An Open Letter

For those who want a basic lesson in international trade concerning whether exports are better than imports, this blogpost by Cafe Hayek is a must read. 

Hardhitting and nuanced.

More imports - Why not?

Conventional wisdom is that exports are good for the domestic economy while imports are to be minimized. Apart from encouraging local manufacturing capacity, exports lead to a better balance of trade position.

Some thinking on why imports are good for the economy and the need to unilaterally cut tariffs is found in this piece titled "Tariff reform needed to boost the US Economy" by Bryan Riley.

"Economists were right in 1930, and they are right today. Although eliminating all remaining tariffs and quotas might sound like a radical idea to lobbyists for the sugar industry and other special interests, it is the consensus recommendation from U.S. economists. In 2006, 87.5 percent of respondents to a survey of 210 PhD members of the American Economic Association agreed that the United States should eliminate remaining tariffs and other barriers to trade.[35] More recently, a 2012 survey of prominent economists found that 85 percent agreed with the following statement: “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”[36] Congress should listen to the economists, not the special interests, and engage in broad-based, permanent tariff reform."

This suggestion, similar to an earlier study,  is contrary to conventional wisdom of higher imports impacting local domestic industry. I had blogged about it here earlier. What about the policy objectives of creating a local manufacturing capacity, local industrialization, local employment, tariffs as a domestic policy tool, revenue generation as well as the current account deficit? Is the policy of import liberalisation to ve viewed differently in developed and developing economies? No one size fits all?

Hat tip to Scott Lincicome for referring to this issue in his blogpost here.

Pankaj Ghemawat on the extent of globalization

Since we are into rankings and globalization,here is another globalization ranking index - the DHL Global Connectedness Index 2012. I had earlier blogged about the E&Y globalization index.

Pankaj Ghemawat, who believes that the world is not as globalized as claimed to be (not really as flat as some would claim) commented on the globalization rankings here. His analysis of the world not being as globalized as claimed is found here:

 "...Among the several dozen audiences to which I have administered this test over the years, that third quote, which suggests that the we live in one, integrated world — what I call World 2.0 — is the one that garners the most support, usually a majority. Spouting such attitudes — the flattening of the world, the death of distance, and the disappearance of differences across countries — seems to be considered a hallmark of global thinking.
But I prefer to think of it as globaloney. 

Why? Because economic data simply don't support the view that we live in a flat, connected world, even if we are technologically connected with everyone, everywhere, all of the time. Data show that most types of economic activity that could be carried out across national borders are actually still concentrated domestically. For example, take foreign investment. Of all the capital being invested around the world, how much would you think is foreign direct investment by companies outside of their home countries? 25%, maybe? More, if you've heard the globaloney about "investment knowing no boundaries"? The fact is, the ratio was less than 9% in 2009 and, while it may be pushed higher by merger waves, has never reached 20%."

Coming back to the globalization index.The index "tracks the depth and breadth of trade, capital, information, and people flows across 140 countries that account for 99% of the world's GDP and 95% of its population. Based on data covering the period from 2005 to 2011, it charts how globalization has evolved since the onset of the financial crisis at the global, regional, and national levels."

The study concludes with a series of recommendations on how to increase the depth of "global connectedness" by studying the case studies of Netherlands (the most globally connected economy), Vietnam and Mexico. I found two of these conclusions interesting:

"6. Focus on value, not on volume. That was how Pascal Lamy, director-general of the WTO, summarized the implications of the ADDING Value scorecard, pointing out how trade professionals still often think mainly about increasing trade volumes rather than the value generated via trade.65 Vietnam and Mexico can both tap into large gains from increasing the share of domestic value-added in their exports at the same time as they continue growing their trade volumes. 

7. Recognize the importance of imports. Don’t mistake an export-only development strategy for a true global connectedness strategy. Recall the emphasis Vietnam’s exporters placed on challenges associated with the cost of imports. Imports of capital goods – machinery, equipment, and infrastructure-related products – boost productivity by facilitating the adoption of new technologies. New evidence suggests that imports might be associated with even more domestic innovation than exports. Importing is also usually the first step in the internationalization of small and medium-sized businesses that later go on to export."

Countries normally follow an export-led growth model shunning imports and seeing them as competition to domestic industry. However, imports that are inputs to various products can be a vital factor to boost a country's global connectedness. 

