Implicit Policy Preferences and Trade Reform by Tariff Aggregates

Pressure from negotiators on agricultural tariff reform in the Doha Round is favouring commitments to reduce “average” tariffs over a range of commodities. This stems from the perceived need for “flexibility” in protection levels, particularly for some highly protected product groups like sugar, dairy products and rice. Yet reforms that reduce the average tariff across agricultural products but raise tariff dispersion may well reduce welfare and therefore defy the spirit of the negotiations. This paper develops a practical approach to identifying the policy preferences implicit in existing tariff patterns and employs these preferences in formulating mathematical programs that represent the primary policy formation process. These are solved and the effects explored of reform by reductions in either the arithmetic or the trade value weighted average of tariffs. In applications to the EU and Japan, tariff dispersion is found to increase with either averaging formula but by more in the trade value weighted case

China's Growth to 2030: Demographic Change and the Labour Supply Constraint

Chinese economy, demographic change, labour market and economic growth

Appreciating The Renminbi

International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with an underlying real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis, which sees growth as stemming from improvements in traded sector productivity and associated rises in wages and non-traded prices. Yet, despite extraordinary growth after the mid-1990s China’s real exchange rate showed no tendency to appreciate until after 2004. We use a dynamic general equilibrium model to simulate the economy and show that, during this period, trade reforms and a rising national saving rate were offsetting forces in the presence of elastic labour supply. We then examine the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural terms of trade has tightened China’s labour market. We show that, should the Chinese government bow to international pressure by appreciating the renminbi either via an extraordinary monetary contraction or via export disincentives the consequences would be harmful for both Chinese and global interests.

On the Robustness of Short Run Gains from Trade Reform

The long run gains from reductions in distortionary tariffs are robustly positive in neoclassical economies. In the short run, however, depending on the prevailing exchange rate and tax regimes, a combination of producer price deflation and nominal wage stickiness can cause trade liberalisation to be contractionary. Because trade liberalisation, taken alone, reduces the home prices of foreign goods, there is a substitution away from home produced goods and a real depreciation. Under the explicit and de facto fixed exchange rate regimes adopted by many developing countries this necessitates a contractionary producer price deflation. Under the floating exchange rate regimes of the larger industrialised economies, if lost tariff revenue is replaced via a consumption tax increase, contractionary producer price deflation can also occur. This paper examines the implications of these and other policy combinations for the short run gains from trade reform using a comparative static numerical model of a generic, twosector, “almost small” open economy with asset markets and forward looking agentsTrade reform, short run, exchange rate regimes, fiscal policy

Strategic Interaction amongst Australia’s East Coast Ports

Australia’s principal container ports, located in its state capitals, are owned and operated by state authorities that largely return profits from port operations to state governments. Since they govern the volumes of trade in most merchandise, they command immense influence over the openness and flexibility of the national economy. In this study, we estimate the elasticities of substitution between services of ports in Brisbane, Sydney and Melbourne. We also examine the pricing of port services to estimate the extent of their interaction, from which we derive conjectural variations parameters to assess the actual and potential levels of price collusion. The results confirm that there is considerable potential for destructive oligopoly behaviour and that pricing by the apparently isolated Port of Melbourne has been effectively controlled by price-cap regulation. The services of the ports of Sydney and Brisbane are comparatively substitutable, however. Although their regulation appears to be less restrictive, this substitutability appears to result in some level of competition, which aids in the control of pricing.

Demographic Dividends, Dependencies and Economic Growth in China and India

The world's two population giants have undergone significant, and significantly different, demographic transitions since the 1950s. The demographic dividends associated with these transitions during the first three decades of this century are examined using a global economic model that incorporates full demographic behavior and measures of dependency that reflect the actual number of workers to non-workers, rather than the number of working aged to non-working aged. While much of China's demographic dividend now lies in the past, alternative assumptions about future trends in fertility and labor force participation rates are used to demonstrate that China will not necessarily enter a period of “demographic taxation” for at least another decade, if not longer. In contrast with China, much of India's potential demographic dividend lies in waiting for the decades ahead, with the extent and duration depending critically on a range of policy choices.

Combating China’s Export Contraction: Fiscal Expansion or Accelerated Industrial Reform?

Initially, the global financial crisis caused a surge of financial inflows to China, raising investment, but this abated in 2008, leaving a substantial contraction in export demand. The government’s key response was to commit to an unprecedented fiscal expansion. Two oftignored consequences are, first that government spending is on non-traded goods and services and so enlarges the consequent real appreciation and, second, that a more inward-looking economy causes firms to face less elastic demand and hence to increase oligopoly rents, further enlarging the real appreciation. Both are important for China because of the contribution of its real-exchange-rate sensitive, low-margin labour-intensive export sector to total employment. An economy-wide analysis is offered, using a model that takes explicit account of oligopoly behaviour. The results suggest that a conventional fiscal expansion would further contract the Chinese economy. On the other hand, notwithstanding the export contraction further industrial reform, emphasising the largely state-owned sectors, would reduce costs and foster growth in both output and modern sector employment.China, financial crisis, fiscal expansion, oligopoly, price caps, privatisation

Global Demographic Change and Economic Performance Applications of an Augmented GTAP-Dynamic

demographic transition have led to accelerated ageing of populations in developed countries and in several advanced developing countries. This paper introduces a global demographic model from which emerge the implications of these changes for population sizes, age distributions and gender compositions. From these results are inferred corresponding changes in labour force size and in patterns of consumption and saving which are then analysed using an augmented GTAP-Dynamic, in which regional households are disaggregated into four age groups and two genders. Demographic change is found to act most significantly through variations across age-gender groups in both labour force participation and savings behaviour, with secondary effects arising from variations in consumption preferences across these groups. As policies to control ageing in the developed countries, increased labour force participation by the aged and replacement migration are examined and shown to have very considerable effects on global economic performance.

China's Growth to 2030: The Roles of Demographic Change and Investment Premia

China's economic growth has, hitherto, depended on its relative abundance of production labour and its increasingly secure investment environment. Within the next decade, however, China's labour force will begin to contract. This will set its economy apart from other developing Asian countries where relative labour abundance will increase, as will relative capital returns. Unless there is a substantial change in population policy, the retention of China's large share of global FDI will require further improvements in its investment environment. These linkages are explored using a new global demographic model that is integrated with an adaptation of the GTAP-Dynamic global economic model in which regional households are disaggregated by age and gender. Interest premia are integral with projections made using these models and in this paper their influence on China's economic growth performance is investigated under alternative assumptions about fertility decline and labour force growth. China's share of global investment is found to depend sensitively on both its labour force growth and its interest premium though the results suggest that a feasible continuation of financial reforms will be sufficient to compensate for a slowdown and decline in its labour force.Chinese economy, demographic change, investment risk and economic growth

Appreciating the Renminbi

International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with a real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis under which growth stems from improvements in traded sector productivity that cause wages and non-traded prices to rise. Yet, while evidence on China’s productivity and prices supports this hypothesis, its real exchange rate has as yet shown no long run tendency to appreciate. The use of a global numerical model allows extensions of the hypothesis, including failures of the law of one price for tradable goods, which point to WTO accession trade reforms and China’s high saving rate as key depreciating forces since the late 1990s. The same model is then applied to the implications of premature RMB appreciation. It is shown that, unless this is achieved in association with the repatriation of foreign reserves, which would require thus far unavailable financial depth in the Chinese economy, unilateral RMB appreciation would be destructive of both Chinese and global interests.