consistent with our notion of horizontal investment. We also estimate a Tobit specification, accounting for the absence of affiliate sales in or from small developing countries. The Tobit results are even stronger and indicate that trade costs in the parent country do limit vertical investment and exports. We then estimate a panel specification with country fixed effects. Here it becomes difficult to identify the separate contributions of investment and trade costs because the country dummies account for some portion of the idiosyncratic country impacts of economic frictions on investment behavior. Nonetheless, the signs of the coefficients are robust to all specifications.
We use the econometric results to characterize some of the economic processes driving output decisions of affiliates. We find that differences in relative endowments (skill ratios) must be fairly large for an increase in trade costs to lead to a fall in affiliate sales. Thus, the model is capable indirectly of discriminating between horizontal investment (among countries with skill ratios similar to the United States) and vertical investment (among countries with considerably lower skill ratios). We also find that an increase in a country's GDP will raise its affiliate sales abroad only if it is small and/or skilled-labor scarce. Convergence in GDP levels between the United States and an affiliate country, holding the sum of their GDPs constant, increases affiliate sales in both directions, as predicted by the model. Finally, positive trade costs in larger countries tend to weak the effects of rising skilled-labor-abundance on outward affiliate sales.
In summary, we test hypotheses regarding the importance of multinational activity between countries as a function of size, size differences, relative endowment differences, trade and investment costs, and certain interactions among these variables as predicted by the theory. The model fits well and provides considerable support for the theory. Affiliate sales increase in the sum of economic size of parent and host countries, in size similarity, and in the relative skilled-labor abundance of the parent. Coefficients on interaction terms have the hypothesized signs and are significant in the panel estimation. Our measures of trade costs and investment costs (based on surveys of multinational enterprise managers) are capable of supporting the model in basic specifications, but lose significance in the estimation with fixed effects.
Competition policy has been linked to trade since before the creation of the GATT system after World War II. For example, as first constructed in 1916, the United States antidumping laws were about predatory dumping, and hence about trade-based injury to competition. After the Second World War, the Havana Charter for the creation of an International Trade Organization was to be accompanied by international rules for the control of restrictive business practices. The GATT/WTO system itself contains a prohibition of export cartels. Recent WTO-based disputes between industrial countries (like the Fuji-Kodak film dispute) have also centered on competition policy issues and their relationships to market access commitments within the WTO. Finally, the WTO Ministers took a decision at Singapore in 1995 to establish a Working Group in the WTO on "the Interaction between Trade and Competition Policy."
Competition policy is now squarely on the menu of issues to be tackled within the multilateral trading system. It also lurks behind regional and multilateral efforts to reform the antidumping system and to link economic integration to regulatory integration. In the notable case of the EU and EFTA, a conscious decision was taken to explicitly link competition policy to antidumping regulation. Given the immediate policy relevance of these issues, we view rigorous analytical treatment analysis of the trade and competition policy nexus as important and highly relevant. In this regard, our goal in this paper is to explore the formal analytics of open economy competition policy. We pursue this goal in a multi-country, multi-sector general equilibrium setting, because we view this as necessary if we are to relate strategic and distributional aspects of competition policy to basic trade theoretic concepts like comparative advantage and terms-of-trade manipulation.
The set of canonical competition policy models represents a partial equilibrium (and largely closed economy) world. These models are powerful and highly effective pedagogical tools. Their simplicity and clarity have proven very effective in communicating the basic principles of national competition policy to policy makers. However, we really need to move to a general equilibrium, open economy setting if we want to throw terms-of-trade effects and economy-wide resource constraints into the analytical mix. Since 1980, there has of course been a massive and well-known cross-fertilization, with ideas from industrial organization theory being used to greatly expand and enrich the fields of partial and general equilibrium trade theory. Our goal in this paper is not to rework this familiar ground. Rather, it is to offer a different type of value added, in the form of an attempted cross-fertilization that runs in the opposite direction.
In our view, the examination of competition policy in an open economy setting raises questions that are essentially different from those of the earlier literature. Oddly, trade theorists have until very recently ignored this important set of issues. While the earlier literature emphasized the implications of various market structures (i.e. the degree and nature of competition) for trade, we are interested instead in the interplay between trade and competition policy (such as the degree and nature of competition). The issues we address involve the general equilibrium distributional effects of competition policy, the relationship of competition policy to terms-of-trade gains and losses, and the implications of "distinct national markets" linked through trade (the starting point for all trade theorists) for the analysis of national competition policy.
