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USITC Analysis of Trade Policy Issues Presentation at the Ministry of Commerce Beijing, China, October 23, 2006. Bob Koopman, Chief Economist Director, Office of Economics United States International Trade Commission
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USITC Analysis of Trade Policy Issues Presentation at the Ministry of Commerce Beijing, China, October 23, 2006 Bob Koopman, Chief Economist Director, Office of Economics United States International Trade Commission These remarks are my own and do not necessarily reflect the views of the USITC or any of its individual Commissioners.
Overview of seminar • Provide an overview of: • some of the questions we address and the economic models used at the USITC to analyze trade policy issues. • how the ITC’s work is used in U.S. trade policy formulation and deliberation. • ITC is an independent agency not part of Presidential Administration. (See HSE presentation for more on this.) • ITC operates under a number of specific statutes or laws • Sections 131, 332, 2104,etc. of various trade acts – 1974, 2002 • Office of Economics has approximately 48 staff, some visiting scholars. Very few support staff – research assistants. Mostly PhDs, but some masters and ABDs. • ITC staff level is 350, Office of Industries (partner office on most studies) has approximately 100 staff. • USITC’s independence is important and one of its most valued assets along with its employees.
USITC continued • USITC had five main areas of responsibility • Import injury work • AD/CVD and Safeguard • Intellectual property rights • “337” cases • Industry and Economic Analysis • Studies on FTA’s, and other trade related topics • Maintaining the US Tariff • Providing informal assistance based on our expertise to USTR and Congress as requested on trade related matters • USITC holds public hearings, writes both public and non public reports, and provides a venue for interested parties to report their concerns over policy issues. • The ITC is viewed as independent and objective in its analysis.
Trade Policy Development in the United States – the Policy Process • Roles of Congress and the President defined by the U.S. Constitution and subsequent legislation • Congress given authority over trade • But through many years of legislation Congress has given the President much discretion and authority over negotiations, while retaining responsibility for final approval.
Congress • Congressional authority over trade defined under Article 1, Section 8 of the Constitution – known as the Commerce Clause • grants the Congress the right to "regulate commerce with foreign nations, and among the several States,"
Congress and Trade • Congress has 2 houses, the House of Representatives and the Senate. • 2 Congressional Committees largely responsible for, among other things, trade issues • House Committee on Ways and Means • Senate Finance Committee • Both are important and influential committees with wide ranging responsibilities. • The USITC can be given work by either of these committees. • Any member of Congress can introduce trade related legislation, but it is likely to be referred to one of these Committees for consideration. • If it doesn’t make it out of Committee, the legislation is dead. • Sometimes trade related legislation is added to other, non trade related bills as amendments, and may by pass these committees, but that is rare.
Sources of input for Congressional Views on Trade • Congress has numerous mechanisms for obtaining input on trade issues. • Constituent input • Public Hearings • Briefing by the President’s Administration, lobbyists, public interest groups, etc.
President • The President has the right to make treaties • “(the President)… shall have power, by and with the advice and consent of the Senate, to make treaties, provided two thirds of the Senators present concur; and he shall nominate, and by and with the advice and consent of the Senate” • However, starting in 1934 Congress provided authority to the President to reduce tariffs through bilateral and GATT multilateral trade negotiations. • In 1962 Congress establishes USTR predecessor, and authorizes President Kennedy to agree to up to 50% reductions in on most items in US tariff schedule on a reciprocal basis. • 1974 Trade Act first time President given authority to negotiate non-tariff barriers and provides Fast Track Authority (for a period of 5 years), where Congress agrees to consider the trade agreements as presented by the administration without making amendments. • Fast Track renewed in 1979, 1984, 1988 (8 months after expiration), 1991, and 1993. Not renewed at the end of 1994. 2002 Trade Act provides for Trade Promotion Authority (TPA) – Fast Track’s replacement. TPA expires June 2007.
President and Trade • The United States Trade Representative is part of the Executive Office of the President and is delegated authority by the President to negotiate trade agreements. • The President retains the decision making responsibility.
Some analytical tools we use… • The USITC uses partial equilibrium and general equilibrium simulation models, and econometric models to analyze trade measures. Will provide examples as we go. • PE models are largely commodity specific, Armington specification, applied at 6 or 8 digit tariff line. Some multi sector PE models are used also. • GE models include: • large scale, 500+ sector model of the U.S., United States Applied General Equilibrium Model (USAGE). • Large scale world model, Global Trade Analysis Project (GTAP) model (based at Purdue University.) • Econometric models applied recently include gravity models, reduced form supply and demand models, logit and probit specifications. • Choice of econometric specification depends very much on the question we are asked to answer.
