Author Archives: Benjamin Chris Zissimos

The Political Economy of International Organization

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The 12th Annual Conference, February 7-9, 2019

The PEIO conference brings together economists, political scientists and other scholars to address political-economy issues related to any international organization, including the World Trade Organization, the United Nations, the International Monetary Fund, the World Bank, the European Union, and also other international organizations that have as yet received less attention in the academic literature. Questions we seek to address include how IOs are organized and governed, what are the incentives of governments dealing with IOs as well as the incentives of the bureaucrats who staff them, and what are the effects of IOs on policy outcomes. We also consider the interaction of IOs with transnational actors such as commercial lobbies and NGOs and have a particular interest in the interaction of the international political economy with the domestic political economy of IO members. Submissions on topics more broadly related to international organization—such as foreign aid, international agreements and international law—are welcome.

Conference Venue:

University of Salzburg, Austria

2019 Program Committee:

Thomas Bernauer (ETH Zurich) Lawrence Broz (University of California, San Diego) Renee Bowen (University of California, San Diego)
Axel Dreher (Heidelberg University) Andreas Dür (University of Salzburg) Simon Hug (University of Geneva)
Christopher Kilby (Villanova University) Katharina Michaelowa (University of Zurich) Helen Milner (Princeton University)
Christoph Moser (University of Salzburg) Daniel Nielson (Brigham Young University) B. Peter Rosendorff (New York University)
Gabriele Spilker (University of Salzburg) Randall Stone (University of Rochester) Michael J. Tierney (College of William and Mary)
Eric Werker (Simon Fraser University)

Call for Papers

Submissions

Special issue of the Review of International Organizations: The Political Economy of the European Union, eds. Andreas Dür, Christoph Moser, Gabriele Spilker (University of Salzburg)

Click here for a link to the PEIO site.

 

Growth, Import Dependence, and War

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By Roberto Bonfatti (University of Nottingham) and Kevin Hjortshøj O’Rourke  (University of Oxford)

World trade has increased tremendously in recent decades, driven by the rise of China and other emerging economies. The reliance of world trade on choke points (such as the Strait of Hormuz, the Malacca Strait and the South China Sea) creates the need for someone to guarantee the freedom of navigation. Traditionally, this role has been upheld by the naval hegemon of the day: Britain during the 19th century’s Pax Britannica, and the United States today. While the naval hegemon may in fact be providing a global public good by behaving in this manner, its activities may not always reassure everyone, especially if strategic tensions are gradually building up between itself and rising powers such as China.

Rising tension between the US and China is often analyzed in the context of the broader challenge that the rise of China poses to US military hegemony. Political scientists have long cautioned against the risks posed by shifts in relative power. In fact, in the eyes of some theorists, such shifts are the main reason why war can occur. Robert Powell shows, in the context of a two-country world, that if one of the two countries is catching up militarily on the other, it may be impossible to dissuade the established power from launching a pre-emptive war against the rising power.[1]

This is because from the perspective of the established power, not going to war carries a future cost: in the future, the rising power, having become more powerful, will be better able to impose its will on the established hegemon when it comes to disputes between the two. The follower has an incentive to forestall a pre-emptive war by the leader, by promising the leader a sufficiently big slice of the pie in the future. Since it cannot pre-commit to this, and has an incentive to use its greater power in the future to secure a greater share of the pie, the leader may choose to launch a pre-emptive war in order to lock in a higher share of the spoils while it still has the chance.

Applied to the case of industrial catching up, this model seems to have clear implications. Military power goes hand in hand with growth and industrial development; thus, an established industrial leader should be the one to consider launching a pre-emptive war against a catching-up, late industrializing, follower.

In our recent work, we show that, if international trade is taken into account, the implications of the model can be quite different.[2] Central to our analysis are the assumptions that the follower needs to import increasing amounts of raw materials from the rest of the world, as it undergoes structural change, and that the leader may be able to blockade the follower’s trade.

An industrial leader may well be losing out to a catching-up follower in terms of potential military power; however, this does not necessarily imply that it is actually becoming militarily weaker over time. Industrial catching up is a double-edged sword for the follower: while it makes its military apparatus potentially more powerful, rapid growth and structural change also makes it more dependent on imported raw materials. If the leader has the capacity to blockade these imports in case of war, the follower may actually become militarily weaker, rather than stronger, over time. In this case, it may be the follower who launches a pre-emptive war on the leader, and not the other way around.