We identify purely general equilibrium effects of cartelization that lead directly to income distributional effects. In a general equilibrium setting, this means that we can identify the classes of winners and losers under alternative competition policy regimes. Even with terms-of-trade effects (an open economy phenomenon), the basic message is the same. Factor owners, as a group, lose from moves toward less competition. If national welfare is increased as a result, this will be because the recipients of profits also receive the spoils from terms-of-trade gains. Beggar-thy-neighbor competition policies therefore have consequent national income distribution implications.
We also examine the equilibrium set of competition policies that emerge in a Nash equilibrium when governments seek (non-cooperatively) to maximize national welfare. The Nash equilibrium involves cartelization of export industries, and perfect competition in import industries. This provides some formal analytical underpinning for the WTO prohibitions on export cartels. In political economy equilibria, the equilibrium policy depends on the matching between the distribution effects of various degrees of competition, and the underlying income sources of individual voters.
Finally, we also examine the effects of FDI in settings where competition policy is endogenous. Allowing multi-plant FDI in cartelized industries can be pro-competitive, even to the point of forcing perfect competition in both countries. The general equilibrium effect of cartelization on factor prices lies at the root of the relationship between competition policy and the incentives for multi-plant FDI. Importers will generally oppose cross-border FDI (i.e. mergers), though exporters may favor such a move.
Seminar Paper 98-07
Outsourcing Jobs and Enterprise-level Bargaining: 'Cheshire Cat'Unions
The paper has two broad objectives. First, it briefly reviews the salient facts and theories relating foreign direct investment, multinational enterprises and labour markets. Most studies find little evidence that foreign ownership has any adverse effects on labour market outcomes. However, an interesting finding of recent research is that foreign direct investment is influenced by strategic considerations and collective bargaining structures. Second, the paper argues that the decentralisation of collective bargaining is an endogenous institutional or political economic response by unions to the growing global nature of the firms they work for. This is illustrated by developing a model which shows that unions prefer a more wage-oriented bargaining posture if their members are faced with an outsourcing threat. It is argued that the political support for enterprise bargaining by unions in Australia may be viewed in this light. As well as having the ability to explain why outsourcing is not more empirically significant, the model can rationalise the growing wage inequality that has characterised the Australian labour market since the advent of enterprise bargaining in the early 1990's.
Seminar Paper 98-08
The Transition to a Market Economy, Poverty and Sustainable Development
in Central Asia
The five Central Asian republics (CARs) were among the least prepared of the Soviet republics for the dissolution of the USSR at the end of 1991. Their efforts to establish new nation states and market-oriented economies took place amidst three major shocks:
- the disruption of old economic ties and intra-USSR subsidies,
- the disorganization associated everywhere with abandoning central planning
- the hyperinflation of the ruble zone in the early 1990s
By the late 1990s it is becoming possible to attempt an assessment of the development strategies and economic performance of the CARs since independence.
Early in the process there was a polarization as Uzbekistan and Turkmenistan resisted market forces more than Kazakstan and the Kyrgyz Republic. The Kyrgyz Republic was the first to adopt a national currency and to bring annual inflation below 50%, and has moved fastest in other areas of transition to a market-oriented economy. Turkmenistan is at the opposite extreme with fairly tight control over private economic activity. Of the two largest CARs, Kazakstan is by most rankings considered more liberal than Uzbekistan. Tajikistan has been disrupted by civil war and political uncertainty.
So far, Uzbekistan has been the most economically successful, with the smallest decline in GDP of all former Soviet republics allowing it to maintain government spending, which with innovative decentralization of social services has helped to alleviate poverty. This contrasts to the widely held view that more rapid economic reform is associated with superior performance. Policies do not, of course, exist in a vacuum - initial conditions, external aid, or measurement error may explain relative outcomes as reported in GDP estimates. Finally, perhaps it is too early to judge and the more rapid reforms will pay off in the Kyrgyz Republic and Kazakstan as a firmer base for long-term economic growth.
The paper considers how to measure performance, focussing not just on aggregate output, but also on income distribution and the incidence of poverty. Transition everywhere has been associated with increased poverty. Poverty is not only a bad in itself, but also may induce coping mechanisms awhich run down phsivcal and natural resource assets and have other deleterious consequences for long-term growth.
Who are the poor in Central Asia, and how have they been coping with poverty in the 1990s? The best evidence is from the Kyrgyz Republic, which is also the most interesting case due to its relatively rapid transition and its lower starting income levels. In the first two Living Standard Measurement Study (LSMS) surveys, in 1993 and 1996, poverty rose sharply from pre-independence levels. Poverty is more prevalent in rural than in urban households, and especially in southern and mountainous districts. Initial results from a probit analysis indicate that the least likely to be poor are residents of the capital city and families headed by university/college graduates.
