Trade Initiatives and Domestic Policy

1
Trade Initiatives and Domestic Policy

• Bob Koopman
• USITC

2
The Setting

• The best way to eradicate poverty is to
  encourage trade between nations.
• Trade is the most certain path to lasting
  prosperity.
• Corporate-driven globalization under the WTO has
  sharply increased income disparity, which the WHO
  has identified as one of the key correlates of a
  countrys health status.  Trade liberalization is
  producing greater income inequality between and
  within nations, which in turn, has led to greater
  disparities in public health conditions and
  outcomes. 
• A large increase in the volume of international
  trade has failed to produce better jobs or higher
  wages for most Americans.

3
The Current Trade Agenda

• Its ambitious
• Its surprising given complaints about lack of
  political support from key constituencies
• Does recent history help us understand the role
  of the current trade agenda with respect to
  domestic support?
• Not really?

4
The approach

• List the agenda negotiations and coverage
• Summarize estimates of the net economic effects
  of past trade agreements
• Summarize trends in trade and economic growth
• Implications for Doha and the upcoming FTAs.
• Challenges in measuring the potential economic
  effects means challenges in knowing the economic
  value of trade offs.
• What might all this mean for domestic support?

5
The Trade Agenda

• Whats being negotiated and being considered for
  negotiation - Competitive Liberalization
• FTAA
• Australia
• CAFTA Nicaragua, Guatemala, El Salvador,
  Honduras, Costa Rica and (Dominican Republic)
• Morocco
• Panama, Columbia, Bolivia, Ecuador, Peru
• SACU Botswana, Lesotho, Namibia, South Africa,
  and Swaziland
• Bahrain
• Thailand
• and more
• Did I mention Doha?

6

• By moving forward on multiple fronts, the United
  States is exerting its leverage for openness,
  creating a new competition for in liberalization,
  targeting the needs of poorer developing
  countries, and creating a fresh political dynamic
  by putting free trade on a global offensive. -
  The Presidents Trade Policy Agenda for 2003 -
  http//www.ustr.gov/reports/2003Annual/overview.PD
  F, downloaded 1/6/04.

7

• When making the case for passage of Trade
  Promotion Authority the Administration noted that
  there were more than 130 trade agreements in
  force around the world, and that the US was a
  party to only 3. There are 30 free trade
  agreements in the Western Hemisphere and the
  United States is a party to only one.
  http//www.ustr.gov/new.2001-12-03-tpa-leadership.
  htm.

8
The U.S. negotiating agenda as described by USTR,
is focused on

• market access for consumer and industrial goods,
  agricultural products, and services.
• intellectual property rights
• rules governing unfair trade practices
• e-commerce
• government procurement
• trade facilitation
• environmental and labor issues
• and capacity building.

9
Trade agreements signed under fast track

• Tokyo, U.S. Israel FTA, U.S. Canada FTA,
• NAFTA, and Uruguay Round.
• See USITC publication 3621 The impact of above
  agreements
• Includes concise summaries of the setting and
  coverage of each negotiation

10
The Welfare Impacts of the Agreements
URA
11
Chile and Singapore FTAs

• Welfare estimates
• for Chile FTA -.001 to .003 of GDP (-92 mi to
  280 mil)
• for Singapore FTA -.002 to -.001 of GDP (-184
  mil to - 92 mil)
• Points to consider
• All partners have fairly open trade regimes
• FTAs most important benefits likely not
  reciprocal tariff elimination but in things
  difficult to quantify
• General improvement of business climate
• Specific obligations in
• Intellectual Property
• Services
• Investment
• Temporary entry of businesspersons
• Telecoms
• Note rules of origin

12
Some caveats and important ones

• Estimates are likely lower bounds
• Tariffs and tariffied NTBs only
• No indirect effects trade and productivity,
  scale economies, etc.
• Still not exactly earth shattering numbers, nor
  do they explain why trade has grown so fast vis a
  vis GDP growth
• Note the difference in magnitude for multilateral
  vs. preferential

13
Traditional welfare estimates are the tip of the
iceberg

• Steel tariffs example
• Estimated welfare impact the tip
• Central case (Es 10) -41.6 million
• Underlying est. income changes in mil. rest
  of iceberg
• Tariff revenue 649.9
• Labor income -386.0
• Capital income -294.3
• Iron and steel ind. 239.5
• Other pos. affected ind. 67.4
• Indus where K income declines -601.2
• Net GDP - 30.4
• Another bad analogy
• All the political action surrounded how the pie
  was carved up not by how much bigger the pie
  might have been.

