Large Trade Deficits Research Articles

Agricultural Tradables and Economic Recovery in Uganda: The Limitations of Structural Adjustment in Practice

Uganda's economic reform program has been widely regarded as a success story for structural adjustment. Nevertheless, a large trade deficit persists, shored up by inflows of aid and private remittances. The poor performance of the agricultural tradables sector is presented as the key explanation for this trade imbalance. Two main reasons for this poor performance are found to be the failure to liberalize producer prices quickly and the failure to overcome early institutional resistance to reforms of marketing arrangements. Uganda's recovery is therefore much less impressive than it appears and the sustainability of the now heavily aid-dependent economy must remain in serious doubt.

Money Transmitters, Remittances, Exchange Rates, and Mechanisms for Money Laundering in the Dominican Republic

The estimated US$1.138 billion in remittances sent from Dominican expatriates back to the Dominican Republic is the country’s most consistent and perhaps largest source of dollars. Without these dollars, the D.R. would run large trade deficits and eventually would be forced to greatly reduce its imports of consumer goods. Dominican based international money transmitters heavily compete to transfer annually an estimated US$892 million to the D.R. On top of this, returning expatriates carry back to the D.R. another US$246 million. While many of the transfers made by transmitters are bona fide remittances, weak points in the U.S. regulatory system and the loose affiliation between transmitters and their retail collection points create ample opportunity for money laundering.

Open Regionalism versus Discriminatory Trading Agreements: Institutional and Empirical Analysis

This article explores two approaches to regional integration: traditional free trade areas and customs unions under Article XXIV of GATT and the new concept of open regionalism introduced by the Asia-Pacific Economic Co-operation (APEC). Once the main features of open regionalism are described, we analyse the feasible extension of this model to other regions. Special attention is paid to the traditional framework of Article XXIV and the alternative ways of making regional agreements more open. Finally, empirical evidence is provided for two ongoing projects of regional integration: Mercosur and the ASEAN Free Trade Area (AFTA). I. Introduction The principle of non-discrimination is a cornerstone of the General Agreement on Tariffs and Trade (GATT). In Article I, contracting parties are committed to grant Most Favoured Nation (MFN) treatment to all other GATT signatories, that is to extend to them all trade concessions without discrimination. Regional trade agreements are, by definition, discriminatory, since trade concessions are granted only to members. However, as an exception to Article I, Article XXIV allows for regional agreements under certain conditions on the grounds that international economic liberalization has been pursued by both multilateral and regional agreements. The insertion of these discriminatory agreements within the international trading system has been a major issue of discussion over the decades, ever since the signature of the GATT in 1947. In those early days of the postwar trading system, the United States and Great Britain disagreed on the compatibility of the British Imperial Preferences with the new provisions of the multilateral trading framework. In the present, concern arises again on the proliferation of regional trade arrangements in the 1980s and 1990s and on the possible weakening of the multilateral system embodied by the World Trade Organization (WTO): more than one hundred regional agreements so far have been notified to the GATT/WTO, twenty-nine of them recorded since 1992. Although some of them simply replace former regional agreements, for example EU for EC or AFTA for ASEAN, there is certainly a renewed impulse towards regional integration. The fear of a failure of the Uruguay Round negotiations boosted the search for liberalization at the regional level, with the United States, the former sponsor of multilateral trade, as the key player (Bhagwati 1987). The large trade deficits in the 1980s, along with the expected emergence of the EC as a fortress after the Single Act led to a major shift in American trade policy towards unilateralism and regionalism. Also the EU adopted a regionalist approach and developed throughout the last decade numerous forms of association and co-operation, which stand out as classical examples of hub-and-spokes agreements and threaten to proliferate in the future (for example FTAA and TAFTA initiatives). The concern over the expansion of such agreements and the creation of regional trading blocs relates to its impact on third countries outside the regional scheme. As the world moves towards larger trading blocs, with countries linked by tailor-made agreements, developing countries that did not implement or join any arrangement may be harmed (Hughes Hallett and Primo Braga 1994). Also, trade between blocs is likely to shrink (Krugman 1991), even though it can be offset by new intra-bloc flows. Regionalism may as well undermine the GATT system by diverting resources and political capital from the multilateral system (Lawrence 1996). All these concerns have been widely addressed in the economic literature, from the classical theory of customs unions by Viner (1953) to the new theory of regional integration, mainly concerned with the dynamics of integration and the incentives for single countries to join regional trade initiatives (for example Baldwin 1993). At the same time, a new concept in regional integration has recently emerged from the experience and proposals of the Asia-Pacific Economic Cooperation (APEC): open regionalism. …

