William Krist's Blog, page 39

China: Developing Country and World Trade Giant

China is now the world’s largest exporter of goods, yet it self-designates as a developing country in the World Trade Organization (WTO). This, and the fact that it is recognized as a developing country by the international financial institutions is, understandably, a source of friction between China and the United States and its allies. China, though evidently a world power, remains a developing country according to any plausible criterion. China exhibits features like those of other upper-middle income countries, including institutional weaknesses, corruption, and the vulnerability of its large poor population. For example, the share of agricultural employment in China is 25%, compared to 3% in high- income countries and 22% in upper-middle-income countries. Here, I discuss the implications of China’s dual status—world power and developing country—for Chinese policy and for its trading partners.

I focus exclusively on the economic considerations associated with China’s integration into the world trading system. Though the importance of security, geopolitics, and concerns about human rights in shaping China policy is evident, I leave those issues to others better equipped to deal with them. I take an outcome- and data-driven approach to evaluate China’s trade relations and, where possible, I try to avoid the legalistic WTO- centered approach taken in many discussions of the subject. This is because what determines trade outcomes is not the fine print of trade agreements, but the general direction policymakers adopt and the actions of firms. Furthermore, with the WTO stalled, the big changes in policy are occurring outside that vital organization.

Even though they are normally the subject of distinct jurisprudence, I treat international trade and foreign investment as two sides of the same coin, which in economic terms is what they typically are. For example, trade in services is carried out predominantly through foreign investment (Mode 3 Foreign Establishment). In the era of complex global value chains, it is difficult to promote trade—whether in manufacturing or services— without promoting foreign investment. Often, when I refer to ‘trade’ I convey messages that also apply to foreign investment. I refer to the United States and its main allies (the European Union, Japan, and the UK) as the ‘West’ or the ‘Western powers’.

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To read the full policy brief from the Policy Center for the New South, please click here. 

Free Trade in Environmental Goods Will Increase Access to Green Tech

Negotiations to liberalize trade in environmental goods began in 2014 at the World Trade Organization (WTO) with the aim of removing tariffs on a wide range of environment-related products. While there was ample progress in just two years, talks soon stalled as countries clashed over the content of the deal. With President Biden’s focus on addressing climate change, he has an opportunity to relaunch these talks and encourage other countries to come to the table. Freeing trade in environmen- tal goods is a policy area with bipartisan consensus, and one which can help achieve the goal of moving toward a greener economy. This paper provides an overview of negotiations on freeing trade in environmental goods to date, details the hurdles to a final deal, and suggests the inclusion of environ- mental services in a subsequent negotiation package to fully reap the benefits of this growing sector.

 

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To read the full report, please click here.

Lowering Prices of Pharmaceuticals: Insights for Better Procurement Strategies in Latin America

Containing rapidly growing health care costs in the Latin American and the Caribbean region, especially amid the COVID-19 pandemic, requires an in-depth analysis of prices from a novel perspective. This paper documents hitherto understudied variations in prices paid for pharmaceuticals, equipment, and medical supplies within countries and markets. It also identifies effective procurement strategies for lowering prices within existing regulatory frameworks. The analysis uses public procurement data gathered by governments’ electronic procurement systems in nine countries and territories across the region. The data are uniquely detailed and complete, encompassing the minute detail of purchasing decisions and processes made across all regulated public entities in the study countries and territories. Traditional regression analysis and machine learning (random forests) methods are used to explain prices as a function of procurement decisions and outputs, such as the number of bidders. Based on in-depth discussions with policy makers, the paper also devises realistic policy interventions, which in turn can be used to estimate savings scenarios. First, the findings show that the prices paid vary greatly across and within countries. The latter is surprising given that the regulatory and institutional framework is largely fixed within each country. Second, a high proportion of within-country and -market variation can be explained by standard features of procurement policy implementation, such as the length of advertising tenders. Third, the explanatory models point to the potential for lowering prices across the region by about 14 percent by implementing low-level, yet impactful changes to how purchasing is done.

 
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To read the full report from The World Bank Group, please click here.

