International Econ Final Exam

If there is a balance of concessions in tariff cuts between Countries 1 and 2:

The world price ratio for goods x and y remains constant

Suppose the skilled wage falls to w', but there is no possibility of outsourcing:

Total excess demand for labor is GE'

By value, the largest regional trade agreement currently under negotiation is:

Trans-PacificPartnership

"Factory Asia" led "race to the bottom" unilateralism: (T/F)

True

After 50 years of trade liberalization under the GATT/WTO, it has been argued that developed countries are facing "globalization fatigue": (T/F)

True

Which of the following is not a regional trade agreement:

UNCTAD

The area D2E0w0 is the return to:

Unskilled labor in industry 2

The Great "Unbundling"*

Advances in transport/communication have weakened link between geographic concentration and specialization Possible to separate tasks in time and space Blinder (2006) denotes this as "third industrial revolution", i.e., (i) agriculture to manufacturing (18th -19th Century); (ii) manufacturing to services (20th Century); (iii) outsourcing (21st Century) Friedman (2005) describes it in terms of forces he believes have "flattened" world

What is Outsourcing?

After economist Gregory Mankiw described outsourcing as "...a good thing...", it became a hot- button issue in 2004 Presidential election Procuring of service inputs by firm from foreign source Origin - contracting out of design work in UK auto industry to Germany in 1970s Focus on service outsourcing to low-wage countries - 6/10 leading cities for outsourcing are Indian

Border tax adjustments

Carbon tariffs are a special case of a border tax adjustment (BTA) BTA is a tax imposed at the border on imports, given tax is imposed on "like" domestic good Allowed under GATT Article II, but BTA cannot be greater than domestic tax (GATT Article III) Legal status established in late-1960s when EEC was discussing implementation of VAT Not clear BTAs are applicable in carbon case

Border tax adjustments continued

Concern with tougher climate policy is that it will raise costs of energy-intensive industries such as aluminum production Industry will suffer loss of competitiveness, and there will be carbon leakage Debate among legal observers as to whether WTO/GATT rules will allow BTAs on imported goods that embody energy inputs Clarity will only be settled via WTO panel

Why The Concern?

Employment in services sector has outgrown that in manufacturing Service sector previously impervious to international competition Pace of outsourcing has been swift given modern communication technology Concerns about a "jobless" recovery in early part of 2000s, and also arising during recent recession

Future of Outsourcing

Forecast that outsourcing of service jobs will actually slow down over next decade: - easiest jobs to outsource have already gone - many jobs that could have been outsourced have been lost due to productivity improvements Firms also discovering hidden costs to outsourcing: - salaries for software engineers increasing in emerging markets - looking after customers is a core part of business

Will the juggernaut re-start?

History suggests idiosyncratic shocks are required for trade liberalization to occur At present, political unwillingness to liberalize agricultural trade is holding up continued multilateralism in WTO, as well as aftermath of recession Perhaps future role of WTO may be to promote multilateralism through taming tangle of regional/bilateral agreements Alternatively, "...regional deals may create a new sense of urgency around multilateral talks, much as deeper North American and European integration encouraged progress on the Uruguay Round..." The Economist, March 16, 2013

Multilateralizing regionalism: how the EU spaghetti bowl was tamed

In early-1990s, EU signed many bilateral agreements with Central and Eastern European countries, followed by bilateral agreements with Mediterranean countries Resulted in emergence of European spaghetti bowl with complex rules of origin Became unsustainable for many EU-based firms as they began to offshore production of inputs EU introduced Pan-European Cumulation System (PECS) in 1997 - a coat that was 50% Hungarian, 30% Turkish, and 20% Polish is now 100% European, i.e., de facto multilateral freeing of trade

How Many US Service Jobs?

Increased from 103,000 in 2000 to 315,000 in 2003 (Forrester Research, 2004) 3.4 million service jobs expected to be lost by 2015, with wage loss of $151 billion More US jobs in-sourced than outsourced (Amiti and Wei, 2005) Expected annual job losses accounts for 1% of 30 million jobs "churned"/year "Cost-disease" likely to apply, i.e., price of personal services will rise relative to price of impersonal services

Is the Earth Really Flat?

Leamer (2007) suggests three key forces: - more unskilled workers (China, India) - new equipment for knowledge workers - communications innovations First two not "flattening", third a force to reducing costs based on location, i.e., workers located offshore can bid away tasks Over time, information technology will turn more and more services from "personal" to "impersonal", i.e., deliverable over distance (Blinder, 2006)

What Has Caused Outsourcing?

Lower costs of production overseas, main difference being in labor costs, e.g., computer programmers - in 2001, India: $45,000/annum vs. US: $70,000/annum Increase in educated workers overseas - especially in fast developing countries such as India Technological advances in computers and telecommunications Deregulation and trade liberalization in services sector over past two decades

By Whom, Where To, What Jobs?