Mongolia: Agrarian crisis in the transition to a market economy

THE RELATIVELY SHORT TIME SPAN before Mongolia resumed positive economic growth in its transition to a market economy has been attributed to a successful and rapidly implemented privatisation and market liberalisation programme. Since 1990, when the transition to a market economy began in Mongolia, a great number of economic and political reforms have indeed been undertaken. Compared with most of the former Soviet Central Asian republics, which gained independence in 1991, Mongolia advanced rapidly in the process to transform its command economy, with policies of deregulation, privatisation and market liberalisation, while simultaneously introducing political democratisation (see Spoor, 1993 and 1995). However, after the first turmoil of economic and political reforms and the dramatic changes in its external environment, by 1992 the Mongolian economy was in a serious crisis, with urgent problems such as a near shut-down of the crucial energy sector (Lee, 1993).1 Although the annual decrease in gross domestic production (GDP) slowed down in 1993 to 1.3%, over the period 1990-93 GDP contracted in total by 25.2% (see Table 1). More comprehensive policy reforms were introduced from 1993 onwards, in particular in banking and government finance, although a substantial-state dominated-'soft budget' sector still remained (which caused pressure on the government to keep on providing cheap credit).2 By 1994 the Mongolian economy's macro-stability substantially improved, with a more manageable level of 66.3% inflation, while a positive growth rate of GDP of 2.1% was reported (MRI, 1995). Was this indeed the simple consequence of a blueprint reform programme which apparently worked in Mongolia and not in other FSU countries? In order to be able to qualify this mainstream-and rather superficial-conclusion, this article will highlight three factors that throw more light on the specific circumstances and complexity of the transition in Mongolia. Firstly, the dramatic import reduction that occurred had a far-reaching impact on the economy. The Soviet aid that financed most of the turn-key projects and essential imports during the 1980s (at the level of 25-30% of GDP) was actually stopped in 1990-91 (Lee, 1993, p. 624). This import squeeze rapidly reduced (and finally removed) the large trade deficit, but induced dramatic negative multiplier effects on industry and capital-intensive-and import dependentagriculture. Secondly, while the Mongolian economy suffered from galloping inflation during the 1990-93 period, the government rather quickly reduced its budget deficit (and share of government expenditure in GDP) by severely cutting current budget expenditure and improving tax collection. However, the still sizeable deficit that is

MACROECONOMIC ADJUSTMENT TO CAPITAL INFLOWS: LESSONS FROM RECENT LATIN AMERICAN AND EAST ASIAN EXPERIENCE

Capital inflows to some developing countries have increased sharply in recent years. Impelled by better economic prospects in those countries, lower international interest rates, and a slowdown of economic activity in the capital exporting countries, the inflows have furnished financing much needed to increase the use of existing capacity and to stimulate investment. But capital inflows can bring with them their own problems. Typical macroeconomic repercussions have been appreciation of the real exchange rate, expansion of non-tradable at the expense of tradable, larger trade deficits, and, in regimes with a fixed exchange rate, higher inflation and an accumulation of foreign reserves. Should government intervene to limit some of these side effects- and if so, how? The question is especially pressing in the wake of the Mexican crisis of December 1994. This article looks for answers in the experience of four Latin American and five East Asian countries between 1986 and 1993, examining the effects of the capital inflows on the economy and comparing the different ways in which these countries responded to the problem of too much capital.

