Tuesday, 28 October 2014

Behind global trade statistics

Do you sometimes wonder about the world trade statistics, published by the WTO? Behind the headline numbers, there is a lot to explore ….

Until 1995, when the GATS was added to the corpus of trade rules, there was no official recognition of services trade. There was of course awareness among those who handled balance of payments data – and at the IMF in particular – that cross border financial flows took place; but these covered a wider area than just trade. In London the trade component was called “Trade in Invisibles”.

Now, in 2014, it is well established that a country’s overall trade performance is the result of both goods and services trade.  However, “not many people know” what the connections are between the two flows, and how the data is compiled, and the size of the two respective flows. Increasingly the statistical experts argue that trade in services is ‘embedded’ in the data for trade in goods because the transaction value includes a service component (design, transport or marketing costs). So, the services data is systemically understated.           

Goods data are put together from the customs returns: what we used to call, rather quaintly, customs collections. They represent primarily the value of imports and exports, duty paid, and sometimes there is additional data on weight. But even in the 1960s we referred to data as FOB (free on board) – meaning as delivered to the ship - or CIF (carriage, insurance, freight) which recognised that service elements such as transport and insurance had already entered into the value of the transaction.
                
Services data on the other hand are collected from the financial flows through the banking system, and that includes government business (foreign aid, capital flows) as well as commercial flows.
In advanced economies goods trade tends to be around 4-5 times larger than services trade (the UK is the exception at 2.5:1), while countries with less developed service economies such as China are around 8:1 and more.  Here the exception is India whose services figures are one third of the goods figures.


Table 1. Leading countries in world trade: combined table goods and services




This table gives many other indications of strengths and weaknesses:
·         The top four countries in goods – US, China, Germany and Japan, in that order -  are also the top four overall;  but they are in a different order in services trade (Japan lower).
·         The next three countries are in shifting positions:  NL is fifth in goods, UK is seventh, but overall it is reversed – UK # 5 and NL # 7, largely due to the UK performance in services.
·         As you go down, there are non-G 7 countries appearing:  Korea, Hong Kong, Belgium and Russia among others.  India is # 15 in goods and # 13 overall – good services performance.
·         The top 15 countries in services are the same as the top 15 in goods, with one exception: Russia falls out, and is replaced by Spain.
·         Mexico is well placed for trade in goods, but so weak in services that it is outside the combined table of top 20.
·         Just below the top 20 group is a mixed group of advanced economies (Australia, Taiwan, Switzerland, Poland and Sweden) and emerging countries (Brazil, Thailand, Malaysia and Indonesia).

Another feature of these tables is that they indicate trade deficits. These are most commonly quoted in the media as trade deficits in goods: countries such as US, Japan, France, UK and Canada have deficits in goods, while China, Germany and Korea lead those with a trade surplus. On the other hand China and Germany have a deficit in services, while US, France and UK have a surplus. Strange world...

Friday, 24 October 2014

Why Italy fails and Swedish economists are smug

Our friends at Bruegel posted a nice piece called "Why does Italy not grow?" which I missed when it was first published (until a chronically sleep-deprived friend posted it on her Facebook). The post compares how France and Italy underperform in terms of GDP compared to Sweden – and Swedish economists love to gloat, and talk about our model that rest of the world would embrace - if they knew what's good for them.

Well, my very Swedish persona digresses – in any case, the authors correctly point to three factors why Italy fails – the huge gap on innovation measured in number of international patents (the poor returns of R&D in  France and Italy is something I've pointed out in some of my sector studies); low levels of education in the workforce, and inflexible labour markets that created a huge youth unemployment that pushed its bright young things to move abroad (some of them works in our office; and no, Italy – you can't have them back).

However, the authors fail to mention an important point: Italy did not deregulate its markets (especially on services), which had tremendous downstream effects, creating inefficiencies across the whole economy. Here's a graph on services restrictiveness from the OECD that says a thousand words.


(in case you're looking for Italy somewhere in the middle, try on the far-far-far right)

The problem with Italy however, is that country is so simply so divine that you will forgive it for all its flaws – or to quote my favourite line in Where Angels Fear to Tread: There is something majestic even in the bad taste of Italy.