How did the poor cope? Anecdotal evidence from rural areas is of destruction of physical assets, eg. selling livestock and cutting down fruit trees, to support immediate consumption. Such measures hamper sustainable development by reducing the (broadly-defined) capital stock and by degrading the environment. Increased inequality and poverty also threaten future economic progress by undermining human capital formation and political stability.
Transition to a market economy has been difficult in the CARs. Huge initial adverse shocks exacerbated the decline in living standards and with the lowest income levels in the USSR the Central Asian republics were least prepared to weather substantial increases in poverty. Policies have mattered; Uzbekistan's gradual but positive reform process has been most successful in the short to medium term, although the more substantial changes in the Kyrgyz Republic and Kazakstan could provide a firmer basis for economic development over the next decade. The increased poverty in the Kyrgyz Republic, and inequality in Kazakstan, could, however, undermine the sustainability of the development process.
Seminar Paper 98-09
Asia's 'Open Regionalism' Alternative to Preferential Trade Agreements:
Promising, Attractive, or Vulnerable to Cronyism?
Peter Sinclair and David Vines
Starting with a world where all countries apply Nash-optimal tariffs against all imports, we ask when, if ever, a group of countries can gain by trading freely ("promise") and when, if ever, it pays an outsider to join them ("attractiveness"). The free trade club is promising if enough join, but it cannot be attractive. If the club, instead, abolishes internal tariffs and reduces tariffs on imports from non-members, it can be attractive, and will be promising if it is attractive. Our results are then modified to incorporate cronyism (policies to enhance the rent of a domestic firm at the expense of other domestic agents). Although a trade-liberalizing club stands to gain more from cutting tariffs on a true welfare basis, because cronyism implies higher tariffs, the distorted measure of welfare implied by cronyism may well register a fall, and especially when the club is large.
Seminar Paper 98-10
China's WTO Accession: Foreign Investment, Government Procurement,
Grain Self-sufficiency, and Labour Standards
In late 1995 the University of Adelaide established a Graduate Diploma in International Economics (GDIE) to offer training for trade policy analysts and diplomats interested in furthering their economics skills and their understanding of the global trading system. The term papers by four groups of students in the 1998 class are included in this collection. All relate to China's attempt to seek membership to the World Trade Organisation.
The first, on "China's Foreign Investment Regime and the TRIMs Agreement", by Xiaohong Dang, Zhentao Li, and Ling Xu, points to areas where China's policies on foreign-invested enterprises will require modification in order to be consistent with the WTO's agreement on trade-related investment measures. They include the use of rules requiring (a) minimum local content for parts used in certain industries such as motor vehicle assembling, (b) minimum shares of production that should be exported, and (c) foreign exchange for purchasing imported inputs to be earned from the enterprise's export sales of its output. Each of these rules is shown to reduce the efficiency of resource use in China, as well as to distort China's foreign trade and thereby upset its trading partners. Reforming those rules to make them consistent with the WTO's TRIMs agreements will, therefore, provide economic benefits both to China and other countries, as well as reduce the barriers to China's accession to WTO.
The second paper is on China and the WTO's plurilateral Agreement on Government Procurement (AGP), by Zhouxiang Lu, Zhiyong Pei, and Lingyan Zhu. Since the AGP has not yet been signed by all WTO members, China's WTO accession will not necessarily require it to sign. Even so, the country needs to contemplate the pros and cons of being a signatory, in part because members might require China to sign it as a condition of accession, and in part because the AGP might be transformed into a multilateral agreement in the future. This paper explores the benefits that China would enjoy as a WTO member if it was a signatory to the AGP, as well as the potential difficulties that might cause.
Implications of WTO Accession for China's Grain Self-sufficiency, by Wei Ding, Hai Hu, and Linlin Liu, is the topic of the third paper. This paper challenges the view held by some in China that WTO membership will so limit China's degrees of freedom in agricultural policy making as to ensure that grain self sufficiency declines to an unacceptable level. It points out that there is ample scope for China to boost grain productivity and self sufficiency by removing some of its market impediments and using WTO-consistent policy measures to increase investments in agricultural research and infrastructure and improve the functioning of land and other input markets.
The final paper is on "Labour Standards, WTO, and China", by Fuying Li, Chenhai Miao, and Gaojian Peng. They analyse the economics of enforcing higher labour standards in developing countries as well as legal and institutional aspects of this issue - which is one that has come under discussion repeatedly among WTO members in recent times even though it has no formal place on the WTO agenda at this stage. The paper argues that the ILO rather than the WTO is the most appropriate international forum to discuss this matter. In examining the implications for China, the paper notes that China's labour standards are rising and can be expected to continue to rise with economic development, and that it might be counter-productive to interrupt this natural process by imposing excessively high standards from outside.