Mainly US and UK-based firms to English-speaking countries Back-office services (accounting), telephone call centers, computer programming, and testing components through computer modeling Examples in Ohio: - LexisNexis (Dayton) IT jobs - Chiquita (Cincinnati) IT jobs - Procter & Gamble (Cincinnati) IT/back-office jobs

Policy Options

Proper macroeconomic policies Protection a costly way to preserve US jobs Rethink inadequate Trade Adjustment Assistance Program (Blinder, 2006) Education and research to maintain US comparative advantage in services A "New Deal" for globalization (Scheve and Slaughter, 2007), i.e., recognize there are "winners" and "losers" from trade

Economic Impact

Trade not expected to reduce output or employment in long-run Short-run effects on employment due to job losses and/or dislocation Amiti and Wei (2005) find no correlation between job growth and outsourcing Workers who lose jobs, do suffer income loss Outsourcing expected to raise average real income in US (Bhagwati et al., 2004)

Asia: a case of unilateralism to regionalism

Until 1980s, tariff-cutting in Asia limited to Japan In mid-1980s, "factory Asia" led to "race to the bottom" unilateralism China's entry to WTO sparked a domino effect with signing of multiple regional/bilateral agreements Created Asian "noodle bowl"

Larry Summers was once quoted as saying:

"...I like all the 'isms', unilateralism, regionalism and multilateralism..."

By 2015, it is expected that the total wage loss to the US of outsourcing will be:

$151 billion

The net effect of greater integration for country I is the sum of areas:

(C+D+J)-H

Prior to customs union members lowering their non-tariff barriers to trade, the supply curve facing importing country I is:

(EC+ER')

At the initial equilibrium skilled wage, employment by industry 2 is:

02 to S0

Currently, the US has regional trade agreements in force with:

20 countries

In comparing a customs union with a free trade agreement, one can say that:

A customs union sets common external tariffs

GATT/WTO membership has resulted in:

A significant increase in trade for developed countries but only modest gains for developing countries

Prior to the customs union reducing internal barriers to trade, the tariff revenue on its imports was made up of the following areas in the diagram:

A+B+H+G

Area C in the diagram is:

An internal terms of trade gain to the customs union

Trade diversion in the EU is where, for example:

Cheaper imports by the UK from the rest of the world are replaced by imports from other EU countries

According to Leamer (2007) which of the following causes a "flattening" of the world:

Communications innovations

The origin of service outsourcing was:

Contracting out of design work by the UK auto industry in the 1970s

When tariffs t1 and t2 are both cut:

Country 2 expands its exports of x and its imports of y

If tariffs t1 and t2 were cut on goods x and y respectively, but not tariff t3, which country must be receiving special and differential treatment?

Country 3

Regional free trade agreements are:

In conflict with GATT Article I but are allowed under Article 24

The GATT response to regionalism in the 1960s was:

The Kennedy Round

The net benefit of outsourcing is given by:

E0FE' and E'AB

Outsourcing is expected to slow down in the next decade because:

The easiest jobs to outsource have already gone from the US

Outsourcing mainly occurs between US and UK-based firms to:

English-speaking countries

In the long-run trade is the most significant factor affecting output and unemployment: (T/F)

FALSE

In the GATT/WTO, developing countries have historically not received a "free pass" to tariff cuts under the Most Favored Nation clause: (T/F)

False

NAFTA is a customs union: (T/F)

False

The Doha Round of the WTO has been completed: (T/F)

False

Domino theory of regionalism:

Formation of regional bloc eventually triggers membership requests, e.g, EEC6 in 1950s, entry of UK, Ireland, Denmark

If General Motors were outsourcing, an example of such an activity would be:

Getting its US payroll accounts managed by an Indian firm

If agricultural export subsidies were cut by the developed countries:

Global agricultural commodity prices would increase

Country 2 has a comparative advantage in producing:

Good x

Trade diversion and trade creation are the areas:

H and D

When tariffs t1 and t2 are both cut, Country 3:

Its trade volume will most likely remain constant

If Country 1 can influence its terms of trade, the reduction in tariff t1:

Lowers domestic price of x and raises world price of x

After non-tariff barriers to trade have been lowered between customs union members, imports by country I become:

M'=(MC'+MR')

Trade Diversion

Occurs because non-members face discriminatory tariffs on their goods

Trade Creation

Occurs due to removal of tariffs between members of a regional agreement

Juggernaut theory of multilateralism:

Once liberalization ball starts rolling it's difficult to stop, i.e., successive rounds of GATT/WTO

According Bhagwati et al. (2004), outsourcing is expected to:

Raise average real income in the US

Dominos can start juggernauts:

Regional blocs may be building blocks to freer trade, e.g., enlargement of EU has resulted in reform of the Common Agricultural Policy (CAP) - Dominos and Juggernauts: Richard Baldwin

Ways to freeing trade

Regional/bilateral trade agreements: • Trade liberalization on a discriminatory basis, i.e., concessions only made between parties to agreement • Free trade areas (NAFTA) or customs unions (EU) • In conflict with principle of non-discrimination in GATT/WTO Article 1, but allowed under Article 24 if tariffs are reduced for "substantially all trade" between parties

When tariffs t1 and t2 are both cut, in Country 1:

Resources move from x to y production

In order to resolve the WTO "latecomers problem", developed countries should:

Should offer to reduce their agricultural export subsidies

Is more regionalism good?

