Henry Quillen's Weblog

Henry Quillen's Weblog
Miscellany

Monday, December 08, 2003

Taking Back the Tariffs

United States Trade Representative Robert Zoellick has announced that the U.S. will drop its illegal tariffs on steel, but not because we were in line for massive retaliation. Instead, he claims, an "independent" process led to this sage economic decision. Some, including Brad DeLong, have accused Zoellick of lying "through his teeth", but I think it's more interesting to take him at his word and see what this implies. Assuming that the USTR went through a thoughtful, independent process free of political considerations that found steel protection was no longer necessary, how should we view his vigorous efforts to keep them in place during WTO dispute settlement procedures? There are three possible answers.

Blatant protectionism: During the appeals process, the USTR finds that the tariffs had done their job. Nevertheless, not believing in the value of free trade, he works to preserve them anyway by appealing the WTO's decision and then denouncing his loss on appeal.

Ignorance: Shortly after aruging its case, the office of the USTR finds that the tariffs did not need to be continued, leaving us all to wonder why he would argue so vigorously without a basic understanding of the underlying economic situation.

Making a point: The USTR realizes that the tariffs are no longer necessary (not mentioning this discovery to anyone), but pursues the appeal because he feels that the tariffs are legal, and would like to be able to impse them in the future minimal fuss.

The last scenario is the most favorable, but also the least plausible. I'm not sure I believe any of them, though.

posted by Henry | 8:26 AM

Friday, December 05, 2003

Keeping Score 2

Treasury Secretary John Snow predicted that the economy would generate 200,000 jobs per month, on average, between 3rd quarter 2003 and 3rd quarter 2004. October's job creation figure has been revised upwards by 11,000 to 137,000. In November, job growth was 57,000. We are now 206,000 jobs behind, and need to average 221,000 new jobs per month to reach the goal.

Update: it just occurred to me that I have been using the most widely reported jobs figure, which is non-farm payrolls. Next time around I'll throw in some of the other numbers. For instance, the number of self-employed people is growing, but it's hard to tell how many are making any money from their self-employment.

posted by Henry | 5:16 PM

Wednesday, December 03, 2003

Coming Soon

Between my workload and Thanksgiving, I haven't written much. I'm eagerly awaiting the Bush administration's decision on steel tariffs. Hopefully there will be something worth writing about on Saturday.

posted by Henry | 6:21 PM

Tuesday, November 25, 2003

Is Child Molestation Funny?

Last night, Jay Leno did a segment with Gilbert Gottfried playing the boy at the center of the latest Michael Jackson scandal. A typical joke went something like this:

Leno: What did you do while you were at Michael Jackson's house?
Gottfried: We would watch Malcolm in the middle.
Leno: That's a popular television show.
Gottfried: It's a show?

It wasn't until today that I realized that Michael Jackson's life has become so surreal that we can even forget not to make fun of alleged molestation victims. (To some extent, this phenomenon has happened already with the bizarre episode of Catholic priests). How many letters would NBC receive if Leno made fun of an average victim of child abuse? How many jokes about Lacey Peterson's son has he told?

The other lesson in all of this, is "Don't let your child spend the night with Michael Jackson." It's approximately as negligent as letting your child play on train tracks.

posted by Henry | 6:13 PM

Sunday, November 23, 2003

More about Regional Free Trade Agreements

Pure economics concerns aside, do regional free trade agreements foster more open world trade? The answer: again, it's hard to say. The reason is that there are perfectly plausible arguments on each side.

A proponent of regional agreements will tell you that countries coming together increase the incentives for others to join. So when Guatemala sees NAFTA happen, it will realize that Mexico is now a tougher competitior for exports to the United States. Soon, it will do what is necessary to obtain the same arrangement Mexico has. Eventually, you ge the Free Trade Area of the Americas. This process keeps happening until the entire world has very low barriers to trade.

On the other side of the debate, we hear that large trading blocs can actually derail negotiations in bodies like the WTO, which requires consensus to pass almost anything substantial. With alliances set, countries will not feel the need to concede to other areas, and the process of trade liberalization breaks down.

Which is correct? I'm sure they both are, to some extent. It seems to me that being able to find opportunities in agreements like the FTAA makes the alternative to WTO agreements a little more attractive, and thus makes the negotiation process more difficult. In the end, though, only time will tell.

posted by Henry | 3:21 PM

Wednesday, November 19, 2003

What You Need to Know about Regional Free Trade Agreements

I don't want to be the millionth person to write about free trade and how great it is. In short, free trade tends to produce net gains, but managing the process is tricky. It is not clear that trade causes a "race to the bottom" in environmental or labor standards.

However, as negotiations on the Free Trade Area of the Americas go on and protesters get shot in the face with rubber bullets, we need to ask ourselves, "How do free trade areas, like NAFTA, affect countries inside and outside the agreement?" As it turns out, this is a much harder problem to solve than whether lowering tariffs worldwide would make us better off. Why is it so difficult? There are several reasons, but the most interesting one involves trade creation and trade diversion.

We tend to think that removing market imperfections always makes us better off, but it turns out this isn't necessarily true. In 1956, Richard G. Lipsey and Kelvin Lancaster formulated the "theory of the second best", which says that removing some imperfections and leaving others intact may not actually improve welfare. How does this relate to trade?

Imagine three countries: the United States, Mexico, and China. Both Mexico and China would like to sell bicycles to the US. China can sell as many bicycles as the US needs for $100 each. Mexico can also make as many bicycles as the US needs, but for $110. At the outset, we put a 20% tariff on bicycles, regardless of national origin. We buy all of our bicyles from China, and the government pockets $20 on each one. Now we sign NAFTA, and the tariff on Mexican bicycles disappears. Consumers who were spending $120 for a Chinese bicycle switch to the $110 Mexican bicycle. Pretend that bicycle consumption doesn't change much with price. For each bicycle, the consumer is $10 better off, while the government is $20 worse off. Overall, the United States has backed into a raw deal. Mexico seems to be doing well; demand for their bicycles has exploded. China is definitely worse off; demand for their bicycles has collapsed.

Before drawing too many conclusions, realize that this is an oversimplified case. In reality, the US will have a domestic bicycle industry, and bicycles themselves will be differentiated. In the real world, the results of regional trade agreements are often not obvious. People who realize this might not be surprised that the Carnegie Endowment for International Peace has found that NAFTA hasn't had profound effects on the US or Mexico in its first ten years. My gut tells me that it slowed the departure of Mexican jobs to China, but I have no solid evidence to back that up.

There are so many moving parts to keep track of when thinking about free trade. By Saturday evening, I'll write about some of the other issues surrounding regional trade agreements and their consequences.

posted by Henry | 9:33 PM

Tuesday, November 18, 2003

More Steel

Here's where the administration stands on steel, and why it doesn't make much sense.

posted by Henry | 4:15 PM