Who’s Killin’ Who?

“Mexico is killing U.S. on trade,”

“They’re killing us at the border and they’re killing us on jobs and trade. FIGHT!”

~ D. Trump

Here’s the data:

mex trade

Looks like a 500% plus increase in total trade, a merchandise trade deficit of around $50 billion and US merchandise exports of around $240 billion.

There is also a $10 – 15 billion US trade surplus in services to consider.

For context, The US merchandise trade deficit with China was $343 billion in 2014 and US exports to China were $123.6 billion.

The US exports twice as much to Mexico as it does to China and its merchandise trade deficit with Mexico is around 6.5 times smaller than its deficit with China.

It is also true that a lot of US trade with Mexico come from an international production process as can be seen below:

Untitled 2

The US imports Motor Vehicles and their parts, oil and gas, computer equipment and audio-visual equipment from Mexico while it exports Motor Vehicle parts, Petroleum products computer equipment and electronic components to Mexico.

****Let us pause for a moment of silence to remember the late, lamented Heckscher-Ohlin theory of trade******

It would be far more accurate to say that US drug laws are killing Mexico than to say that any or everything that Mexico may be doing is hurting the US.

Borders, Ethnicity and Trade

My stack of reading material is increasing daily.  The latest addition is called “Borders, Ethnicity and Trade” and it is forthcoming in the JDE (click here for an earlier, ungated version).  The paper looks to be really interesting on the topics of geography and ethnicity.  Below is the abstract:

This paper uses unique high-frequency data on prices of two agricultural goods to examine the additional costs incurred in cross-border trade between Niger and Nigeria, as well as trade between ethnically distinct markets within Niger. We find a sharp and significant conditional price change of about 20 to 25 percent between markets immediately across the national border. This price change is significantly lower when markets on either side of the border share a common ethnicity. Within Niger, trade between ethnically distinct regions exhibits an ethnic border effect that is comparable, in its magnitude, to the national border effect between Niger and Nigeria. Our results suggest that having a common ethnicity may reduce the transaction costs associated with agricultural trade, especially the costs associated with communicating and providing credit.

A new free trade agreement in Latin America

It’s called the Pacific Alliance and its members include Mexico, Colombia, Peru and Chile. Apparently Costa Rica is set to join soon and Panama not that long afterward.  The group has agreed to remove all tariffs on member trade.  An article on the new agreement argues that this  will “encourage free trade between Latin America and the rest of the world.”  

I am all in favor of more free trade, but regional trade alliances are unlikely to foster free trade in the rest of the world.  As Paul Blustein explains wonderfully in Misadventures of the Most Favored Nations, bilateral and regional agreements give member countries less of a stake in the multilateral trading system of the WTO.  Given the trade diversion they may benefit from in the regional groupings, it’s possible they will be less likely, ceteris paribus, to want to move forward with the Doha Round.

I’m not saying that’s a bad thing, only that the idea that this trade agreement will foster free trade in the rest of the world seems doubtful.  Maybe they meant that it will inspire other countries to create their own free trade agreements?

The new pact explains that duties will drop to zero on 92% of the goods and services traded within the group. The remaining tariffs, mostly on agricultural goods, will be slowly phased out until 2030.  Interestingly, the members have “also declared their commitment to implement automatic tax and financial information exchange within the next six months, and it has been agreed that Mexico is to be accepted, probably by the end of this year, as a member of the Latin American Integrated Market, which currently consists of the stock markets of Colombia, Peru and Chile.”

Not everyone is thrilled with the news though.  Evo Morales has claimed that the FTA is “a geopolitical scheme by the United States to oppose the progressive, left-wing governments of Brazil, Argentina, Uruguay, Bolivia, Venezuela and Ecuador.”


NAFTA’s impact on Mexican farmers

Nice new paper by Silvia Prina in RDE (gated link here, ungated version of the paper here). Here’s the abstract:

Trade liberalization can generate substantial distributional conflicts. This paper measures the impact of increasing trade openness between Mexico and the U.S. resulting from NAFTA on the income of small versus large cash-crop farmers in Mexico. Benefits resulting from higher prices of export goods as well as losses incurred from greater import competition are considered. First, relating NAFTA cuts in trade restrictions to border prices of Mexican exports and imports, I find that NAFTA-induced tariff reductions decreased the border price of corn, Mexico’s main agricultural import, and increased the border prices of tomatoes and melons, Mexico’s main agricultural exports. Then, I find that, among cash-crop farmers, the rise in fruit and vegetable prices benefited small farmers more than large farmers; while the drop in corn prices hurt large farmers more than small. Finally, the analysis at the regional level shows stronger results in the central region where trade liberalization increased the level of earning of poor farmers relative to those of large farmers. These results are consistent with observed cropping patterns and regional characteristics.

Africa’s growth prospects: a view from the trenches

One of my favorite (non-academic) articles on development was in last year’s NY Times Magazine’s profile of Andrew Rugasira, a Ugandan coffee entrepreneur.  The article is titled “Can Coffee Kick-Start an Economy?” and it was fascinating throughout.

