Sawyer, W. Charles

Sprinkle, Richard L.

English

Aquila Digital Community (University of Southern Mississippi, USM)

The University of Southern MississippiThe Aquila Digital CommunityFaculty Publications7-1-1990The Impact of the Caribbean Basin EconomicRecovery Act on Caribbean Nations Exports andDevelopment: A CommentW. Charles SawyerUniversity of Southern MississippiRichard L. SprinkleUniversity of Texas at El PasoFollow this and additional works at: http://aquila.usm.edu/fac_pubsPart of the Economics CommonsThis Article is brought to you for free and open access by The Aquila Digital Community. It has been accepted for inclusion in Faculty Publications byan authorized administrator of The Aquila Digital Community. For more information, please contact Joshua.Cromwell@usm.edu.Recommended CitationSawyer, W. C., Sprinkle, R. L. (1990). The Impact of the Caribbean Basin Economic Recovery Act on Caribbean Nations Exports andDevelopment: A Comment. Economic Development and Cultural Change, 38(4), 845-849.Available at: http://aquila.usm.edu/fac_pubs/7404 The Impact of the Caribbean Basin Economic Recovery Act on Caribbean Nations' Exports and Development: A Comment on Pelzman and Schoepfle's Estimates* W. Charles Sawyer University of Southern Mississippi Richard L. Sprinkle University of Texas at El Paso In a recent article in this journal J. Pelzman and G. Schoepfle (hereafter PS) provide estimates of the trade effects of the Caribbean Basin Eco- nomic Recovery Act (CBERA).' They use two models to estimate the increase in CBERA export earnings. The first is a traditional partial equilibrium trade creation/trade diversion model and the second is a shift-share model. In the first part of this comment we show that they use an incorrect equation in their partial equilibrium model and that they compound this error by making incorrect use of empirical import demand elasticities. As a result, the estimates they report are not valid. In the second part of the comment, we provide more reasonable esti- mates of the economic impact of the CBERA. I. Estimating Methodology Pelzman and Schoepfle set forth a standard partial equilibrium model to estimate the trade impact of the CBERA. This model results in the simple equation (p. 778): R* = l [(1 + E)/(E - rq)lt*, (1) where R* is the percentage change in CBERA export earnings resulting from tariff preferences, rl is the U.S. elasticity of demand for imports from CBERA countries (defined as negative), E is the elasticity of supply of CBERA exports to the United States, and t* is the percent- ? 1990 by The University of Chicago. All rights reserved. 0013-0079/90/3804-0068$01.00This content downloaded from 131.95.218.41 on Fri, 21 Oct 2016 14:57:38 UTCAll use subject to http://about.jstor.org/terms 846 Economic Development and Cultural Change age change in price resulting from the preferential tariff reductions (i.e., t* = - T/[1 + TI], where T is the ad valorem tariff rate).2 R* ranges in value between - t* (for E = 0) and rqt* (for E = o); since t* and rl are both negative, R* must be positive (except in the extreme case of rl = 0).3 More will be made of this point later when we discuss their actual estimates. Citing difficulties in obtaining reliable estimates of E and rl, PS estimate the impact of the CBERA using their equation (p. 780): AM = Mrqt*, (2) where M is the value of U.S. imports from CBERA and rl is now the U.S. aggregate import demand elasticity (i.e., from all supplying coun- tries rather than just CBERA countries).4 They claim that equation (2) is a reduced-form equation derived from their initial partial equilibrium model. In fact, it is the traditional equation used to estimate the trade creation effects of preferential tariffs; it does not include trade diver- sion.5 Thus, their estimates of "gross trade creation" include only the net increase in U.S. imports from CBERA; they do not include the extent to which preferential tariffs result in imports from CBERA dis- placing imports from other countries. As such, the PS estimates are biased downward. We now turn to the actual estimates reported by PS. Using equation (1), PS calculate (p. 782) that trade expansion would be $24.7 million if the CBERA supply elasticity were zero. With the bounds for equation (1) as discussed above, this figure will under- state (overstate) the true gross trade expansion effects if the own-price elasticity of U.S. demand for imports is greater than (less than) unity. Pelzman and Schoepfle go on to estimate the upper bound estimates using Stern's "best guess" elasticity estimates plus or minus one stan- dard deviation.6 The results of this exercise are reproduced in table 1. Although it is impossible for a