Trade and Gender Linkages: An Analysis of Least Developed Countries

In the first months of 2020, the world experienced an outbreak of the coronavirus (COVID-19). The disease was declared a pandemic, and social distancing measures were introduced all around the world that resulted in travel restrictions and an unprecedented disruption in economic activity. As a result, the COVID-19pandemic has led to the worst economic and social crisis since the Great Depression. The health effects of the pandemic in the LDCs have been relatively less dramatic than was initially feared. However, the global economic downturn has had disproportionately adverse economic and social effects on the LDCs due to their lack of domestic financial resources, high debt levels, fragile health systems, and limited capacity to cope with external shocks. Moreover, the recovery path for the LDCs from the current global economic downturn is projected to be slower and longer than from previous downturns.

The economic and social impact of the COVID- 19 pandemic is disproportionality experienced by women because of occupational and sectoral gender segregation in employment, uneven division of unpaid labour, and pre- existing gender inequalities in economic and social life. Evidence from developing countries in South and South-east Asia and West Africa shows that the COVID-19 pandemic is likely to have a disproportionate negative effect on women’s employment opportunities and widen the gender gap in employment over time. Similarly, women are found to be more likely to permanently lose their job and experience a larger fall in their income than men due to the pandemic.

The same holds for women in the LDCs, since women in these countries are very active in economic activities that have been hit hard by the pandemic. These activities include horticulture and informal cross-border trade, especially important in the African LDCs; the low-skilled manufacturing sector (e.g. garments) central to many of the Asian LDCs and a few of the African LDCs; and the accommodation and food services sector and other tourism-related services that are important for most Island LDCs. Most people lack access to social protection and income- support systems in the LDCs, exacerbating the adverse impact of job losses.

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To read the full report from the United Nations Conference on Trade and Development, please click here.

Chinese Investment in Latin America: Sectoral Complementarity and the Impact of China’s Rebalancing

Over the last decade China’s investment in Latin America and the Caribbean (LAC) has increased substantially in volume and become more diversified from natural resources to other industries. Using cross-border mergers and acquisitions data, we demonstrate that since mid-2010s China’s overseas investment has tilted toward sectors where China has a comparative advantage in the global markets, a trend similar to that of other major foreign direct investment (FDI) source countries. Moreover, China’s rising overseas investment can be linked to the rebalancing of Chinese economy, and LAC stands to benefit from its complementarity vis-à-vis China in sectors where the rising Chinese overseas investment can be met with LAC’s own investment gaps. The COVID-19 pandemic could have a long-lasting impact on global value chains and FDI flows, which poses both challenges and opportunities to LAC in attracting FDI, including from China, to support the region’s long-run economic development.

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To read the full article from the International Monetary Fund, please click here. 

Service Offshoring and Export Experience

Service inputs are a key component of the costs of exporting, and contribute to explain the process of internationalization of firms. A new dataset on the participation of French firms in global value chains reveals that firms with longer export experience in a market are more likely to source service inputs from there. We rationalize this fact in a model where firms are initially uncertain about how successful they are as exporters, but learn their export profitability as they keep selling abroad. Because offshoring requires larger sunk costs than domestic sourcing, some firms decide to offshore only when they become sufficiently confident about their export prospects, i.e., once they acquire enough export experience. More export experience in a foreign destination also induces firms to offshore within the boundaries of the firm rather than at arm’s length. The model further implies that firms are more likely to offshore when frictions in the provision of services between the domestic and the foreign market are greater. In turn, offshoring firms sell greater volumes, display less volatility, and are less likely to exit foreign markets. Exploiting our novel dataset, we provide strong empirical support for each of these predictions.

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To read the full article from the Centre for Economic Policy Research (CEPR), please click here.

EU Proposes a Strong Multilateral Trade Response to the COVID-19 Pandemic

Today, the EU has submitted its proposal seeking the commitment of World Trade Organization (WTO) members for a multilateral trade action plan to expand the production of COVID-19 vaccines and treatments, and ensure universal and fair access. With this proposal to the WTO, divided in two communications, the EU underlines the WTO’s central role in the response to the COVID-19 pandemic and urges fellow WTO members to agree on a set of commitments, including on intellectual property rights.