By generalizing the model in this manner, we open up a rich menu of theoretical possibilities. For example, the follower may decide to attack resource-rich peripheral areas in an attempt to become more self-sufficient, or entirely self-sufficient, in raw materials. It may do so instead of, or prior to, launching an attack on the leader. The follower may even attack the resource-rich region in circumstances when it knows that this will provoke an attack upon it by the leader, when otherwise the two countries would not have gone to war.

We argue that our model can shed light on why it was Japan who attacked the United States in 1941, and not the other way around.[3] This was unambiguously a case of an industrial follower catching up on the leader. And yet Japan was also becoming rapidly more dependent on imported raw materials. Japan’s invasions of resource-rich Manchuria, China, and Southeast Asia were attempts to break free from this pattern of increased dependence: they correspond to attacks on the resource-rich region in our model, prior to an eventual attack on the leader.

Like Japan, late 19th and early 20th century Germany had been rapidly catching up on the Britain and the United States. However, Germany had also become more dependent on imports of food and raw materials. While we do not argue that this strategic dependence explains the origins of either world war in Europe, Avner Offer has argued that it was a key factor explaining the Anglo-German naval rivalry which preceded World War I.[4] After World War I, Hitler was obsessed with German dependence on imports of food and strategic raw materials. The importance of securing the resources needed to fight his wars is a constant theme of Adam Tooze’s classic book on the Nazi economy.[5] One obvious solution was to attack Eastern Europe, which corresponded to the resource-rich peripheral region in our model, even though attacking Poland risked war with the UK and France. And in the long run, conquering Russia was seen as the only way to achieve complete self-sufficiency in raw materials.

Such theoretical and historical considerations suggest that it is Chinese vulnerability, rather than American, that we should be worried about. As long as the United States retains control over maritime choke points, it may be China, rather than the United States, that fears becoming more vulnerable over time. In that context, Chinese expansionism in the South China Sea, while potentially dangerous, may not be so surprising.

References

Barnhart, M.A. (1987). Japan Prepares for Total War: The Search for Economic Security, 1919-1941. Cornell University Press.

Bonfatti, R. and K.H. O’Rourke (forthcoming). “Growth, Import Dependence and War.” Economic Journal. An earlier version is available as CEPR Discussion Paper 10073.

Offer, A. (1989). The First World War: An Agrarian Interpretation. Clarendon Press.

Powell, R. (2006). “War as a Commitment Problem.” International Organization, vol. 60(1), pp. 169-203.

Tooze, A. (2006). The Wages of Destruction: The Making and Breaking of the Nazi Economy, Allen Lane.

Endnotes

[1] See Powell (2006).

[2] See Bonfatti and O’Rourke (forthcoming).

[3] See Barnhart (1987).

[4] See Offer (1989).

[5] See Tooze (2006).

Foreign Investment Boosts Sophistication of Domestic Manufacturing: New Evidence from Turkey

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By Beata Javorcik (University of Oxford), Alessia Lo Turco, (Marche Polytechnic University), Daniela Maggioni (University of Catania)

Recently, there has been a renewal of interest in industrial policy across the world. Advanced economies promise to use industrial policy to revive their declining manufacturing, while emerging markets hope that industrial policies will help them upgrade their production structure and in this way stimulate economic growth. Yet, little is known about the micro determinants of product upgrading.

The existing research suggests that inflows of foreign direct investment (FDI) can foster host countries’ production upgrading, where upgrading is measured in terms of the unit values of exports (Harding and Javorcik,  2012).[1]

In our recent work, we move away from unit values – a highly imperfect proxy for product quality –  and examine the link between FDI and product upgrading, as captured by complexity of new products introduced by domestic firms.[2] We focus on manufacturing firms in Turkey, a country that has experienced a spectacular surge in FDI inflows during the 2000s and dramatically increased the sophistication of its productive structure in the last decades.[3]

Anecdotal evidence

Anecdotal evidence suggests that foreign affiliates stimulate product upgrading among their suppliers. For example, Indesit Company, an Italian white good producer – recently acquired by Whirlpool – has produced refrigerators in Turkey since the 1990s. In 2012, Indesit built a new plant to produce washing machines. To become a supplier of this new plant, a local company purchased new presses and automated its production process. This allowed it to start producing a new and more sophisticated product, a washing machine flange, and to increase efficiency and production volumes. The flange is a very complex product as it needs to be produced with no aesthetic defects by an 800-1,000 tonne metal presses. It also needs to withstand the stress of between 1,000 and 1,400 revolutions per minute while remaining within a certain range of vibration and noisiness. Indesit has shared essential tacit knowledge, information processes, instructions and control procedures with the local company, thus stimulating and supporting the supplier’s complexity upgrading.