The report ends with a country-wise analysis of the factors that constitute global connectedness with a rooted map. A great source of information about issues of globalization and how connected we actually are.

China, national interest and the WTO

China's participation in the WTO is often a subject matter of intense debate and analysis. Experts have argued that since its accession to the WTO in 2001 China has benefitted immensely from its membership of the multilateral intruding institution and has seen unprecedented growth in trade. Critics have often argued that China takes advantage of the multilateral system for its benefit and continues to violate trade rules by subsidizing its export industry and "manipulating" its currency. "Made in China" products seem to permeate countries and is a source of tension.I have blogged about China and its participation in the multilateral system here and here.

This piece in the National Interest highlighted China's growth in the WTO system and why it is important for China to stay within the multilateral system.

"Now that China has arrived as a global trading powerhouse, it must take on more responsibility for maintaining the system from which it benefits.First, it needs to play by the rules. The current international order was created by Western powers, but China has profited from these rules more than any other country and thus should abide by them. 

Second, China can’t afford to play the “developing country” card forever. It’s true that China’s GDP per capita is only around $5,500 and that it is still working to lift millions of people out of poverty. But at the same time, some of its economic practices are proving to be counterproductive and are stoking protectionist impulses abroad, a dynamic that is certainly not in China’s own best interests. 

Finally, as a rising power, there will be an increasing number of global challenges to which China will be expected to contribute resources. Setting aside phrases such as “non-interference” and “responsible stakeholder” for a minute, if China wants to build a “new type of great power relationship” with the United States, then it must shoulder more great-power burdens."

Jayati Ghosh and C.P.Chandrasekhar in this piece in the Hindu Business Line have differentiated the growth of China with other developing countries (especially other BRICS countries) and highlighted the growth story of China in world trade. It is clear that in terms of share in world trade China has clearly benefitted from its participation.

(The charts above all present data calculated from the online database of the WTO, http://stat.wto.org/Home/WSDBHome.aspx?Language=E)

Are there lessons to be learnt from China's involvement in the multilateral trading system? Is China charting its own course within the framework of trade rules that other developing countries can learn from? Is there a national strategy to engage with the multilateral system in order to ensure that national interest is protected?

EU, Japan and U.S. vs. China - Rare Earth Panel established

(Labourers work at a site of a rare earth metals mine at Nancheng county, Jiangxi province March 14, 2012.

Credit: Reuters/Stringer)

I had blogged about China "blocking" the establishment of a Panel to examine complaints into the restrictions on export of rare earths imposed by China. As rightly pointed by two comments on the post, the "blocking" was permitted in the first meeting where the request was placed. The WTO website has reported setting up of  Panel in the subsequent meeting of the DSB. The establishment of the panel was widely reported here, here, here and here. With China producing 90% of the world's rare earth output, this decision of the WTO would have significant impact on the trade in rare earth minerals like tungsten and molybdenum. The NYT and Reuters had earlier reported on the genesis of the dispute.

The European Union's main contention in the DSB meeting was:

"The European Union said that export restrictions in this dispute constitute a violation of China’s WTO commitments undertaken under the General Agreement on Tariffs and Trade (GATT) as well as commitments undertaken in China’s Accession Protocol specifically aimed at these types of restrictions. According to the EU, the export restrictions significantly distort the market and create competitive advantages in favour of China’s manufacturing industry to the detriment of foreign competition."

This dispute would be interesting in terms of the contours of permissible export restrictions under GATT, domestic policy space under Article XX GATT available to China as well as the special obligations China has under its special Accession Protocol (WTO plus obligations).With the U.S., EU and Japan being the complainants, and a host of other countries (11 to be precise) signing up as third parties, it promises to be a keenly fought battle.

Argentina, Spain and Biodiesel - Tit for Tat?

Reports of Argentina challenging a Ministerial order of Spain at the WTO related to sourcing of biodiesel produced in EU based plants to satisfy the quota system are trickling in here, here here and here. In fact, this has been brewing for sometime now as reported here, here and here.