Friday, 17 October 2014

Competition authorities should listen to Jean Tirole

by Maria Salfi


The recent Nobel Prize winner in Economics, Jean Tirole, has brought very important contributions to economics – and competition policy authorities should take on some of the key conclusions from his research.

In Industrial Organization, every model analyzing how firms interact with each other in a static and/or dynamic contest is based on some assumptions such as perfect market competition, the number of firms in the industry, homogeneous or heterogeneous preferences of consumers, constant (increasing or decreasing) return to scale. Moreover firms are treated as acting in the same way in different industries and there is little differentiation about the nature of the industry. All the analysis that has been done for years on how industries work and how firms interact with each other has potential to change. Tirole’s work differentiates between industries and takes into consideration the fact that firms can act in a different manner depending on the industry they are in. What are the implications for the competition authorities?

First of all, past cases in which firms would have been accused of unfair competitive behavior would have a different outcome now. During the presentation of his work at the Royal Swedish Academy of Sciences, Tirole made a clear example. Newspapers give away information at a very low price in order to acquire market share and increase advertising revenues. What at first can be perceived as a predatory behavior by the press firms, it is actually not. There is clearly a trade off between price and market share/advertising revenues. According to this line of reasoning, the context does matter. Different rules should then be applied to different industries and each case should be investigated individually.

Second, consumers should be taken into consideration. If the assessment of a merger or a monopolistic behavior are a priori considered detrimental for society it is then counterproductive. There are cases in which consumers have actually been harmed by a competition authority’s decision. Monopolies usually arise because they are the most efficient firms in the industry and it is not necessarily harmful for consumers.


Competition authorities can now utilize a solid tool to improve society. The definition of fair competition might then be reformulated, taking into consideration the real consequences and the effects that the competition authority’s decision can have on the market and on consumers.

Tuesday, 14 October 2014

Cracking the mainstream notion of fiscal competition

by Maria Salfi

There is a general widespread notion within the European Union that a lower corporate tax rate can harm society. In fact, the European Commission strongly advises the EU’s member states to raise the rate until a certain threshold – about 30% - and to harmonize the tax among countries. A lower corporate tax rate leads to a lower return in government revenues and therefore a lower public goods’ provision for society. Corporate tax rate can be used as a fiscal tool in order to attract capital and labor because firms have an incentive to relocate in a country where the tax rate is lower.

According to the figure below, the corporate tax rate differs across EU countries. Newly member states tend to have lower tax rate compared to countries such as France, Italy or Germany which are characterized by a rate of 30% or more. Being the EU’s average tax rate 21%, half of the member states are actually below or equal to the average (Estonia and the United Kingdom are two examples). 

                                       Source: KPMG

However there are some misleading ideas about the role of the corporate tax rate in society and about the popular “race to the bottom” argument. Although the economic literature widely investigates fiscal competition and its impact on society and it strongly affirms that firms relocate where tax is lower and that it can indeed lead to a lower supply of public goods, the economic models date back to the 80s such as Zodrow and Mieszkowski (1986) or late 90s such as Keen and Marchand (1997). Empirical literature is quite more recent nonetheless it reports controversial results.

Yet, the general public looks at only one side of the coin. First of all, firms are influenced by different factors when relocating to a country - and corporate tax rate is only one of them. According to Ernst and Young (2004), firms look at 18 main factors[1], where corporate tax rate occupies only the 11th place on the list. Second of all, following the argument that a low tax rate will attract multinationals, it leads to a larger tax base. Since a higher amount of firms relocate in one country, the tax base is enlarged and the government can re-balance the tax return although the tax rate is lower. Third, harmonization of the tax rate will not necessarily lead to welfare gain. Countries will find another tool to enhance fiscal competition. In fact, fiscal competition’s studies often forget that corporate tax is not the only tool that countries can use to attract capital and labor: public spending can be used in a similar way to achieve similar results.  Government can indeed increase public spending in certain categories in order to attract firms. Generally speaking, a country investing in domestic infrastructure will not only benefit society and domestic industries per se but also foreign firms which will want to relocate to profit from the business environment, causing an agglomeration effect.  Nonetheless governments should be careful when allocating public revenues since using public expenditure as a fiscal tool can provoke a shift in the supply of public goods. Infrastructure expenditures could be increased at the expenses of social spending. 