Inspired by the anecdotal evidence, our study examines the link between the presence of foreign affiliates and production upgrading by Turkish firms located in the same region and active in the input-supplying industries.

Measuring product complexity

To capture product complexity we use a measure proposed by César Hidalgo and Ricardo Hausmann, who relate the concept of product complexity to the extent and exclusivity of capabilities needed to produce a given product.[4] It is easiest to explain this measure using a Lego analogy. Think of a country as a bucket of Lego pieces with each piece representing the capabilities available there. The set of products (i.e., Lego models) a country can produce depends on the diversity and exclusiveness of the Lego pieces in the bucket. A Lego bucket that contains pieces that can only be used to build a toy bicycle probably does not contain the pieces to create a toy car. However, a Lego bucket that contains pieces that can build a toy car may also have the necessary pieces needed to build a toy bicycle.  While two Lego buckets may be capable of building the same number of models, these may be completely different sets of models. Thus, determining the complexity of an economy by looking at the products it produces amounts to determining the diversity and exclusivity of the pieces in a Lego bucket by simply looking at the Lego models it can build.

Our findings

Our analysis suggests that the presence of foreign affiliates does not affect the propensity of Turkish firms to innovate. However, the presence of foreign affiliates is positively correlated with the complexity level of products newly introduced by Turkish firms active in the supplying industries and located in the same region.

The estimated effect is economically meaningful. A 10 percentage point increase in foreign presence implies moving about half of the way from the production of pot scourers to producing stainless sinks. An increase of about 17 percentage points in FDI in the relevant sectors would be necessary in order to move from the production of stainless sinks to the production of the washing machine flanges.

Conclusion  

Our findings matter for policy. Dani Rodrik argues that enhancing an economy’s productive capabilities over an increasing range of manufactured goods can be considered an integral part of economic development.[5] As foreign affiliates facilitate the upgrading of the host country’s productive capabilities, our results, then, imply that FDI inflows can act as an important stimulus for economic growth. Thus, there is room for investment promotion activities, a policy that is quite effective in developing countries.[6] In contrast to many other industrial policies, investment promotion is relatively inexpensive and causes few distortions. Therefore, there is little downside when the government gets it wrong.

References

Harding, T. and Javorcik, B.S. (2011). ‘Roll out the red carpet and they will come: investment promotion and FDI inflows’, Economic Journal, vol. 121(557), pp. 1445–1476.

Harding, T. and Javorcik, B.S. (2012). ‘Foreign direct investment and export upgrading’, The Review of Economics and Statistics, vol. 94(4), pp. 964–980.

Hidalgo, C.A. and Hausmann, R.(2009). ‘The building blocks of economic complexity’, Proc. Natl. Acad. Sci., vol. 106, pp. 10570–10575.

Javorcik, B.S., Lo Turco, A., Maggioni, D. ‘New and Improved: Does FDI Boost Production Complexity in Host Countries?‘ Economic Journal, forthcoming.

Rodrik, D. (2006). ‘Industrial development: stylized facts and policies’, Kennedy School of Government.

Endnotes

[1] See Harding and Javorcik (2012).

[2] Javorcik, Lo Turco and Maggioni (forthcoming).

[3] See Hidalgo (2009).

[4] See Hidalgo and Hausmann (2009)

[5] See Rodrik (2006)

[6] Harding and Javorcik (2011)

2018 InsTED Workshop at Syracuse University

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5th InsTED Workshop on
“Advances in Institutions, Trade and Economic Development”

The workshop will take place at Syracuse University, NY, USA, May 15th-16th 2018. Sponsorship by the Department of Economics, the Maxwell School Dean’s Office, the Moynihan Institute of Global Affairs, and the Program for the Advancement of Research on Conflict and Collaboration, all at Syracuse University, is gratefully acknowledged.