Broad context for ITC analysis… • USITC analysis is used at many stages in the trade policy formulation and deliberation process. • Our economic analysis, and that of others, NEVER determines the policy choice. It is used as one input to the policy process. • ITC analysis is used before negotiations begin on FTAs (largely commodity specific PE analysis.) – won’t provide examples but can discuss if you are interested. • ITC analysis is used after negotiations are completed, but before Congressional vote on FTA (usually GE analysis for economywide effects and broad sectoral impacts.) • ITC analysis is used to inform debate on many other topics • Significant U.S. import restraints and steel special safeguards – (examples follow – large single country CGE model) • China’s accession to WTO and FTA’s (global CGE model) • Non-Tariff Measures
Example of independence • Trade liberalization and growth • Policymakers (USTR) wanted to assert that trade liberalization causes growth • Asked ITC to prepare report that examined the theoretical and empirical research, summarized current findings, and recommended areas for further research.
Independence sometimes means not everyone agrees… • Some Commissioners were skeptical that economic theory and empirical work could answer the question “correctly.”
Our answer was that trade liberalization and growth were not as directly linked as some had expected …
But we still get asked…some recent questions… • Market for Medical Devices – Japan • HK – EBA • Asia trade patterns and FDI • Peru FTA, Colombia FTA, Ecuador FTA, etc… • South Korea and Malaysia probable economic effects advice • We usually get 6 to 12 months to complete studies, but FTA studies often done in 3 to 4 months
Economic Models used at the ITC • The USAGE model – developed jointly with Peter Dixon, COPS, Monash U. • A dynamic, regional applied general equilibrium (AGE) model of the U.S. economy with capability to analyze effects for distinct labor and household categories • 513 sectors, dynamic • Four closures • Historical, decomposition, forecast, and policy • Calibrates the model more tightly to observed data over time • Examines changes to parameters on tastes and technology • Helps identify areas in the data or model that need further attention • Add-ons • Take AGE results as an input and produce results for variables not included in AGE model • Offer computational advantages • State-level effects – all 50 states - completed • Distinct labor categories with different economic characteristics – flexible, but up to 753 occupations, self employment, and farming – in development • Distinct household categories with different primary factor endowments and demands (BLS data from Current Household and Payroll Surveys) – again flexible, but probably no more than 10 – data gathering. • Refinements • Sweetener markets – U.S. sugar policy – explicit modeling of US quotas using complementarities. • Jones act, upcoming
USAGE • I’ll elaborate a bit on this model – will play important role in our future work by addressing a number of concerns customers have raised about economic models in general. • Model validity, dynamics, state level results, labor detail, and household breakouts • Data source 1992 U.S. Input – Output table • Updated annually annual BLS 182 sector macro data and trade data - currently to 2004. • Major new challenge – BEA changed from SIC to NAICs classifications, most up-to-date IO table is in NAICs – 2002. We must redo all our data. • Then projected to 2015 using “outside forecasts” for key macro variables and labor.
USAGE closures to ensure model fits historical data and official government forecasts • We follow Australian Monash approach and use closures to “validate” the model on recent data and fit projections to official government forecasts – CBO, BLS, etc. • Historical closure • Estimating changes in tastes/technology, 1992-2001 • Decomposition closure • Decomposing effects of economic developments, 1992-2001 • What were the effects of changing tastes and technologies versus observed changes in policy variables. • Forecasting (projection) closure • Projecting, 2001-15, annually – forms baseline consistent with government macro forecasts • Policy closure • Policy analysis, 2001-15, annually – examines potential effects of policy changes as deviations from baseline.
Historical simulation • An attempt to rectify problem of infrequent and outdated Input-Output (I-O) tables • an attractive alternative to mechanical update methods such as RAS • Historical simulation approach • Flexible approach regarding data requirements • Based on USAGE-ITC theory • By-product • Detailed and interpretable estimates of changes in household preferences and industry technologies • Central input to decomposition and forecast simulations • By-product overshadows up-to-date I-O tables as the major output of historical simulation • Done by swapping endogenous and exogenous variables in closure.