Measurement of the unexpected US trade deficit

Monthly announcements from 1980 through 1992 of the US overall and bilateral balance of trade figures and revisions of previous announcements are examined in detail. The unexpected trade deficit is measured as the difference between the announced overall trade deficit and the median survey measure from Money Market Services. Survey expectations are found to incorporate publicly available information. A surprisingly large trade deficit is associated with expectations of larger future trade deficits. Unexpected bilateral trade balances and revisions of previous overall balances which are released at the same time as the overall trade deficit significantly influence the Canadian dollar and some US stock market indexes.

Are trade balance announcements informative?

The impact of US trade balance announcements on stock prices and bond interest rates of varying maturities is examined over the period 1980–90. The results indicate that an unexpectedly large trade deficit drives stock prices down. The unanticipated trade deficit has no influence on stock prices and bond interest rates for the sub-period 1980–85. However, it has a negative impact on stock prices and a positive effect on bond interest rates over the sub-period 1986–90.

Exchange Rates and the Role of the Trade Balance Account

The essence of the modern asset‐market approach to the analysis of exchange rate behavior includes the role of the trade balance account. We examine the relationship between exchange rate changes and US trade balance announcements. Statistically significant exchange rate adjustments to these announcements are documented using for the first time the comparison period approach to testing the significance of trade balance announcements on exchange rates. The evidence is consistent with the predictions of the modern asset‐market exchange rate model. There is also evidence that the foreign exchange market is more sensitive to increasing rather than decreasing trade balance deficit announcements. To date, a number of theoretical papers have investigated the possible sources of the exchange rate determination process (see, Dornbusch [1976,1980], Dornbusch and Fisher [1980], Frenkel [1976, 1981], Kouri [1976], and Mussa [1982], among others). There is no consensus on how exchange rates are determined and why they...

Les incidences des relations franco-britanniques sur le commerce du vin (1689- 1860)

War and wine : the constrained evolution of the Anglo-French wine trade , 1689-1860. Prior to the last quarter of the seventeenth century, France was Britain's largest trading partner and accounted for the bulk of Britain's large merchandise trade deficit, mostly through the sale of wine and brandies. War with France, and retaliation for Colbert's mercantilist policies limiting imports of British manufacture led to prohibitions followed by extravagantly high tariffs on French wine and other alcoholic beverages. The long period of prohibition and tariffs between 1689 and 1713 permitted three strong lobbies to emerge in Britain : domestic beer brewers, makers of gin, whiskey and other liquor, and Anglo-Portuguese wine merchants. This led to a deliberate policy of keeping out French products and promotion of local beverages and imports from Portugal and Spain. Indeed, the Portuguese export of wines developed primarily to serve Britain. For the French, this meant the loss of her most lucrative market for over one and a half centuries, a loss only partially alleviated by French development of high-priced, high-quality wines designed to minimize the effects of specific (per volume) tariffs. For France, this meant a substantial loss of income. Preliminary calculations suggest a counterfactual in which I860 French domestic product would have been 20% to 70% higher depending on the underlying assumptions, a loss of much greater magnitude than the calculated gains for Britain from the steam engine. For Britain, this served as the foundation of a tax system that relied heavily on customs duties and domestic excises on alcoholic beverages while developing a national pattern of alcoholic demand centered on beer and gin at the low end and port and fine Bordeaux at the high end. Overall this paper stresses the importance of examining gains (or in this case, losses) from trade in an evolving economic and political context.