Keynote speakers:

Pol Antràs (Harvard University)

Nina Pavcnik (Dartmouth College)

 

WORKSHOP PROGRAM

Directions to 220 Eggers (Registration & All Sessions)

Registration: Please click here to register

 

 

 

Organizers: Kristy Buzard (Syracuse), Devashish Mitra (Syracuse), Ben Zissimos (Exeter) and Isleide Zissimos (Exeter)

Self-Enforcing Trade Agreements and Lobbying

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By Kristy Buzard (Syracuse University)

Going back to the mid-1980s, the repeated prisoner’s dilemma has been used to model the absence of strong external enforcement mechanisms for trade agreements.[1] Cooperation is enforced by promises of future punishment for any deviation from the agreement, and the amount of cooperation that can be achieved depends on the severity of the chosen punishments. The strongest incentive-compatible punishment is often the grim trigger strategy in which all players play the static Nash equilibrium forever when any of them defects.

More recent work shows that grim trigger punishments can be improved upon in some circumstances. Jee-Hyeong Park, for instance, has demonstrated that the presence of asymmetric information and imperfect monitoring can make it more efficient to choose shorter punishments.[2] In a similar setting, Alberto Martin and Wouter Vergote show that retaliation — i.e. delayed punishment — dominates reciprocity.[3]

In a recent paper, I identify a different rationale for limiting punishments: endogenous politics.[4] This paper is the first to incorporate endogenous lobbying along the lines of the classic Grossman-Helpman “Protection for Sale” model — the standard model for endogenizing politics in trade policy — into a repeated-game setting. In place of a unitary government, this model has two branches of government who share policy-making power.[5] By endogenizing the political economy weights, one can address questions about the commitment value of trade agreements, and examine the implications of self-enforcement constraints for the design of trade agreements.

I assume that the social-welfare maximizing executives of two countries choose trade agreement tariffs that must then be implemented by politically-susceptible legislatures.[6] For simplicity, only the import-competing industry is represented by a lobby. The weight the legislature puts on the import-competing industry’s profits increases in lobbying effort, which can be thought of as including campaign contributions as well as broader measures of lobbying activity. The lobby will choose its effort level to optimally influence the legislature’s decisions about whether to abide by the trade agreement and how to set tariffs in the absence of an agreement. Assuming there is no uncertainty about the effect of lobbying effort on the outcome of the political process, the lobby either exerts the minimum effort needed to derail the agreement or exerts no effort at all. The executives maximize social welfare by choosing the lowest tariffs that make it unattractive for the lobbies to provoke the legislature to violate the trade agreement. There will thus be no trade disputes in equilibrium, but the out-of-equilibrium threat that a lobby might provoke one is crucial in determining the equilibrium trade agreement structure.

Adding a lobby to the usual repeated-game model adds a new constraint. The constraint on the legislature is loosened by an exogenous increase in the length of the punishment: defections become relatively more unattractive as the punishment becomes more severe as in the standard prisoner’s dilemma. However, the new constraint due to the presence of lobbying becomes tighter because the lobby prefers punishment periods. The higher tariffs during punishment periods give the lobby increased incentive to exert effort as the punishment lengthens. In the face of this heightened lobbying incentive, the executives must raise the trade agreement tariff to avoid a trade dispute.

The optimal Nash-reversion punishment strikes a balance between these two competing forces, so adding endogenous politics suggests an optimal length for punishments: it is  finite for most values of the political weighting function and can be derived directly from the players’ incentive constraints.[7] Shortening the punishment in models with uncertainty serves to increase welfare by minimizing time spent in punishment periods. Since there is no uncertainty in this model, the players remain in the cooperative state in all periods.[8] Here, social welfare improves because shorter punishments weaken the lobby’s incentive to exert effort and this allows the executives to reduce the trade agreement tariffs.

For a given punishment length, increases in the patience of the legislature mean the lobby must exert more effort to induce the legislature to endure the punishment. The executive can thus reduce trade agreement tariffs without fear that the agreement will be broken. Increases in the lobby’s patience and the lobby’s ability to influence the legislature (as measured by the political weighting function) work in the opposite direction: they allow the lobby to exert less effort to provoke a trade dispute, and therefore higher equilibrium trade agreement tariffs are necessary to avoid a dispute.