It turns out that Rugasira has just published a book called A Good African Story  that I will definitely be purchasing.  In an article about the book and its author, Rugasira offers various nuggets about trade, African development, fair trade, and non-trade barriers.  I couldn’t possibly say it better than him, so I will just quote him on the various topics.  The whole article is worthwhile though.

The need to hear from real African entrepreneurs: “I was really surprised at the extent to which entrepreneurs on the continent don’t publish their business experiences, yet everybody talks about the private sector being the engine for growth and no one ever visits the engine room and sees what’s really going on. The first reason I wrote the book was to really get it written because African business people don’t write. Secondly, it was to really bring a kind of empirical perspective to the debate. Lastly, it was to encourage other entrepreneurs and to show them the pains other entrepreneurs, like themselves, were facing. I don’t think it’s very helpful if you write with hindsight and with reflection that allows you almost to be able to revise.”

The real obstacles to development: “The governments say they have removed all the tariff barriers, but what about the non-tariff barriers?  “How about access to market issues? How about the failure to raise capital? People talk about agriculture being the next big thing, they say Africa’s growth is at 6% or 7%, but hang on a minute, I mean, I have visited 36 banks but none of these financial institutions wanted to lend me money, it wasn’t just even me.”

“I went to school here in the UK,” he replies, “so in theory it should be easy for me. I have some networks, I know the culture. But it took me two-and-a-half years to be able to sell my product. It took 14 trips back and forth. Imagine an SME [small and medium scale enterprise] in Africa without the inherent advantages I have. So with all the talk from the Commission of Africa, I said, no, I really have to document this stuff in a book.”

“For example, the governments are not delivering services efficiently. Capital for young entrepreneurs isn’t available, infrastructure is poor and there is no reliable energy. All these things are lacking, and are constraining young people from doing business. The cost of importing a container from Dubai to Mombasa is $1,800, and taking that same container from Mombasa to Kampala costs $3,800.”

Fair trade: “Fair Trade is not a sustainable model,” Rugasira insists. “It is a Western kind of charity model that cannot work. It cannot develop or claim to be developing, growing farming communities by adding pennies to pounds of coffee, and then doing all the roasting and packing overseas. Smallholder coffee farmers are poor because they don’t have an access to the inputs that will get them to a higher level. They are at the lower end of the value chain, that’s why they are poor. They don’t diversify their crops and they have insecurity in terms of their finances.

“So to turn around and say that [fair trade] is a solution, I can’t accept that. If anything, it becomes like an unintended obfuscation and distracts the conversation from the real issue. Agriculture has been proven to have two to four times more potential to bring about prosperity than any other sector. But fair trade is not the solution. Dealing with the structural issues is.”

Passing Gas, part deux

I recently wrote about how US export restrictions on natural gas are distorting markets and creating inefficiencies and/or pollution both here and abroad.

Here, from the mighty WAPO is a great graphic showing the geographic price gaps in gas:


You can see in 2004-2007, how the prices tracked reasonably closely. This was before the boom in American production, when we imported a lot of gas. Since the US production boom, US prices have fallen while European and Asian prices have risen, creating a big wedge that is being sustained, in a large part, by our export restrictions.

People, a 3-5 fold difference in the price of energy inputs can cause a lot of production distortions/inefficiencies.

It’s past time to just go ahead and let our gas out.

Passing Gas

“Saudi America” has a dilemma. Should we “allow” the export of natural gas or should we continue to ban it.  Because of export restrictions (and shipping costs), the price of natural gas in Europe is up to 3 times greater than in the US, while in Asia, gas is considerably more expensive than that.

The economic case is clear: the export restrictions are distorting markets both here and overseas and should be dropped.

In the US, the restrictions mean that energy using firms face an artificially low price of gas and will use the resource more intensely. These firms are inefficiently over-producing, and creating more pollution than they would if they faced the world price for gas.

Abroad, the restrictions mean that energy using firms face an artificially high price of gas and will use the resource less intensely either by reducing production or by using a dirtier source of energy such as coal.

I don’t think that the pollution inefficiencies cancel out. Here gas is cheaper than coal and probably still would be if we allowed exports and let the domestic price rise toward the world price. Abroad, coal is cheaper than gas in some places, but likely would not be if our exports hit the markets and drove their prices down a bit.

Under the current export restrictions, we produce too much, they either produce too little or produce too dirty.

People, we call that a lose-lose situation.

Not to worry though, our political overlords are on the case, debating the restrictions on, you guessed it, National Security grounds!

I am not making this up.

Now sure, the fact that we now produce so much gas means that gas we used to import goes elsewhere and that can reduce the price disparity, but the disparity is still pretty big.  The US has become a huge player in global gas and our restrictions are seriously distorting the world market.

But judging by the rhetoric and lobbying in DC,  economics is probably not going to be used in any way to make the export / no export decision.