Rente géo-stratégique et avantage comparatif des petites économies insulaires

In this paper it is suggested that the high level of aid per capita received by small island countries and territories (population of less than 1 million), and their often very large trade deficit with the rest of the world, can only be explained by their international specialization on the export of geo-strategic services to large industrial aid donor countries. This is a non market public export, and as such does not appear in trade statistics. Small islands receive much more aid per capita than continental Third World countries, because they have a comparative advantage in this kind of «geo-strategic» exports. They can be, because of their privileged geographical location, actual or potential military bases, military testing centers (nuclear testing, missile testing), or political and cultural influence outposts in a remote region. In addition, the cost of securing their political allegiance is relatively small, so that per capita aid can be rather large and make a big difference to the islanders, at a relatively moderate total cost to the donor nation. Using a two countries, two commodities model of international trade, it is possible to show how both countries will gain from trade when the small island exports non market public geo- strategic services (possibly using local labor resources for this purpose), while importing from the donor country private goods, financed by aid or transfert payments. This is because in the donor country, there is a comparative advantage in the production of the private goods, while in the small island country, there is a comparative advantage in the export of non market public geo-strategic services : it pays for the donor countries to « import » such services, rather than, for example, allocate more resources domestically to the production of nuclear submarines or aircraft carriers to compensate for the lack of a good network of actual or potential military outposts around the world. The smaller the population of the island, the lower the cost to obtain this export, the higher the demand price the large industrial country will be willing to pay in aid per capita to the small island. This explains why there is an inverse relationship between population and aid per capita to small islands. An other conclusion of the model is that the international geo-strategic outlook will affect the amount the large industrial country is willing to pay for geo-strategic exports : the « collective indifference curve» of the donor nation between the public «military» geo-strategic good and the private «civil» good will move toward preference for the latter when, as is the case today, the threat of a conflict with other nations from trade between the island and the big industrial nation will get smaller, the negociation on the amount of aid will become more difficult, and in some cases the «trade» might cease altogether.

Platforms in the Pacific: the trade effects of direct investment in Thailand

Thailand, as other ASEAN countries, experienced a dramatic surge of inward foreign direct investment in the late 1980s. These investments took place in relatively advanced, export-oriented industries. This study examines the effects of these investments on Thailand's trade, using a new methodology based on international input-output analysis. This framework accounts for the direct trade of foreign-affiliated companies as well as their indirect trade effects, including the displacement of competing imports, on one hand, and the procurement of imported intermediate inputs and capital goods, on the other. The framework is implemented with data from a Japanese Chamber of Commerce (Bangkok) survey. The results show, among other things, that Japanese-affiliated firms tend to offset their large direct trade deficits in the longer run with substantial indirect trade surpluses. These firms do, however, contribute to “triangular trade”-that is, Thai trade deficits with Japan, and surpluses with other countries.

Trade announcements, exchange rates, and interest rates

This paper demonstrates a significant depreciation of the dollar in foreign exchange markets to announcements of larger than anticipated monthly U.S. trade deficits over the entire period from early 1985 through late 1988 but differential interest rate responses to this information. Through mid 1986 short term interest rates declined on the announcement of negative trade news which is consistent with monetary easing to depreciate the dollar during this time period so as to narrow the trade gap. For trade announcement surprises after this, through late 1988, interest rates increased across the entire maturity structure. This result suggests a policy reversal by the central bank in response to continued large trade deficit announcements in order to defend the foreign exchange value of the dollar. Yet the continued depreciation of the dollar coupled with rising long term interest rates are consistent with increased risk premia associated with holding dollar denominated assets during this time period.