A Ministerial order issued in April 2012 by Spain which is at the heart of the controversy establishes a biodiesel production quota system. This Ministerial Order lays down the rules to allocate biodiesel production quotas to EU based biodiesel producers whose production would be eligible to meet consumption mandates. In other words, to meet the consumption targets of biodeisel, it would be essential to source the biodiesel from EU based biodiesel plants. This effects Argentinian exports of biodiesel which hitherto occupied about 90 % of the Spanish market.

The Biodiesel Magazine captures the contours of the dispute well here. A United States Department of Agriculture (USDA) report captures the implications of the Spanish measure in this study. It concludes:

"Impact on biodiesel production, raw materials use and trade The publication of this Ministerial Order would likely result in an increased domestic production –in Spain and possibly in other EU MS– as well as in increased imports needs of raw materials that would replace finished product imports.

In 2011, data available show that domestic consumption of biodiesel reached 1.5 million MT, about 30 percent of capacity installed. The quota allocation will ensure that domestic consumption is supplied by EU based plants, however, full capacity use of Spain’s based is not assured, unless biodiesel exports become grow, as other MS plants can participate in the quota system and the overcapacity installed compared to projected consumption in Spain."

The issue raises several interesting questions:

1. By mandating that biodiesel should be sourced only from EU based plants, is not the measure in violation of the national treatment principle enshrined in the GATT and TBT Agreements? Is the measure not treating imported biodiesel less favourably than domestically produced biodiesel? Which exception in the WTO rules would Spain try to utilise to justify this measure?

2. In recent times Argentina has been accused by several countries of becoming "protectionist" by mandating import licensing requirements that are inconsistent with the provisions of WTO rules. I have blogged about this issue here and here. Also, Spanish interests were affected by the nationalisation of Argentina's biggest oil firm. Is this Ministerial order in response to this? Was this Spain's tit for tat measure?

3. Is this another  example of a protectionist wave? Are inward looking measures being justified on the grounds that it is a general practice? Does this not indicate the futility of protectionist measures since protectionism is a double edged sword - while one's protectionist measure might be temporarily beneficial, an other country's protectionist measure is bound to have an impact on your exporters. Hence, to challenge another country's protectionist measure with a moral authority, one's track record would also play a role.

4. Are we going to see a rise in such reactionary protectionist measures and what impact would it have on the dispute settlement mechanism? Without sounding alarmist, is this a start of a trade war scenario or should it be considered as a normal progression of the longstanding tension between domestic policy making and multilateral trade rules? As Dani Rodrik predicted in his "The End of the World as We Know it" in the Project Syndicate piece will we be seeing trade wars?

"Over the next few years, the world economy slumps into what future historians will call the Second Great Depression. Unemployment rises to record-high levels. Governments without fiscal resources are left with little option but to respond in ways that will only exacerbate problems for other countries: trade protection and competitive exchange-rate depreciation. As countries sink into economic autarky, repeated global economic summits yield few results beyond empty promises of cooperation."

Will multilateralism prevail or will it be the days of protectionist, unilateral measures once again? Time will tell? 

Observatory of Economic Complexity - Brilliant data visualisation

The Observatory of Economic Complexity by MIT is a brilliant display of data and its visualisation in the area of international trade. The Economic Complexity Observatory is a multidisciplinary effort between the Macro Connections group at the MIT Media Lab and the Center for International Development at Harvard University. The goal of the observatory is to develop new tools that can help visualize and make sense of large volumes of data that are relevant for macroeconomic development decision making. Explaining the rationale for this effort, it said:

"Ultimately, the complexity of an economy is related to the multiplicity of useful knowledge embedded in it. For a complex society to exist, and to sustain itself, people who know about design, marketing, finance, technology, human resource management, operations and trade law must be able to interact and combine their knowledge to make products. These same products cannot be made in societies that are missing parts of this capability set. Economic complexity, therefore, is expressed in the composition of a country’s productive output and reflects the structures that emerge to hold and combine knowledge."

I chanced upon it a few days ago and have been hooked ever since!

There is abundant literature on the impact of China on entering the WTO both on its internal economy as well as for the globalised economy. I tried to analyse some data relating to China in this Observatory and found the following results:

1. Percentage of exports from the US to China rose from 2.4% in 1995 (prior to China joining the WTO) to 3.3% in 2001 (when China joined the WTO) to 8.4% in 2010 (9 years after joining the WTO). US products have gradually found a place in Chinese markets over the last 10 years after China's accession tot he WTO.