preferential tariff program to cause imports from preferred countries to decrease, assuming normal sloping demand and supply curves (under such conditions the CBERA coun- tries would refuse to use CBERA preferences and continue to send goods to the United States under normal tariff treatments), PS never- theless report negative estimates of gross trade creation for 10 CBERA countries.' In fact, their low-range estimates for all CBERA countries combined is a negative $164 million-a decline in CBERA exports to the United States of more than 100%. This is truly an absurd result. Instead of examining these results for reasonableness, they simply added, or allowed the computer to add, one standard deviation to the demand elasticity estimates even if the result is an upward sloping demand curve, thereby producing negative impact estimates.This content downloaded from 131.95.218.41 on Fri, 21 Oct 2016 14:57:38 UTCAll use subject to http://about.jstor.org/terms W. Charles Sawyer and Richard L. Sprinkle 847 TABLE 1 ALTERNATIVE ESTIMATES OF THE EFFECTS OF THE CBERA, 1983 (Thousands of U.S. Dollars) PELZMAN-SCHOEPFLE BALDWIN-MURRAY Trade Trade SIC CODE AND DESCRIPTION Low High Creation Diversion Total 01-Agricultural products $ 2,088 $ 2,611 $ 2,350 $ 402 $ 2,752 08-Forestry products 6 8 7 3 10 09-Fishery products 2 2 2 3 5 20-Food products 789 1,818 1,304 54 1,358 21-Tobacco products (27,028) 43,557 8,265 38 8,303 24-Lumber and wood products 63 103 83 8 91 25-Furniture and fixtures 0 1 1 0 1 28-Chemicals 23 29 26 2 28 29-Petroleum refinery products 11 35 23 2 25 32-Stone, clay, and glass 18 72 45 4 49 33-Primary metal products 587 855 721 161 882 34-Fabricated metal products 1 1 1 0 1 35-Machinery, except electrical 4 7 6 1 7 36-Electrical machinery (141,335) 216,710 37,688 9,159 46,847 37-Transportation equipment (1) 2 1 0 1 39-Miscellaneous manufactures 510 1,096 803 408 1,211 Total (164,262) 266,907 51,326 10,245 61,571 SOURCEs.-See n. 9. II. Trade Benefits of the CBERA In table 1 we provide reestimates of the results reported in table 11 (p. 794) of PS. The first two columns are a replication of PS's low and high estimates by two-digit SIC code and in total. The third column contains correct estimates of trade creation. These estimates were cal- culated by using PS's "best" estimates, which are an average of their low and high estimates. This represents a reasonably accurate measure of trade creation. The Baldwin and Murray method was used to obtain the estimates of trade diversion shown in the fourth column.8 The correct total effects of the CBERA are shown in the final column, which is the sum of trade creation and trade diversion. Pelzman and Schoepfle's total estimates of "gross trade creation" range from a negative $164.2 million to a positive $266.9 million. In percentage terms this works out to a range of negative 104% to a positive 169%. A corrected estimate of total trade creation is calculated to be $51.3 million. Using the Baldwin and Murray technique, our estimate of trade diversion is $10.2 million.9 The estimated total impact of the CBERA on exports from the region is $61.6 million. These corrected estimates would represent a 33% increase in exports from the CBERA countries due to trade creation and a 6% increase due to trade diver-This content downloaded from 131.95.218.41 on Fri, 21 Oct 2016 14:57:38 UTCAll use subject to http://about.jstor.org/terms 848 Economic Development and Cultural Change sion. The projected overall increase of 39% would seem to be a more reasonable estimate of the effects of the CBERA than the PS estimates. III. Conclusions All estimates of changes in trade flows caused by tariff reductions are of necessity "rough orders of magnitude." Some estimates, however, are rougher than others. The original estimates presented by PS range from the totally implausible (a drop in CBERA countries exports) to the merely unlikely (exports more than double). Since the results re- ported by PS are based on the misapplication of an inappropriate model, this is not surprising. The corrected estimates presented here indicate that the exports of the CBERA countries may rise by approxi- mately $51.3 million due to trade creation and $10.2 million due to trade diversion. These results are both conceptually correct and, un- like the PS results, are at least plausible. Notes * We would like to thank Tracy Murray and Don Rousslang for comments on an earlier draft. The usual caveat applies. 1. J. Pelzman and G. Schoepfle, "The Impact of the Caribbean Basin Economic Recovery Act on Caribbean Nations' Exports and Development," Economic Development and Cultural Change 38 (July 1988): 753-96. 2. Subscripts denoting countries and commodities have been suppressed. 