Inflationary dynamics and the Angell-Johnson proposals

During the 1980s, the United States economy has undergone enormous change. Among the more notable changes are the emergence of large federal budget and international trade deficits, high real interest rates, and a movement to rates of inflation and real commodity prices much lower than those of the late 1970s. Trade weighted measures of the dollar exchange rate rose to historically high levels by February 1985, and then declined precipitously. While the Federal Reserve has maintained a fairly conservative money supply posture in its fight against inflation, fiscal authorities have more than doubled the national debt since 1981. Because of the fiscal deficit, monetary policy is the only major macro policy tool that can presently be used with any degree of flexibility. In response, three key Washington policy makers have called for changes in the way monetary policy is conducted both here and abroad. Citing the Federal Reserve Board's goal to stabilize the price level in the face of increasingly volatile money velocity, Federal Reserve Governor Wayne Angell emphasizes that the need for reliable early warning indicators of inflationary pressures. Angell proposes determining the rate of expansion in bank reserves and the basic money supply according to the movements in a group of basic commodity prices [Angell, 1987]. Commodity prices are attractive for two basic reasons. First, they are reported daily and thus available more than a month in advance of the CPI estimates. Second, most commodity prices fluctuate freely in response to monetary disturbances and other

ARE THE TWIN DEFICITS REALLY RELATED?

The emergence of record current‐account and fiscal deficits in the United States during the 1980s draws increasing attention to what has become known as the “twin deficit” problem. Conventional wisdom is that a shift to larger government deficits entails a decline in government saving and results in larger trade deficits, Persistently large trade deficits are troublesome because they imply a transfer of wealth to foreigners and possibly a reduction in future generations' living standards.This paper examines whether post‐World War II data for the United States reveal a long‐run secular relationship between the trade deficit and the fiscal deficit. The focus is on the secular relationship since that is the one most relevant to long‐run policy concerns. The authors employ three different statistical techniques: (i) a deterministic technique for separating the secular components from the cyclical components to derive secular measures of the twin deficits, (ii) a stochastic procedure to isolate the secular components, (Hi) cointegration analysis to test for a long‐run equilibrium relationship.The authors conclude that, based on the first two approaches, evidence of a positive secular relationship between the twin deficits exists only under flexible exchange rates. This relationship appears quite strong–that is, a $1 change in the fiscal deficit eventually leads to roughly a $1 change in the trade deficit. On the other hand, findings based on cointegration analysis indicate no long‐run equilibrium relationship between the twin deficits. This latter finding, however, may reflect a low power of the relevant statistical tests stemming from the shortness of the sample period.

Macroeconomic development of China: “Overheating” in 1984–1987 and problems for reform

After the Chinese Communist Party embarked on economic reform in 1978 China's macroeconomic performance was quite satisfactory until the autumn of 1984. Since then, however, the Chinese economy has run into “economic overheating,” with rapid inflation and large trade deficits, which is a typical case of demand-pull inflation. Its two major causes are a high rate of increase in money supply caused by rapidly increasing bank leading and a high rate of increase in wage payments, both accompanied by some mismanagement in the process of economic reform. A third cause is too high an increase in government expenditures financed by the central bank credit. Chinese leaders seemed to believe that the economic overheating was beginning to come under control in 1986, but it appears that this was only temporary and that overheating continued throughout 1987. During this economic overheating in 1984 through 1987 China's net international assets-liabilities position deteriorated severely: by 12.5% of China's GNP in 1986. China's present macroeconomic management is deficient in several ways and needs to be improved. Money supply must be firmly controlled through a two-tier quota system with quotas set for each quarter both for central bank lending to each of the noncentral banks and for the latter's lending to their customers. Both noncentral banks and nonfinancial enterprises should be transformed into full-fledged independent enterprises operating on a commercial basis, free from political and nepotistical influences. China's management of the balance of payments also needs to be improved in several ways. Imports should be controlled on a centralized basis under a “foreign exchange budget,” while a competitive price mechanism should be fully used in promoting exports, and directive planning and the complicated foreign exchange retention system currently in force should be abolished. The dependence on foreign burrowing should be lowered by promoting exports and restricting imports more efficiently. China's ratio of annual investment to GNP remains too high and should be lowered, and the efficiency of investment should be raised.

U.S. Competitiveness: Beyond the Trade Deficit

Large trade deficits and the corresponding increase in U.S. international indebtedness have raised concerns about the long-run competitiveness of the United States. But being competitive requires more than balance in our foreign trade; it requires an improving standard of living. The long-term U.S. competitive problem is largely caused by low saving rates, high costs of capital, and the resulting inadequate level of both visible and invisible investment. As long as the U.S. national saving rate remains far below that of all our major competitor nations, there is little chance for restoring America's international economic position.