Significant debate among economists: • Jagdish Bhagwati (Columbia) - "...do trade blocs serve as 'building blocks' or 'stumbling blocks' for worldwide freeing of trade?" • Larry Summers (Harvard) - "...I like all the 'isms', unilateralism, regionalism and multilateralism..." • In assessing regionalism, Bhagwati sees discrimination, Summers sees liberalization - smacks of the blind men and the elephant!

The December 2013 WTO agreement on "trade facilitation" focused on:

Simplification of customs rules

At the lower skilled wage of w', outsourcing of O2O'2 will clear the market: (T/F)

TRUE

The initial skilled wage bill in industry 1 is the area:

w0E0S001

The "latecomers" problem

• As well as concerns over SDT, the WTO may face a "latecomers problem", i.e., globalization fatigue • Reciprocal bargaining among developed countries has gone on for over 50 years - tariffs on manufactures are now very low • Local price distortions in developed countries have been already eliminated, making it difficult for them to identify new tariff bargains with developing countries

Where is WTO?

• December 2013, WTO agreement on "trade facilitation" - essentially measures to simplify customs rules • Raises question(s) of why a multilateral agreement, similar to those concluded under GATT, not reached under its successor

Developing countries and the WTO Continued

• Despite "free pass" to tariff reductions of developed countries, developing countries have lost voice over which sectors to liberalize • Sectors that matter to developing countries - textiles, agriculture - have seen least trade liberalization • Latter argument misses point of SDT though, i.e., developing and developed country exporters would each be able to compete for market share in developed countries under a specific tariff line

Developing countries and the WTO

• Developing countries get "free pass" to tariff cuts negotiated in GATT/WTO under MFN clause but do not have to reciprocate, i.e., special and differential treatment (SDT) • Objective to ensure developing countries benefit from gaining market access to developed country markets • Evidence suggests GATT/WTO membership has resulted in significant increases in trade volumes for developed countries but less so for developing countries (Subramanian and Wei, 2007)

Why might regionalism be bad?

• Economic benefits, trade creation, may be outweighed by costs, trade diversion • Also, potential for complex rules of origin, i.e., it really matters where a good comes from • Example: Mexico can export overcoats to US tariff-free, but if fabric used to make them is imported from outside NAFTA, overcoat is no longer Mexican and is subject to a tariff

Outsourcing has grown because of:

• Lower skilled labor costs overseas • Better educated workers overseas • Technological advances in computers and telecommunications ALL OF THE ABOVE

Alphabetti spaghetti

• Multiple agreements, and different rules of origin cause production inefficiency • Rules of origin (RORs): determine country of origin of a product for purposes or trade - in regional trade agreement RORs determine what products benefit from tariff cuts • Half-finished goods go around agreement networks based on differential tariffs in an attempt to deliver final good at lowest price - a "spaghetti bowl" effect (Bhagwati, 1995) • If all WTO members signed a bilateral agreement with every other member, there would be over 11,000 strands of spaghetti

Regionalism is growing

• Regional and bilateral trade deals have mushroomed since 1990 • US has agreements in force with 20 countries, and is currently involved in negotiating several others, e.g.,11- country, Trans-Pacific Partnership (TPP), and the US-EU Transatlantic Trade and Investment Partnership (TTIP) • East Asia currently has over 70 in force • EU will likely negotiate more if Doha Round fails • GATT/WTO probably never envisioned this many coming into force - GATT Article 24 designed originally to allow formation of EEC

In previous rounds of GATT, the sectors witnessing the least trade liberalization were:

• Textiles • Clothing • Agriculture ALL OF THE ABOVE

The concern about outsourcing derives from:

• The service sector has previously been impervious to international competition • The pace of outsourcing has been very swift • Concerns about a "jobless recovery" after the recession ALL OF THE ABOVE

Are all 'isms' good?

• Uruguay Round of GATT not undermined by 1980s and 1990s regionalism, e.g., EC expansion, formation of NAFTA • Key multi-lateralist countries have also been regionalists, e.g., US and members of the EU • Multilateralism often a response to regionalism, e.g., the Kennedy Round of GATT in 1960s after formation of EEC • Implies trade liberalization is dynamic