[1] The factors are: domestic market, transport logistic infrastructure and telecommunication network, flexibility of employment regulations, local labor skills level, availability of sites, cost of land and regulations, R&D quality and capacity, potential productivity gains, labor costs, corporate taxation, access to financial investors, aid and support measures from public authorities, specific treatment for expatriate executives or corporate headquarters, transparency and stability of the regulatory environment, social climate, language and culture, quality of life.  


Sunday, 12 October 2014

Railways derailing EU-Japan talks?

By P. Messerlin
Professor Emeritus at Sciences-Po Paris and Chairman of the Steering Committee of the European Centre for International Political Economy (ECIPE) Brussels


Since the mid-2000s, the EU has made the opening of public procurement markets one of its key priorities in the WTO and in the bilateral agreements it negotiates with the US and Japan.

In this context, the Japan-EU negotiations are crucial because they raise all the key problems to be faced. First and foremost, they involve firms with very different legal and economic status. Most of the EU railways companies are public, subject to very limited competition and deeply in debt. The Japanese railway market is competitive, consists of a mix of a small number of relatively small public companies and many totally private companies, including a number of former Japan Railway companies which have been privatized).  In particular, the three largest Japanese railways companies which represent 60 percent of the whole EU28 rail passenger market are totally private and profitable.  It took some time in Europe to realize these key differences.  The reason for the healthy situation in Japan is that, since the Meiji era, the Japanese railways companies have worked as true urban planners—connecting their tracks and large stores—something that the EU railways companies have started to do only a decade or so ago (and at a very small scale with their very limited station spaces).

Of course, this situation means that it is impossible to include private firms under public procurement rules. However, an option could satisfy both negotiating partners: a “railways” chapter with a public procurement section covering most of the EU rail companies and the few Japanese firms of similar statute and with a private section covering the private Japanese firms and the (possibly increasing number of) EU firms of similar statute. Drafting different but equivalent concessions for the two sections is not be so difficult because the Japanese rail sector is as large as the whole EU28 sector and because a progressive and balanced deal could be expressed on a firm by firm basis (individual private Japanese rail passengers firms and individual state-owned EU rail firms).

Such a simple solution seems currently rejected by a few vested interests—led by the French railway equipment company Alstom. Opposition by vested interests is not a new thing in trade negotiations. But this one is particularly astonishing for five reasons.

First, France has massive offensive interests in getting a Japan-EU agreement concluded. For instance, such a deal is the only insurance policy to protect her agrifood exports in Japan (Japan is the 3rd export market in the world) against the conclusion of the Trans-Pacific Partnership which includes all the key competitors of French agriculture (Australia, Canada, Chile, the US, New Zealand). Bowing to Alstom means creating huge troubles for the French farmers and agrifood business.

Second, French consumers need more competition in the rail equipment. SNCF has been able to buy French because of massive subsidies. The bad state of the French public finance means that such a mechanism is out of reach for a very long time. And SNCF will not be allowed to raise its prices for political reasons. The only option for SNCF—and the host of French commuters using daily local and inter-city trains—is to get better deals when buying its equipment. This situation is not new: it happened with Air France buying Boeing aircraft.

Third, the Japanese rail passengers companies have the same problem than SNCF: getting cheaper equipment thanks to more competition. It happens that the Japanese equipment market is huge. For instance, the three major private Japanese rail companies own 23,000 electric railcars, whereas SNCF owns 3,000.

Fourth, the GE-Alstom deal has induced some commentators to talk about Alstom as leading a future “Trainbus”—a term making a reference to Airbus. Such a perspective needs clarification. Airbus has never aimed at being a “national champion” in European closed markets. Rather, it has chosen to face international competition and to make the necessary industrial alliances to operate successfully in worldwide markets. A Trainbus which would try to keep the EU rail equipment markets closed is certain to be on a collision course with not only SNCF but also with all the EU rail companies of passengers and cargo transport, on behalf of the 400 billions of passengers-kilometer in the EU 28.