From Neglect to Activism: American Politics and the 1985 Plaza Accord

ABSTRACTUS exchange rate policy shifted in 1985 from unilateralist nonintervention to actively promoting dollar depreciation and multilateral cooperation. Pressures from producer interests, particularly multinational companies making manufactured goods, and from sympathetic members of Congress were the most important of multiple forces pushing the US Treasury toward dollar depreciation. Once the Treasury had chosen an activist course, a multilateral strategy had several benefits over a unilateral approach to depreciation. It could better counter the immediate threat to Administration trade policy from Congress, orchestrate depreciation, strengthen Treasury's influence within Washington and shift the burden of adjustment away from US fiscal policy, then frozen, onto other governments. When the trade account is in balance, individual policymakers have flexibility in determining exchange rate policy. But when large trade deficits arise, the domestic political pressures of trade-exposed sectors will dominate personalities and ideas.

Have Large Budget Deficits Caused Rising Trade Deficits?

For the United States, the 1980s have been years of both large and unprecedented trade deficits as well as massive federal budget deficits. The trade deficit rose from $25 billion in 1980 to $124 billion in 1985. During this same period, federal budget deficits soared from $74 billion in 1980 to more than $212 billion in 1985. It is widely believed that the U.S. trade deficit rose mainly because of the skyrocketing federal budget deficit. Presenting such a view are, for example, Hutchison and Pigott [25], Hutchison and Pyle [26], Clark [11], Modigliani [30], and Aschauer [2]. Besides economists, many labor unions (i.e., AFL-CIO) and official government documents (see, The Economic Report of the President, particularly of 1984) have all shared similar views.' The issues involved have important policy implications. Suppose that the basic reason for rising trade deficits is indeed the escalating federal budget deficit. In this case, policy makers may focus on curtailing the budget deficit in order to resolve the trade deficit problem that has adversely affected several sectors such as manufacturing industries and agriculture. However, if such a view concerning the causal role of the budget deficit is incorrect, then reductions in the federal budget deficit may not resolve the trade deficit dilemma and, moreover, attention will be diverted from more relevant and urgently needed policy options [6]. The purpose of this paper is to empirically investigate the conventional argument that high federal budget deficit has been the prime cause of the escalating U.S. trade deficit, finding only partial empirical evidence to support it. In section II, I argue that most of previous studies in this area appear flawed by a methodological error rendering their tests unreliable for discriminating between a number of equally plausible hypotheses. Section III describes the data and methodology used in the paper. Section IV presents the empirical results. Section V summarizes and concludes the paper.

Future competition in a cross-cultural environment

Large trade deficits, domestic markets invaded by efficient global competitors are problems that plague many nations today. Individual marketers might find that risks are higher and success might be more difficult to find. Increasingly sophisticated buyers might call for increased segmentation. Sooner than expected, the size of the world-market might be a “must” for profitability. This paper discusses these issues and suggests an analytical model for an initial evaluation of the opportunities and threats from going multinational. Finally, it is argued that even if most companies will never become global firms it is nevertheless essential for them to be aware of the forces behind globalization.

Devaluation, stabilization policies and the developing countries: A macroeconomic analysis

This paper analyzes the short-run effects of traditional balance-of-payments policies for a small developing country. The country is assumed to be running persistent payments deficits under a fixed exchange rate regime. This paper illustrates how conventional results are affected by the presence of (a) imported intermediate inputs, (b) partial wage indexation, and (c) a large initial trade deficit. Stagflationary effects of a currency devaluation are particularly noteworthy. A tariff/subsidy policy that leaves the price of imported inputs unaffected is shown to be likely to achieve the payments objectives without creating significant adverse supply-side effects.