3. Pelzman and Schoepfle address the sensitivity of their estimates of R* to values of q and E using a table on p. 780. A table very similar to this was used by D. Rousslang and J. Lindsey, "The Benefits to the Caribbean Basin Coun- tries from the U.S. CBI Tariff Eliminations," Journal of Policy Modeling 6 (1984): 513-30. 4. Pelzman and Schoepfle state, "Consequently the analysis assumes that import elasticities estimated for total U.S. imports also represent the response of domestic buyers to changes in the price of imports from the CBERA na- tions" (pp. 780-81). This assumption is not a neutral one. The aggregate U.S. import demand is less elastic than the average of U.S. demands for imports from individual countries or country groups if imports from these different sources are substitutes for each other, which is the reasonable assumption. Thus, PS need some justification for their implicit assumption that the U.S. demand for imports from CBERA nations is less elastic than the average of U.S. demands for imports from other sources. Stated this way, their implicit assumption seems quite implausible, particularly since it is applied uniformly across all products. 5. For a recent detailed examination of the partial equilibrium model to estimate trade creation and trade diversion generated from preferential tariff reductions, see W. C. Sawyer and R. L. Sprinkle, "Alternative Empirical Estimates of Trade Creation and Trade Diversion: A Comparison of the Bald- win-Murray and Verdoorn Models," Weltwirtschaftliches Archiv 125 (1989): 61-73. 6. The source of these elasticities is confusing. The note to table 10 refers to Stern's "best guess" elasticities, which presumably come from R. M. Stern, J. Francis, and B. Schumacher, Price Elasticities in International Trade: An Annotated Bibliography (London: Macmillan, 1976). However, these elas-This content downloaded from 131.95.218.41 on Fri, 21 Oct 2016 14:57:38 UTCAll use subject to http://about.jstor.org/terms W. Charles Sawyer and Richard L. Sprinkle 849 ticities do not come with standard deviations. "Best guess" estimates from Stern et al., updated elasticities estimates, and standard deviations for these latter estimates are presented in table 4 (p. 515) of C. R. Shiells, R. M. Stern, and A. V. Deardorff, "Estimates of the Elasticities of Substitution between Imports and Home Goods for the United States," Weltwirtschaftliches Archiv 122 (1986): 497-519. On the other hand, in n. 10, PS attribute the elasticity coefficients to Baldwin and to Shiells, Stern, and Deardorff. 7. See their table 10, p. 783. 8. See R. E. Baldwin and T. Murray, "MFN Tariff Reductions and Devel- oping Country Trade Benefits under the GSP," Economic Journal 87 (1977): 30-46. For an application of the Baldwin and Murray technique in the context of the CBERA, see W. C. Sawyer and R. L. Sprinkle, "Caribbean Basin Economic Recovery Act: Export Expansion Effects," Journal of World Trade Law 18 (September-October 1984): 429-36. 9. Data to calculate trade diversion were obtained from selected issues of the following sources: U.S. Department of Agriculture, Economic Research Service, U.S. Foreign Trade Agriculture Statistical Report (Washington, D.C.: Government Printing Office, 1987); U.S. Department of Commerce, Bureau of the Census, Annual Survey of Manufactures: Value of Shipments (Washington, D.C.: Government Printing Office, 1988); U.S. Department of Commerce, Bureau of the Census, U.S. Exports/Domestic Merchandise SIC- Based Products by World Area, Report no. 610 (Washington, D.C.: Govern- ment Printing Office, 1987); U.S. Department of Commerce, Bureau of the Census, U.S. Imports for Comsumption and General Imports SIC-Based Prod- ucts by World Area, Report no. 210 (Washington, D.C.: Government Printing Office, 1987); U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (Washington, D.C.: Government Printing Office, 1987); U.S. Forest Service, U.S. Timber Production, Trade, Consumption, and Price Statistics (Washington, D.C.: Government Printing Office, 1985); and U.S. National Oceanic and Atmospheric Administration, National Fisheries Service, Fishery Statistics of the United States (Washington, D.C.: Government Printing Office, 1987).This content downloaded from 131.95.218.41 on Fri, 21 Oct 2016 14:57:38 UTCAll use subject to http://about.jstor.org/terms

The Impact of the Caribbean Basin Economic Recovery Act on Caribbean Nations Exports and Development: A Comment

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The Impact of the Caribbean Basin Economic Recovery Act on Caribbean Nations Exports and Development: A Comment

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