The optimal punishment length itself also depends on how readily special interests are able to influence the political process. If the lobby is weak, the optimal punishment converges to that of the model without a lobby: longer punishments are better because the key constraint is the legislature’s. As the lobby becomes more influential, the optimal punishment becomes shorter because the lobby’s incentive becomes more important. That the optimal length of punishments is a function of the influence of the lobbies reinforces the idea that endogenizing politics can be critically important for institutional design questions.

References

Bagwell, K., and R.W. Staiger, (2005); “Enforcement, Private Political Pressure, and the General Agreement on Tariffs and Trade/World Trade Organization Escape Clause.” Journal of Legal Studies, 34(2): 471–513.

Buzard, K., (2017a); “Self-Enforcing Trade Agreements and Lobbying.” Journal of International Economics, 108(1): 226–242.

Buzard, K., (2017b); “Trade Agreements in the Shadow of Lobbying.” Review of International Economics, 25(1): 21–43.

Dixit, A., (1987); “Strategic Aspects of Trade Policy.” in: T.F. Bewley (ed.), Advances in Economic Theory: Fifth World Congress. Cambridge University Press, pp. 329–362.

Maggi, G., and A. Rodríguez-Clare, (2007); “A Political-Economy Theory of Trade Agreements.” The American Economic Review, 97(4): 1374–1406.

Martin, A., and W. Vergote, (2008); “On the Role of Retaliation in Trade Agreements.” Journal of International Economics, 76(1): 61–77.

Milner, H.V., and B.P. Rosendorff, (1997); “Democratic Politics and International Trade Negotiations: Elections and Divided Government as Constraints on Trade Liberalization.” Journal of Conflict Resolution, 41(1): 117–146.

Park, J.-H., (2011); “Enforcing International Trade Agreements with Imperfect Private Monitoring.” Review of Economic Studies, 78(3): 1102–1134.

Endnotes

[1] See for example Dixit (1987).

[2] Park (2011).

[3] Martin and Vergote (2008).

[4] Buzard (2017a).

[5] This approach follows Milner and Rosendorff (1997).

[6] The model admits an interpretation in which the same branch of government both negotiates the trade agreement and decides on the applied tariff ex-post, and thus the one-shot game shares much in common with Maggi and Rodríguez-Clare (2007).

[7] In Park (2011), the finite punishment length is due to imperfect monitoring and/or uncertainty.

[8] In Buzard (2017b), I show how uncertainty can be incorporated into this model.

Fellow in International Economics

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Title: Fellow in International Economics

  • Employer: Rice University (Baker Institute)
  • Location: United States
  • Position Type: Other Academic
  • Deadline: Jan 31, 2018

  • Job Description: 

    Rice University’s Baker Institute for Public Policy anticipates filling a Ph.D. level position in 2018. The Will Clayton Fellow in International Economics will conduct original policy research in international economics and make policy recommendations. Relevant research areas include trade, exchange rates, monetary policy, and international labor markets. The Fellow will engage other Institute fellows, policy-makers in government, and the general public in discussions involving international economics.

    We are particularly interested in candidates with specific skills in statistical analysis and the ability to produce empirical research.

    Two years of relevant research experience are required for this full-time position with competitive compensation. Candidates who recently completed or expect to soon complete a Ph.D. in economics are encouraged to apply. Additional related experience may be substituted in lieu of the education requirement.

    The Baker Institute is a non-partisan, university-based think tank that produces high-quality public policy research. Rice University is an Equal Opportunity/Affirmative Action Employer.

    Applications completed by December 17, 2017 will be considered for interviews at the AEA Annual Meeting. Preliminary applications will be accepted through JOE. Finalists will be required to complete an application at jobs.rice.edu.

