US Trade and Wages: The Misleading Implications of Conventional Trade Theory

Conventional trade theory, which combines the Heckscher-Ohlin theory and the Stolper- Samuelson theorem, implies that expanded trade between developed and developing countries will increase wage equality in the former. This theory is widely applied. It serves as the basis for estimating the impact of trade on wages using two-sector simulation models and the net factor content of trade. It leads naturally to the presumption that the rapid growth and declining relative prices of US manufactured imports from developing countries since the 1990s have been a powerful source of increased US wage inequality. In this study we present evidence that suggests the presumption is not warranted. We highlight the sensitivity of conventional theory to the assumption of incomplete specialization and find evidence that is not consistent with it. Since 1987, although US domestic relative effective prices in industries with relatively high shares of manufactured goods imports from developing countries have declined, effective unskilled-worker weighted prices have actually risen relative to skilled- worker-weighted prices. If anything this suggests pressures for increased wage equality. Also in apparent contradiction to theory, the (six-digit NAICS) US manufacturing industries with high shares of manufactured imports from developing countries are actually more skill-intensive than the industries with high shares of imports from developed countries. Finally, applying a two-stage regression procedure, we find that developing country import price changes have not mandated increased US wage equality. While these results conflict with standard theory, they are easily explained if the US and developing countries have specialized in products and tasks that are imperfect substitutes. If this is the case, the impact of increased trade with developing countries on US wage inequality is far more muted than standard theory suggests. Also methodologies such as the net factor content of trade using US production coefficients and simulation models assuming perfect substitution between imports and domestic products could be highly misleading.

SACU tariff policies: Where should they go from here?

This paper characterizes the current SACU tariff structure, considers its rationale, proposes and evaluates some alternatives and offers some suggestions for reforming the SACU revenue sharing formula and regional trade strategy. While considerable progress was made until recently in liberalizing and simplifying SACU’s tariff structure, over the past few years such movement appears to have halted. This is unfortunate because, as the paper demonstrates, the tariff structure remains excessively complex, and opaque, continues to taxes exports and provides sectors with very disparate amounts of protection. The differentiation appears mainly to be the result of historical accident and does not appear to be justifiable as efficient job preservation, equitable income distribution or on infant industry grounds. Several alternative tariff structures that use just one or two tariff bands are explored. We demonstrate that it is possible simultaneously to provide benefits to consumers, limit employment dislocation, confer a reasonable degree of effective protection, particularly on finished goods, reduce export taxes, improve transparency and provide a norm against which industrial policy priorities can be set. A major reform of SACU tariffs would also provide the opportunity to renegotiate the SACU revenue-sharing formula, more clearly and rationally separating its aid and tariff-revenue sharing components. The paper also advocates that SACU place primary reliance on free trade agreements rather than new customs unions in its dealing with other trading partners.Trade policy; South African Customs Union; Liberalisation

AGOA Rules: The Intended and Unintended Consequences of Special Fabric Provisions

Lesotho and other least developed African countries responded impressively to the preferences they were granted under the African Growth and Opportunities Act with a rapid increase in their clothing exports to the US. But this performance has not been accompanied by some of the more dynamic growth benefits that might have been hoped for. In this study we develop the theory and present empirical evidence to demonstrate that these outcomes are the predictable consequences of the manner in which the specific preferences might be expected to work. The MFA (Multi-fiber Arrangement) quotas on US imports of textiles created a favorable environment for low value-added, fabric-intensive clothing production in countries with unused quotas by inducing constrained countries to move into higher quality products. By allowing the least developed African countries to use third country fabrics in their clothing exports to the US, AGOA provided additional implicit effective subsidies to clothing that were multiples of the US tariffs on clothing imports. Taken together, these policies help account for the program's success and demonstrate the importance of other rules of origin in preventing poor countries from taking advantage of other preference programs. But the disappointments can also be attributed to the preferences because they discouraged additional value-addition in assembly and stimulated the use of expensive fabrics that were unlikely to be produced locally. When the MFA was removed, constrained countries such as China moved strongly into precisely the markets in which AGOA countries had specialized. Although AGOA helped the least developed countries withstand this shock, they were nonetheless adversely affected. Preference erosion due to MFN reductions in US clothing tariffs could similarly have particularly severe adverse effects on these countries.

Is China ‘Crowding Out’ South African Exports of Manufactures?