USAGE 1992 Historical simulation, 1992-2001 Naturally exogenous data, 2001 e.g., CIF import prices, foreign currency Tariff rates Changes in tastes/technology, 1992-01 e.g., Shifts in import/domestic preferences Shifts in foreign demand Primary-factor-saving technical change and capital/labor bias in technical change Naturally endogenous data, 2001 e.g., Imports, exports by commodity Employment and capital inputs by industry Historical closure, long run
USAGE 1992 USAGE 1992 Historical and decomposition simulations, 1992-2001 Naturally exogenous data, 2001 State level decomposition Naturally endogenous data, 2001 Changes in tastes & technology, 1992-01 State-level add-on Decomposition of effects of trade policy and technological change, 1992-2001 Historical closure Decomposition closure
USAGE Annual forecast simulations, 2001-15 Annual forecasts: naturally exogenous & endogenous variables • Macro • Trade policy • Exports, Imports Changes in tastes & technology industry, commodity specific Forecast paths Shifts in functions (e.g., foreign demands, export supplies) and macro coefficients, e.g., APC Forecast closure, short run
The U.S. economy: 1992 to 2010percentage growth over 6-year periods
Calculation of the current account deficit: 1992, 1998, 2004 and 2010 ($billion)
Annual forecast simulations • Contributes to generating believable AGE analysis • “what if” answers depend significantly on the basecase forecast • Incorporates detailed information from several expert groups (in our case official govt agency forecasts or projections.) • USAGE-ITC forecasts/projections are of interest by themselves • Establishes a foreign trade baseline in some detail. Not a part of original projections.
USAGE USAGE Annual forecast and policy simulations, 2001-15 Forecasts: naturally exog. & endogenous • Macro • Trade policy • Exports, Imports Forecast paths Shocks: modified forecasts for naturally exogenous variables Policy effects as deviations from forecast path Shifts in functions Δ tastes & technology Policy paths Forecast closure Policy closure
(iv) Conduct policy (or what if?) simulations as • deviations from benchmark • Import barriers • World trading conditions • Environmental constraints • Outsourcing • Homeland security, restrictions on foreign tourists and students • Homeland security, cargo inspections • Energy policies • Important to obtain policy results as effects on the economy of a • relevant future year, e.g. 2010 or 2020
Model validation in USAGE-ITC framework • USAGE-ITC has most of requirements for statistically tested AGE forecasting model • Dynamic specification to allow forecasting to a year outside data • Fitting of historical events (historical simulations) • Incorporates detailed trend estimates of technology and preferences • But no statistical measure of validity – “estibration”, a combination of calibration and highly restricted estimation of select parameters with no statistical basis.
Example – Significant US Import Restraints • Used by USTR at WTO TPRM to demonstrate transparency re US import restrictions • Significant tariffs and TRQs on food and agricultural products including canned tuna, cotton, dairy products, peanuts, sugar and sugar-containing products, tobacco and tobacco products, beef, and ethyl alcohol; • Significant tariffs as well as quotas on certain textiles and apparel pursuant to the Uruguay Round Agreement on Textiles and Clothing (ATC) and bilateral textile agreements with non-WTO member countries; • Significant tariffs for a number of merchandise goods, including footwear and leather products; glass and glass products; watches, clocks, watch cases and parts; ball and roller bearings; ceramic wall and floor tile; table and kitchenware; costume jewelry; pens, mechanical pencils, and parts; and cutlery and hand tools. • For 45 Input-Output industries we have calculated the percentage by which import restraints raise landed-duty-paid price. • These percentages, which we refer to as wedges, are divided into two parts: • The first part is a tariff equivalent paid by importers, and • The second part is the increase in the price received by foreign suppliers made possible by US-imposed quotas. This second part is often referred to as the export tax equivalent of the US quota regime ….
Estimated price gap Price US import tariff equivalent DUSA with import tariff SROW with export tax DUSA PD SROW PM ROW export tax equivalent 0 Q Quantity of US imports
Significant US import restraintsPrice gaps, US tariff equivalents, ROW export tax equivalent
Removal of significant US import restraintsPrice gaps and US output effects
Removal of significant US import restraintsGross State product effects, per cent
Global CGE applications – GTAP data and model • Australian FTA – more standard application. • Standard GTAP model – though we update macro variables, trade data, and support data particularly for target countries. • We sometimes link GTAP with USAGE, so that we can get more detailed US results. • Planning to develop linkage between dynamic USAGE and dynamic GTAP. • Many technical and data challenges.
Australia FTA • A more traditional setting for GTAP type model. • Interesting to compare ITC assessment to CIE assessment • CIE pushed edges of the analytical envelope.