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To read the original report from the European Commission, please click here.

Trade Trends Estimate: Latin America and the Caribbean

The Covid-19 pandemic hit Latin American trade flows hard in 2020. The most extreme effects were recorded between April and June and although the region’s external sales began to rally in July, they did not return to prepandemic levels until December. 

Although the trade contraction was lower and shorter than initially forecast, this was mainly due to improvements in the prices of some of Latin America’s main export commodities in the second half of 2020. During this period, volumes only recovered partly from the losses of the first few months of 2020.

In the first quarter of 2021, the value of Latin American exports experienced positive year-on-year growth after two years of continuous contraction. This change was driven by prices, while volumes continued to shrink. Volumes did rally significantly in March, although this improvement is partly explained by the comparison to the same month of 2020, when the full impact of the pandemic was first felt.

However, the current recovery is limited by numerous factors of uncertainty against a backdrop of new waves of infection. These are having a severe impact on countries in Latin America, where progress on vaccination campaigns is slow and new containment measures are being implemented. Furthermore, the region is not taking full advantage of the growth in its main two extraregional trading partners, the United States and China.

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To read the full report from the Inter-American Development Bank (IDB), please click here.

Advancing Sustainable Development With FDI: Why Policy Must Be Reset

Properly guided, foreign direct investment has transformed the prospects of firms, sectors, regions, and even economies. In particular, developing countries havebenefited from greenfield investments, opportunities have been created for millions of employees and their families, and living standards have risen.

As multinational corporations are perceived as having ever- growing reach, and now that sophisticated international value chains criss-cross the planet, governments and civil society are demanding that international business does more to advance sustainable development and to tackle climate change. Governments are on record stating that they cannot finance and deliver on the Sustainable Development Goals without private sector engagement.

The reality on the ground is different, however. Companies are resorting less and less to foreign direct investment. Once a hallmark of globalisation, FDI has been in trouble for some time—a fact compounded by the ongoing pandemic:

Even before last year’s 42% drop, sensibly benchmarked annual inflows of FDI have been in decline since the Global Financial Crisis.

The economic fallout from COVID-19 has witnessed new FDI flows retreating to levels not seen for 25 years.

New greenfield investments into developing countries have been particularly hit last year, falling 57% year- on-year in the fourth quarter of 2020.

Globally, the average return on FDI fell during the past decade. Mean FDI returns fell more in developing countries than in higher income countries.

Discussions on the contribution of international business to pressing global challenges need a reset. FDI cannot make a meaningful contribution to sustainable development and to tackling climate change unless sufficient FDI happens in the first place. Deliberations on the quality of FDI and on business conduct are important, but the quantity of FDI matters too

With over $11 trillion invested in developing countries, both international business and governments have a huge stake in reviving the commercial fortunes of FDI. To date, too much of the onus has been on international business. For example, the private sector has been told by advocates of sustainable development to “align” with the global and societal transformations needed to accomplish the Sustainable Development Goals.

Those advocates and policymakers must reflect and act on why the returns to FDI in key sectors are so low and why only a trickle of FDI inflows has occurred in them. Enhanced corporate contributions to sustainable development should be balanced by policy reforms to restore the commercial viability of FDI in developing countries—a proven mechanism to transfer management expertise, people, capital, and technology. Urgently needed is a reset in deliberations on what international business can realistically deliver, especially if there is no reversal in the worsening policy treatment of FDI that is documented in this report.

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To read the full report from Global Trade Alert, please click here.

Long-Run Effects of Trade Liberalization on Local Labor Markets: Evidence from South Africa

This paper uses municipal-level data from South Africa for the period 1996–2011 to estimate the medium to long-run effects of trade liberalization on local labor markets. It finds that local labor markets that were more exposed to tariff cuts tended to experience slower growth in employment and income per capita than less exposed regions. The longer-term effects of trade liberalization on regional earnings are stronger than the medium-term effects, and tend to be more pronounced among municipalities that included the former homelands.

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To read the original report from The World Bank Group, please click here.