Trade and Growth with Heterogeneous Firms and Asymmetric Countries

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By Takumi Naito (Vanderbilt University and Waseda University)

Trade liberalization encourages more productive firms to start exporting, while it forces more unproductive firms to exit from their domestic markets. The increase in the average productivity because of tougher selection contributes to higher welfare of countries. This idea, captured by the Melitz model of heterogeneous firms, has now become one of the standard principles of international economics.[1] However, the implications of liberalization-induced selection for countries’ growth was not explored until Richard Baldwin and Frédéric Robert-Nicoud (henceforth BRN) set up a two-country R&D-based endogenous growth model that embodies this underlying feature.[2] In the BRN model, trade liberalization has mixed effects on long-run growth: on the one hand, it allows knowledge to flow across borders more freely through trade in goods, which is good for growth; on the other hand, it makes it more difficult for a potential entrant to survive, which is bad for growth. The total growth effect of liberalization depends on the specification of R&D technologies.

Since BRN, many researchers have developed models of trade and growth with heterogeneous firms based on a common assumption: symmetric countries.[3] This is clearly unrealistic in the context of developing and developed countries: they are totally different in terms of endowments, preferences, and technologies. Not only that, the assumption also prevents us from studying the effects of policy shocks that are necessarily asymmetric across countries such as unilateral trade liberalization, regional trade agreements, and so on. To enlarge the scope of heterogeneous firm models of trade and growth for policy analysis, we have to extend them to allow for asymmetric countries.

In spite of the demand, there has been no successful attempt to deal with asymmetric countries in heterogeneous firms and endogenous growth settings. The problem is to evaluate an entrant’s future profits possibly growing at different rates across markets and over time, which makes it almost impossible for us to determine the entrant’s entry decision. How can we resolve the technical difficulty?

In a recent research project, which so far consists of two papers, I have provided two possible solutions to resolve this difficulty.  In the first paper, the solution I provide involves giving up the assumption that firms have an infinite horizon.[4] In my framework, each firm’s product life ends in each period, and they have to pay the initial and market entry costs every time they reenter their markets. By embedding the static Melitz framework in a two-country AK model (i.e., an endogenous growth model with constant returns to capital), I show that unilateral trade liberalization increases the numbers and revenue shares of exported varieties and the growth rates of all countries for all periods, and welfare of all countries, compared with the old balanced growth path (BGP), where all variables grow at constant rates. Intuitively, a country’s import liberalization directly encourages exports and domestic selection in the partner country, while it indirectly promotes exports and domestic selection in the liberalizing country through the decreased relative rental rate clearing its trade deficit.[5] More domestic selection implies the higher return to, and hence the growth rate of, capital. The greatest advantage of the model is the ability to describe the transitional dynamics caused by policy changes, distinguishing between the short- and long-run effects.

In the second paper of this project, the solution I provide involves giving up transitional dynamics in order to focus on a BGP in an asymmetric BRN model where firms do have infinite horizons.[6] Then we can still determine the relative number of varieties from the balanced growth condition, and also the relative wage from the balanced trade condition. It turns out that unilateral trade liberalization has similar selection effects to the first paper described above, and the symmetric BRN model: a country’s import liberalization encourages exports and domestic selection in both the partner and liberalizing countries. As a result, even unilateral trade liberalization can speed up global growth if it sufficiently facilitates international knowledge spillovers.

With the two solutions in hand, we are no longer restricted by the assumption of symmetric countries in endogenous growth models with heterogeneous firms. Our models are so flexible that they can be extended to study the effects of trade policies, domestic policies, or combinations thereof. For example, for governments of developing countries who depend heavily on import tariffs as a revenue source, it has been a serious concern how to design a domestic tax structure which recovers the revenue lost from trade liberalization. It will be interesting to see how such tariff and tax reform affects growth and welfare of developing and developed countries in a Melitz world. It should also be noted that the above two-country models can be extended to more than two countries, although the analysis will be much harder. This allows us to examine the effects of a regional trade agreement on member and nonmember countries. It is hoped that the papers will trigger applications of asymmetric heterogeneous firm models of trade and growth to more relevant policy issues.