This article analyses the impact of Chinese competition on South African manufacturing exports to its major markets in Europe, the United States and Sub-Saharan Africa. The article considers five related research questions. First, are China and South Africa competing with each other in export markets, how extensive is such competition and how is this changing over time? Second, to what extent has Chinese competition led to the displacement of South African exports? Third, in which countries have South African exports been most affected? Fourth, which South African export sectors face the greatest threat from Chinese competition? Finally, how does South Africa's experience compare to that of Brazil, another middle-income country and regional power. We find that competition between South Africa and China increased significantly over the past decade, particularly in African markets. All types of manufactured exports lost ground to China, but the impact is strongest in low-technology products. South African exports have nevertheless increased from 2001 so that ‘crowding out’ should be interpreted in relative terms

Trade related business climate and manufacturing export performance in Africa: A firm-level analysis

Africa continues to be marginalised in world trade of manufactured goods, despite reductions in tariffs and non-tariff barriers. This paper investigates whether high business and trade costs associated with Africa’s trade-related infrastructure, trade institutions and the regulatory environment have contributed towards its mediocre trade performance. The paper focuses on eight African countries - Egypt, Kenya, Madagascar, Mauritius, Morocco, South Africa, Tanzania and Zambia - using the World Bank’s investment climate surveys. The results of the study suggest that the business climate, as measured using principal components for micro-level supply constraints, macroeconomic conditions and the legal environment, is closely associated with firm-level export propensity. Improvements in domestic policy may therefore have a considerable positive impact on manufacturing export performance in Africa

ESTIIMATING ELASTICITIES OF DEMAND AND SUPPLY FOR SOUTH AFRICAN MANUFACTURED EXPORTS USING A VECTOR ERROR CORRECTION MODEL

Elasticities of demand and supply for South African manufactured exports are estimated using a vector error correction model in order to address simultaneity and non-stationarity issues. Demand is highly price- elastic, with elasticities ranging from -3 to –6. The price elasticity of supply is generally about 1, but some estimates are as low as 0.35. Competitors’ prices and world income are important determinants of demand, but domestic capacity utilization is not an important determinant of export supply. Many different data alternatives are sourced, constructed and estimated, showing the results can be sensitive to the choice of series.

How integrated is SADC ? trends in intra-regional and extra-regional trade flows and policy

Do Southern African Development Community countries trade enough with each other and with the rest of the world? Although its share of world trade has fallen, appropriate benchmarking shows that, controlling for gross domestic product and other characteristics, Southern African Development Community countries have experienced an increase in openness that is comparable to other developing countries. Once market size and geography are taken into account, trade between Southern African Development Community countries is actually high. Southern African Development Community countries also trade more products with each other than they do with the rest of the world. In this sense, and contrary to stylized fears, the Southern African Development Community region is quite integrated. Although the Southern African Development Community has reduced its tariffs, the structure remains complex and could be lowered on intermediates. Other impediments make it costly and difficult to move goods, but are at levels that are comparable with countries at similar levels of development. Although this may be surprising, there is still scope for improvement and the disadvantageous geography of the Southern African Development Community makes it important for other trade impediments to be reduced.Free Trade,Environmental Economics&Policies,Economic Theory&Research,Trade Policy,Trade Law

Evaluating the general equilibrium effects of a wage subsidy scheme for South Africa

Unemployment among semi- and unskilled workers has reached severe proportions (over 50 %) and threatens the political and economic stability of the South African economy. In this paper a computable general equilibrium (CGE) model of the South African economy to assess the economy-wide impact of a wage subsidy targeted at semi- and unskilled workers. We find that employment of semi- and unskilled workers can be raised quite significantly, although the financial costs can be substantial. The targeting of the correct sectors as well as the budgetary process (deficit financed versus balanced budget) followed play an important role in the outcome.

Trade liberalisation and labour demand within South African manufacturing firms

Using new detailed tariff data, wages disaggregated by skill level and firm level information, this paper ascertains the relationships between trade, technology and labour demand and investigates the effects of tariff changes on factor prices in South African manufacturing. We find evidence that trade liberalization and technological change have affected the skill structure of employment. Export orientation, raw materials imports, training, investment in computers and firm age are positively associated with the skill intensity of production. We also find that tariff liberalisation raised the return to capital relative to labour, but that the negative impact on labour is concentrated on semi-skilled workers. Tariff liberalisation mandated a rise in real returns to unskilled workers.

Estimating elasticities of demand and supply for South African manufactured exports using a vector error correction model

Elasticities of demand and supply for South African manufactured exports are estimated using a vector error correction model in order to address simultaneity and non-stationarity issues. Demand is highly price-elastic, with elasticities ranging from -3 to -6. The price elasticity of supply is generally about 1, but some estimates are as low as 0.35. Competitors’ prices and world income are important determinants of demand, but domestic capacity utilization is not an important determinant of export supply. Many different data alternatives are sourced, constructed and estimated, showing the results can be sensitive to the choice of series.