2. Percentage of imports from China to the US rose from 20% in 1995 (prior to China joining the WTO) to 23% in 2001 (when China joined the WTO) and hovered around 20% in 2010 (9 years after joining the WTO).

3. China's exports of "Automated Data Processing machines" perhaps explains the increasing growth of the Chinese economy in the last 10 years. While Chinese exports of these products was only 2.6% of total exports of this product in 1995, it rose to 11% in 2001 and was at 52% in 2010. China has captured more than half the world share of exports in this sector. Could this be a direct result of its accession to the WTO in terms of accessing foreign markets with reduced trade barriers?

The Observatory of Economic Complexity is useful to understand, analyse and critically study the impact of globalisation on a country's development status. It is a very useful to tool for policy makers and trade experts to come to data linked decisions rather than decisions based on extraneous circumstances.

Africa and Middle East - new trade hubs?

A lot has been written about China's growth after its accession to the WTO  in 2001. China's aggressive domestic policies have ensured Chinese goods enter new, expanding markets. I personally experienced three instances recently of the all "pervasiveness" of the growth of Chinese products.


1. Local toys in local shops seem to be the preserve of the Chinese. The other day I noticed that even toys used in traditional Indian festivals are now made in China!


2. I was flying on a domestic air carrier. The ear phones offered in a plastic cover indicated it was made in China.


3. A few days ago a Japanese Professor visiting me presented me with a small LED reading light that can be attached to books for night reading. After explaining the latest Japanese technology behind the light, he looked up and said "Made in China"!

A Deliotte Research Publication  has come out with its Global Economic Outlook 2nd Quarter 2012 in which a chapter on "Trade Patterns of the Future" looks interesting. Predicting, surprisingly, that China may lose its pre-eminent position the authors have averred:

"It is quickly becoming apparent that China may be losing its status as the “factory of the world.” Cost economics that long worked in China’s favor have come full circle; domestic wages are on the rise, eroding much of the cost arbitrage offered to foreign companies. Even Chinese companies are affected as improving living conditions in the hinterland discourage potential migrants from seeking work in urban coastal provinces. Furthermore, an aging population in the next decade will likely weigh down labor supply and impact wage competitiveness. As Chinese production moves up the value chain, workers are demanding higher wages, better working conditions, and added welfare benefits. Thus, rising labor costs, along with pressure to loosen control on its exchange rate, could pose a serious threat to China’s international competitiveness if productivity does not correspondingly improve."

Authored by the Dr.Satish Raghavendran and Neha Jain, the chapter predicts that the new trade hub would be Africa and the Middle East.

"As economies in Sub-Saharan Africa and the Middle East develop and open up to trade, links between Asia, the Middle East, and Africa are expected to flourish. Economic integration between these regions and the emergence of South-South trade will likely result in the formation of influential trade hubs. The trade of the future will be determined by the availability of cheap resources and the destination of final demand itself. Some firms in developed economies have already begun to question whether the challenges of outsourcing their production processes outweigh the benefits of producing locally.

In this respect, Africa and the Middle East offer both low-cost production capabilities as well as a rapidly growing domestic market. While there are political and economic risks, a burgeoning consumer base will likely induce foreign business to navigate these markets and leverage locally available resources in a more cost-effective way. Supply chain disruptions following the earthquake in Japan also have highlighted the challenges of extreme specialization and reliance on a few economies. Another advantage that the Middle East and Africa offer is the close proximity to European markets. Thus, the emergence of Africa and the Middle East as new trade hubs is likely to play a pivotal role in connecting people, products, and technology."

Would this be the future of trade patterns? Would China's dominant position in today's growth story be challenged? China itself is seriously engaged with Africa as I had noted in this blog piece. Africa's percentage of world trade and intra-Africa trade is very small. Some argue that Africa needs to boost its internal productive capabilities before relying on trade as a weapon of growth. Will it be the end of "Cheap China" making way for a resurgent "Africa" and middle east? One has noticed that the Chinese State has played a pivotal role in structuring its domestic policies to ensure China plays an active part in the international market. Some have called it protectionist while others argue that it has been an intelligent and aggressive use of its international space. Will the African and middle eastern countries have the same strategy? Is it too premature to predict a Chinese decline?