Last but not least, the golden market for the next two or so decades is the Chinese market. For instance, in 2012, there have been 145 billion passenger-kilometers of fast-speed trains in China, compared to 51 in France and 79 in Japan. This market is much too big for Alstom alone. Alstom needs to join forces with rail equipment companies which enjoy a great reputation in Asia and which know already well the Chinese markets. Japanese firms are the only ones to master these two cards.  As a result, the “railway” chapter of the Japan-EU agreement should include  “cooperation” aspects enhancing the EU-Japan industrial alliance, in particular at the third countries including China.

So, why to make troubles when the pros and cons are so clear? Is it the traditional French trade negotiation strategy that consists in playing the “naughty kid” up to the last minute in order to get a few short-term advantages—at the costs of building long-term resentment among our EU partners and in the rest of the world? Or, is it the incapacity of the French government to make the French national interest prevail over narrow vested interests?

One country, two internets: China and Hong Kong

Shenzhen, also known as China’s Silicon Valley, is located less than 30 km north of Hong Kong. As a leading ICT capital, Shenzhen’s economic growth is gradually catching up with Hong Kong – and this mainland city has already surpassed European countries like Slovenia, Portugal and Greece in GDP per capita. 

The Shenzhen-Hongkong metropolitan area is divided by a clear line by the policy of "one country, two systems". While the citizens in Shenzhen are well-informed of the crises in Ukraine and the Middle-East, they were initially oblivious about Occupy Central happening right next door. The public broadcaster CCTV was late to report from the student protests; while Twitter, Facebook and major foreign news websites have been blocked on Chinese mainland for decades. When the images from the umbrella revolution started to appear on Instagram (one of the few foreign social media allowed in China), it was immediately shut down by Chinese censors, but only on mainland China – Beijing knows too well that internet censorship in Hong Kong would only backfire.


Credit: Instagram/@troyadestroyer

Deng Xiaoping, the first post-Mao chairman, supposedly has said that the modernisation of China will take a hundred years divided into three equal instalments: the first period to secure the "territorial integrity” of the motherland (i.e. the civil war and the reunification of Hong Kong), the second to modernise its economy – and finally the third period of political reforms. The People’s Republic is turning 66 next year – or two-thirds of a century if you so wish – and is now weighing on the threshold to its last stage of reforms. Not even the most rabid China-basher would deny that China has gone a long way, and the Chinese people are now enjoying more freedoms than ever before. 

Arguably, one of the most important of freedoms came with its market economy. Yes, it may be volatile, or perhaps a little corrupt, but nonetheless: Chinese market liberalisation created millions of jobs that made the Chinese dream possible and spawned the first-ever generation of Chinese who were able to accomplish their dreams without emigrating; it created the first-ever privately-owned Chinese multinationals – like Huawei, the global leader in telecom engineering, or the e-retailer Alibaba.com, who recently completed largest IPO in history raising $25 billion. It is not a coincidence that both are tech firms operating out of Shenzhen: China is now the world’s largest internet economy with 700 million users online, where more than half a billion people are active on blogs or online forums where the political debate is increasingly outspoken and candid.  


The statue of Deng Xiaoping in Shenzhen (incidentally facing Hong Kong)
Credit: Flickr/Ian Roland

For the central government in Beijing, the internet is an indispensable tool for economic growth, but also a valve to let off some steam from the pressure cooker we call Chinese modern life, with local mismanagement, smog, wide-spread corruption in schools and hospitals. In short, let malcontent crowd microblogs like Weibo (in any case limited to 140 characters) rather than on Tiananmen Square. In any event, there is a kill switch – the ubiquitous state censorship demands that all websites must apply for content provider licences that comes with editorial responsibilities and criminal sanctions that few Western publishers or e-commerce operators would accept. Furthermore, all web and email traffic in and out of the country is routed through checkpoints where censors can block or scan anything. Foreign search engines or apps that compete with Chinese services are sometimes blocked or slowed down to render them useless. This filter between China’s two systems caught Instagram and its thousands of images from Hong Kong Central.