References

Baldwin, R. E., and F. Robert-Nicoud (2008) “Trade and growth with heterogeneous firms,” Journal of International Economics 74(1), 21-34

Demidova, S., and A. Rodríguez-Clare (2013) “The simple analytics of the Melitz model in a small economy,” Journal of International Economics 90(2), 266-272

Felbermayr, G., B. Jung, and M. Larch (2013) “Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model,” Journal of International Economics 89(1), 13-25

Gustafsson, P., and P. Segerstrom (2010) “Trade liberalization and productivity growth,” Review of International Economics 18(2), 207-228

Melitz, M. J. (2003) “The impact of trade on intra-industry reallocations and aggregate industry productivity,” Econometrica 71(6), 1695-725

Naito, T. (2017a) “An asymmetric Melitz model of trade and growth,” Economics Letters 158, 80-83

Naito, T. (2017b) “Growth and welfare effects of unilateral trade liberalization with heterogeneous firms and asymmetric countries,” Journal of International Economics 109, 167-173

Sampson, T. (2016) “Dynamic selection: an idea flows theory of entry, trade, and growth,” Quarterly Journal of Economics 131(1), 315-380

Endnotes

[1] Melitz (2003).

[2] Baldwin and Robert-Nicoud (2008)

[3] See, for example, Gustafsson and Segerstrom (2010) and Sampson (2016).

[4] Naito (2017a)

[5] The reallocation mechanism induced by unilateral trade liberalization described here is the same as that in the static asymmetric Melitz models of Felbermayr et al. (2013) and Demidova and Rodríguez-Clare (2013), except that they consider labor as the only factor.

[6] Naito (2017b)

LSE PhD Studentships

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In 2018 LSE will be offering around 100 major studentships to new PhD students in the form of LSE PhD Studentships and LSE ESRC DTP Studentships.

Eligibility

LSE PhD Studentships are tenable for four years and cover full fees and an annual stipend of £18,000. They are available for UK, EU and international students undertaking research in any LSE discipline, with annual renewal subject to satisfactory academic performance.

These awards will be made solely on the basis of outstanding academic merit and research potential. This relates both to your past academic record and to an assessment of your likely aptitude to complete a PhD in your chosen topic in the time allocated.

The studentships include a requirement that scholars contribute to their department as part of their research training, in the form of teaching or other work, usually from year two onwards.

Deadline: December 13th, 2017.

Click here for further details and to apply

Global Tariff Negotiations as a Stumbling Bloc to Global Free Trade?

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By James Lake (Southern Methodist University) and Santanu Roy (Southern Methodist University)

The principle of non-discrimination lies at the heart of the WTO. GATT Article I mandates that, for a given product, a country cannot set different tariffs on different trading partners. Indeed, GATT Article I has provided the bedrock for the various rounds of global trade negotiations, including the 1994 Uruguay Round. However, GATT Article XXIV allows Free Trade Agreements (FTAs) whereby members eliminate tariffs on each other while maintaining tariffs on non-members. Thus, FTAs directly contradict the non-discrimination principle. In turn, an important and long standing issue in the FTA literature is whether FTAs help or hinder global trade negotiations. In the famous language of Jagdish Bhagwati, are PTAs “building blocs” or “stumbling blocs” to global trade liberalization?

A long literature has tackled Bhagwati’s question.[1] However, the interdependence between FTAs and global trade negotiations need not only run from FTAs to global negotiations. The process of global negotiations may also impact the process of FTA formation and, in turn, the degree of global trade liberalization. That is, the tariff concessions embedded in the Uruguay Round may have shaped the subsequent process of FTA formation and, in turn, the ultimate degree of global trade liberalization. Yet, as noted by Caroline Freund and Emanuel Ornelas in their review of the literature, the impact of global negotiations on FTAs has received surprisingly little attention in the literature.[2]

In a recent paper, we investigate how an initial round of global negotiations over tariff bindings (i.e. the upper bound on tariffs) impact the subsequent process of FTA formation in a three-country world where governments favor the interests of their import competing sector due to political economy motivations.[3] To do so, we compare the outcomes of two extensive form games that differ only because of the presence or absence of an initial round of global tariff negotiations. In the first game, global negotiations precede FTA negotiations and forward looking governments anticipate the possibility of FTA formation during global negotiations. In the second game, there are no global negotiations preceding FTA negotiations. In either game, FTA negotiations take place sequentially through a randomly chosen order. This framework generates interesting insights.

Our main result is that, when political economy motivations are not too strong, global tariff negotiations actually prevent global free trade. When global tariff negotiations precede FTA negotiations, a tariff ridden world emerges with globally negotiated tariff bindings above zero and no more than one pair of countries linked by an FTA. However, in the absence of global tariff negotiations, FTA formation continues until global free trade is attained via all pairs of countries linked through FTAs. Thus, global tariff negotiations are the cause of a world stuck short of global free trade. In other words, global tariff negotiations are a stumbling bloc to global free trade!