14
Remaining significant import restraints
15
Trade and economic growth
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What explains trade growth?

• Partly trade policyempirical research indicates
  maybe only 15 to 20 of growth.
• Tariff reductions
• 1974 applied tariff of 4.64
• 2001 applied tariff of 1.59
• other U.S. trade policy changes
• reductions in foreign trade barriers
• growing incomes
• improved transportation and communication
  technologies
• increased real value of trade in goods and
  services from0.5 tril. To 2.5 tril.

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What else contributed?

• In last 3 decades
• Substantial technological progress
• Deregulation of several large service industries
• Sizable increases in workers average education
  levels
• Substantial growth in K stock and population
• So what was the role of trade policy?
• Political message on both sides pro- and con
  seems to over attribute trade changes to trade
  policy changes

18
Real private gross domestic product, exports and
imports by industry sector, 1980 and 2001

• Real Priv GDP Exports
  Imports
• 1980 2001 1980 2001 1980 2001 Sector
• In percent
• Services 68.3 78.6 18.7 32.1 15.1 16.8
• Machinery and equip. 6.5 6.7 20.7 21.9 10.8 22.6
• Agriculture 4.4 2.7 16.7 6.0 6.4 3.3
• Chem. and allied prod. 2.5 2.6 9.6 9.8 4.4 7.7
• Minerals metals 4.5 2.4 8.8 5.4 10.8 6.3
• Transportation equip. 2.0 2.0 11.5 12.5 10.9 15.7
• Forest and fishery prod. 2.9 2.0 4.0 2.9 4.6 3.7
• Energy and fuels 4.7 1.3 3.2 1.2 28.2 8.7
• Miscellaneous products 3.0 1.2 5.2 6.4 5.6 9.4
• Textiles and apparel 1.3 1.0 1.6 1.7 3.1 5.1
• Total 100.1 100.5 100.0 100.0 100.0 100.0

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Services

• Note the shift to services as a share of GDP (HH
  and businesses have shifted demand towards
  services) and exports (a trade policy focus in
  later and current rounds.)
• Also note that other policies significant
  deregulation in
• Banking
• Transportation
• Communications
• And energy
• Cliff Winston estimates welfare gains from this
  deregulation at 50 million in 1996 all 5 trade
  agreements for all sectors of the economy
  estimated at 56 billion.

20
Growth and Productivity

• Labor supply NFE 78.3 mil 1974, 131.9 mil in 2001
• K stock
• Total value of private fixed assets up 109 in
  real terms from 1974 to 2001 - 11 trillion to
  22.1 trillion.
• TFP BLS estimates TFP rose by 24.5 between
  1974 and 2000.
• If size of L and K remain unchanged Q up nearly
  25 just from doing things better.

21
Doha estimates

• Recent estimates of possible welfare gains of
  Doha for U.S.
• Francois, van Meijl, van Tongeren (North America)
• 12 - 23 billion
• Agric 2.7 bil. Manuf. .5 bil to 13.2 bil.
  Services 7.0 bil.
• Fontagne, Guerin, and Jean
• 9 18 billion
• Brown, Deardorff and Stern (URA est. 19.7
  billion)
• 144 billion
• Agric - 11.1 bil Manuf. 23.6 bil Services
  131.4 bil
• A lot of interest in domestic support disciplines
  by partners. US says multilateral setting is the
  place it will deal with agriculture
• Do overall welfare gains look big enough for
  negotiators to take on the political cost of
  domestic support?
• Will services and manufacturing put pressure on
  for agreement?
• Who really knows how much protection for
  services, or even how to go about really lowering
  it?

22
Upcoming FTAs

• Other than FTAA generally small look for
  impacts similar to Chile and Singapore.
• U.S. in the drivers seat
• In sensitive ag products likely slow phase ins,
  and limited quota increases.
• Other sensitive products rules of origin
• Think MFA with a longer time frame.
• Not a lot of pressure from FTAs for changes in
  domestic support
• But a lot of negotiating resources going into
  FTAs.

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What does this all mean for domestic support?

• Political tradeoffs in negotiations
• Empirics arent clear
• Other economic policies and developments
• Budget deficit large role in Freedom to Farm
• Economic growth and tax policy
• Tight budgets call clear attention to on-budget
  expenditures not much attention to off-budget
  (consumer borne) support