Credit: Instagram/@billiethakid

Nonetheless, Beijing's main concern in Hong Kong is neither photo-blogs nor the calls for democracy. The legendary Chinese top diplomat Qian Qichen, who negotiated the Hong Kong handover, fervently recalls in his autobiography how the British started to push for democratic reforms during the handover – after refusing political rights or citizenships to Hong Kong for a century – with the intent of handing over a ticking bomb to China. Qian’s point may seem banal, but still a valid point in 2014: Hong Kong has never been democratic. Occupy Central is first and foremost a protest against Beijing’s interference in Hong Kong’s internal affairs: Democracy just happens to be the best alternative to Beijing rule.


—Just don't call me Dr. Qissinger
Foreign Minister Qian Qichen, chief negotiator of the Hong Kong handover in 1997
Credit: Wikipedia/Wikicommons

Contrary to what many outsiders believe, China is a relatively loose statehood and a frail federal construct – not dissimilar to the EU. China is on the verge of unravelling at every economic crisis and inflation spike; the tensions between Beijing and the provinces have been a constant throughout the history. The key states act as kingmakers and bargain over budgets and Politburo and State Council nominations – once again, not entirely dissimilar to the EU. Let it remain unsaid whether the current leadership of Xi actually share Deng’s view on the timing and the end of the third and final reforms but no Chinese leader – neither current or past – is willing to risk a return to the time before year Zero, the time before Mao, and the dissolution of the central state. This political instinct explains why Deng resorted to using force in 1989 (albeit reluctantly) – and why Instagram is blocked in 2014.


The nimble art of predicting political unrest in China

Beijing is about 2,000 km from Occupy Central Рtwice as far as Taipei, where the Chinese enjoy free speech and free elections. There are almost forty daily flights to Taipei compared to only twenty to Beijing from Hong Kong. The old clich̩ says globalisation and the internet have shortened the distances Рbut the rift between Hong Kong and Beijing is ever-increasing. Technology, more than anything else, made it possible for the two systems to co-exist in China for another 33 years, if deemed necessary.

A Swedish version of this text was printed as an op-ed in SvD on Oct 9th, 2014

Thursday, 9 October 2014

East African Community and the EU’s Economic Partnership Agreement: Do African countries suffer from the victim complex?

By Maria Salfi


A week has passed and the deadline to ratify the Economic Partnership Agreement (EPA) missed. African countries are at the borderline, giving up 12 years of negotiations with the EU. Enjoying the duty-free quota-free access since January 2008, Kenya is being diminished to a step lower. In fact its export now follows the Generalized System of Preferences (GSP) since they did not implement the agreement within the 1st October’s deadline. The other members of the East African Community (EAC) – of which Kenya is part of – are being placed under the “everything but arms” system that enables them to have only duty-free access to the EU market.

Set it up in 1971, the GSP ensures that exporters from developing countries pay lower duties than the official duty applicable (Most Favoured Nation). It is basically a system of unilateral preferences toward Least Developed Countries (LDC) offering accesses to the EU market similar to EPAs. LDCs which do not have an EPA with the EU can therefore benefit from a special export regime although the GSP is not as favourable as the duty-free quota-free system. Nonetheless, it is a unilateral system meaning that the EU does not get the same treatment that it gives.


Thanks to this special scheme, developing and least developed countries can improve their trading capacity and enter markets that they could not do under the MFN arrangement. Therefore they have always profited from a special position that the “developed world” has proposed to them. However, when finally they had the occasion to implement an Economic Partnership Agreement with the EU, they made a step back.  There is a general feeling that African countries perceive the EPA as being biased toward the EU. Yet, they have enjoyed a distinctive position in terms of trade with the Union for quite some time. Ratifying the EPA would have only improve it and make it official. Instead, their economy is facing major costs in terms of trade. Kenya is now incurring costs on its export which did not have before. Its flower market – Kenya is a major flower exporter to the EU - is suffering from a 5% to 8.5% tariff, risking a loss of some of its business permanently.