Recent empirical work suggests that declining industries lobby more successfully for policy concessions than do growing industries. This paper presents a novel and simple explanation for this phenomenon. It is shown that an industry in decline is constrained in its ability to raise revenue through production and therefore has a greater incentive to protect profits by lobbying for more favorable treatment.
However, greater lobbying only translates into policy concessions if the lobbying technology satisfies certain conditions. Accordingly, the paper seeks to determine whether the conventional models of government behaviour are consistent with these restrictions. The results suggest that declining industries are most successful at gaining concessions when an incumbent government does not confront an immediate election (as in the political support models). In contrast, where policies are determined in an election context, the outcome is more uncertain and depends on certain critical parameters. The results appear to be broadly consistent with observed behaviour.
Despite the huge contribution the General Agreement on Tariffs and Trade (GATT) has made to the world economy in the 50 years since it first came into force in 1948, substantial scope remains for further contributions from its successor since 1995, the World Trade Organization (WTO). This survey paper examines the main challenges confronting the organization as it moves into the new millennium, and assesses the WTO's potential to address each of these issues. They include completing the integration of agriculture and textiles and clothing into the mainstream of the GATT, improving rules for liberalizing trade in services, and lowering further the barriers to trade in all three product areas. But, in addition to these issues, new challenges have arisen during the past few years.
Thus, as well as digesting the latest agreements resulting from the Uruguay Round, the WTO needs to address such issues as the calls to use the WTO and its dispute settlement procedures for issues only peripherally related to trade (environment, labour, human rights more generally), the surge in applications from (especially former socialist) countries wishing to join the WTO, the continuing growth of regional trading arrangements, and the rapidly expanding importance of foreign investment and competition policy as globalization proceeds.
The paper suggests that the most urgent of these issues can best be addressed in the context of another comprehensive round of multilateral trade negotiations early next century, particularly given the built-in agenda to return to the agriculture and services agreements by 2000 anyway. In that case 1999 needs to be devoted to the non-trivial task of building a consensus among WTO members to launch that round at the next Trade Ministerial meeting of WTO members, scheduled to begin in Seattle on 30 November 1999.
The paper concludes by drawing out implications for Australia. It is not only agricultural trade reform that is of interest to Australia's economy. After all, rural products make up barely one-fifth of Australia's exports of goods and services these days. More important is the fact that more than 60 per cent of Australia's exports go to East Asia, which means that growth in those exports is very much dependent on a return to rapid economic growth in Asia. Thus Australia has a strong interest in the implementation of the Uruguay Round's agreement on textiles and clothing too. Australia, being geographically on the periphery, also has a strong interest in open trade in skill-intensive products whose production location need not matter, such as electronic commerce. And being in the East Asian time zone gives it a potential comparative advantage in financial services, particularly if it copes with the Y2K problem better than its banking competitors in Asia. Hence keeping trade in services open and liberalizing such markets more in the next WTO round will help to further the transformation of the Australian economy into a high-tech service provider.
Seminar Paper 99-03
The Importance of Trade for the Ratification of the 1992 Climate
Per Fredriksson and Noel Gaston
The focus in this paper is the issue of "political drag," or "race to the bottom," in environmental policy making. We study the determination of the propensity of countries to participate in global environmental policy making by ratifying the Framework Convention for Climate Change (FCCC). Do countries delay the ratification of international environmental agreements and the associated abatement efforts for international " competitiveness" reasons? We argue that countries that speedily ratify an environmental treaty have a more intense preference for the provisions it contains.
We found mixed evidence that trade mattered for the ratification of the FCCC. Whereas total exports have a positive impact on the speed of ratification, the opposite is true of total imports. More aggregate measures of trade openness indicate no effect of international trade flows on the probability of ratifying the FCCC, i.e., we find no evidence of "political drag" in the ratification process due to international trade. Moreover, the effects of these trade variables disappear when they are scaled by variables capturing size or total wealth, such as GDP.
Other findings were that the conditional probability of signing the FCCC was positively related to total CO2 emissions and the presence of civil liberties. The latter finding is highly significant and robust and is consistent with earlier research that found that democratic freedoms raised the probability of signing the Montreal Protocol. The finding for CO2 emissions indicates that large, heavily polluting countries were under great political pressure, either internally or externally, to ratify the FCCC.