The driving force behind our main result is the different level of tariff concessions given by the eventual FTA non-member in the presence and absence of global tariff negotiations. In the absence of global tariff negotiations, the FTA non-member has no pre-existing tariff bindings. To gain tariff concessions from the outsider, FTA members have strong incentives to form subsequent FTAs with the non-member. Indeed, as long as government political economy motivations are not too strong, sequential FTA formation leads to global free trade. However, global negotiations produce significant tariff binding concessions by all countries before FTA negotiations. These tariff concessions obtained through forward looking global negotiations are deep enough that, upon FTA formation, FTA members no longer have any incentive for FTA formation with the non-member and global free trade does not emerge. In this sense, the success of global tariff negotiations in lowering tariffs drives our result that global tariff negotiations prevent global free trade.

From a practical standpoint, our analysis explains how globally negotiated tariffs depend on anticipations regarding future FTA formation and how binding overhang and tariff complementarity depend on political economy motivations.[4] Indeed, our analysis can shed light on the different empirical results of Antoni Estevadeordal, Caroline Freund and Emanuel Ornelas versus Nuno Limao and Baybars Karacaovali.[5] The former find empirical evidence for tariff complementarity among South American FTA members (i.e. FTA members choose to lower their tariffs on non-members after FTA formation). However, the latter find no evidence that preferential tariff liberalization begets multilateral tariff liberalization for the US and the EU. Our theoretical results suggest the former (latter) should emerge among governments with relatively strong (weak) political economy motivations. Indeed, these predictions based on political economy motivations square well with the recent cross-country empirical estimates of political economy motivations by Kishore Gawande, Pravin Krishna and Marcelo Olarreaga.[6]

References

Estevadeordal, A., C. Freund, and E. Ornelas (2008); “Does Regionalism Affect Trade Liberalization Toward Nonmembers?” Quarterly Journal of Economics 123(4): 1531-1575.

Freund, C. (2000); “Multilateralism and the Endogenous Formation of Preferential Trade Agreements.” Journal of International Economics 52 (2): 359-376.

Freund, C. and E. Ornelas (2010); “Regional Trade Agreements.” Annual Review of Economics 2(1): 139-166.

Gawande, K., P. Krishna, and M. Olarreaga (2012): “Lobbying Competition over Trade Policy.” International Economic Review 53 (1), 115-132.

Karacaovali, B. and N. Limão (2008); “The Clash of Liberalizations: Preferential vs. Multilateral Trade Liberalization in the European Union.” Journal of International Economics 74(2): 299-327.

Krishna, P. (1998); “Regionalism and Multilateralism: A Political Economy Approach.” Quarterly Journal of Economics 113(1): 227-251.

Lake, J. and S. Roy (2017); “Are Global Trade Negotiations Behind a Fragmented World of Gated Globalization?” Journal of International Economics 108, 117-136.

Limão, N. (2006); “Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the United States.” American Economic Review 96(3): 896-914.

Ornelas, E. (2005a). “Endogenous Free Trade Agreements and the Multilateral Trading System.” Journal of International Economics 67(2): 471-497.

Ornelas, E. (2005b); “Trade Creating Free Trade Areas and the Undermining of Multilateralism.” European Economic Review 49 (7): 1717-1735.

Endnotes

[1] Some influential contributions include Krishna (1998), Riezman (1999), Ornelas (2005a,b) and Saggi and Yildiz (2010).

[2] See Freund and Ornelas (2008) for two exceptions, and see Freund and Ornelas (2010) for their review of the literature.

[3] In our paper Lake and Roy (2017), we model global tariff negotiations over tariff bindings because countries negotiate over tariff bindings rather than the actual tariffs (i.e. applied tariffs) in practice.

[4] Binding overhang is the difference between the tariff binding and the actual tariff set by a country. Tariff complementarity is the phenomenon where, upon FTA formation, the FTA members choose to lower their tariffs on non-members.

[5] Estevadeordal et. al. (2008), Limao (2006) and Karacaovali and Limao (2008).

[6] Gawande, Krishna and Olarreaga (2012).