Some Data on International Trade

Warning: A bit wonky

Mercantilism and protectionism have come back into vogue lately, not just in the US but across the world.  Although there is all kinds of literature out there on trade, I thought I’d add just a little of my own.  However, a disclaimer is necessary: the results I will be discussing should be taken with a grain of salt.  This analysis has not passed though any other form of review other than myself (which is why this is a blog post as opposed to academic paper).  I’ll leave you, the reader, to judge their value for yourself.

With that said, let’s get started.

Method and Data Sources:

The goal of this analysis is to attempt to answer the question “Does international trade help or harm an economy?”  President Trump, as well as many others, have claimed international trade harms the US economy.  Economists maintain the opposite view.  In order to test this claim, I have taken a simple approach.  I have run a regression on GDP per Capita (logged) on the Fraser Institutions Freedom to Trade Internationally score, holding “institutions” constant (more on this in a moment).  The standard regression model was applied:

LogGDP=α+βFreedom to Trade InternationallyInstitutions

LogGDP = The natural log of GDP per Capita by country for 2014 (World Bank)

Freedom to Trade Internationally = A ranking put out by the Fraser Institute measuring a country’s tariff level, trade barriers, and capital & labor controls.

Institutions = An author-developed category using the Fraser Institute Legal Systems and Property Rights ranking.  This category includes measurements on a country’s: Judicial independence, impartiality of courts, strength of property rights, military interference in politics or rule of law, integrity of legal system, legal enforcement of contracts, regulatory costs of the sale of property, reliability of police, and business cost of crime.

Of the 155 observations in the data, they were broken up into 4 categories based upon their Institutions score.  This was done in order to hold institutions constant across the nations and try to prevent any negative/positive feedback from institutions that could influence our outcome.

Results

First, some summary statistics for each category:

GDP Per Capita; Note: this data is not logged
Group Obs Mean Standard Deviation Min Max
               1                1              354  –  –  –
               2              19           1,616                         1,441           286             5,233
               3              81           6,026                         6,908           363           37,583
               4              54        34,764                       25,818           698        116,613

And the results of the regression:

Model: LogGDP = 2.26+.327Intl+1.28Inst

R-squared: 0.55.

Discussion

At this particular point, I want to avoid talking too much about the hard numbers.  There are likely a number of issues with my model (not the least of which is only one observation in Group 1) and once this gets cleaned up, I suspect the actual coefficients would change.  Rather, I want to focus on the sign of the coefficients.  We see a positive coefficient for the Freedom to Trade Internationally variable.  This indicates that, as a nation’s freedom to trade internationally rises, so does the log GDP per capita.  This is contrary to the claims of President Trump and his cabal of political speakers.  What’s more, this effect is fairly consistent; the R-squared term of 0.55 tells us this is a decently strong positive correlation.

The next question I’d like to address is a claim some other have made, along the lines of “trade is fine so long as we’re trading only with people with similar rules and cultures as us.  Currency manipulation, export subsidies, and the like actually hurt America!”  This is a far more interesting question than the above, but it will also be much harder to design an experiment and test (if any of you have any ideas, please feel free to share!).

In conclusion, this has been a quick and dirty regression on the topic of international trade.  If you’ve any questions, comments, suggestions, I’d love to hear them.

Update:

In case any of you are the visual type, here is a graph of the data

graph1

 

5 thoughts on “Some Data on International Trade

  1. I suppose I get a notable mention on this article. I seem to recall a situation where Bush, prepping for the 2004 election, levied a tariff on steel to protect OH steel workers. The EU filed a trade dispute with the WTO and there was no question the tariff violated WTO generally. The WTO ruled that the US tariff was a violation pernitting the EU to enact a proportionate countervailing measure. Cleverly, the EU chose citrus products, obviously trying to impact Bush’ chances in the Sunshine State. The end result, the US ceased protecting its steel workers.

    With respect to domestic free trade if somebody interferes with our trade u lawfully, say, a state government actor or even an individual, there is recourse. We can avail ourselves of the courts. In international context, our courts don’t have jurisdiction in foreign countries, invading with military force is disproportionate murder, and ultimately what remedy exists for domestic producers facing foreign protectionism?

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    • babelblogs

      ultimately what remedy exists for domestic producers facing foreign protectionism?

      None. But why would you try to force people to buy things they don’t want?

      Protectionism in every form hurts the people in the country imposing it. To recommend tariffs or other restrictions on foreign imports from countries that protect their own industries is like saying that if, say, the Chinese government punches Chinese consumers in the face, the US government should retaliate by punching US consumers in the face.

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      • “None. But why would you try to force people to buy things they don’t want?”

        Well, in this instance, the Chinese people want to buy things from me I’m willing to sell to them, the Chinese government won’t let me.

        “To recommend tariffs or other restrictions on foreign imports from countries that protect their own industries”

        With the intent to make the protecting country cease the protectionist policy. This apparently works as I noted above, the US enacted a protectionist policy, the EU enacted a retaliatory policy and as a result the US cease protecting the steel industry.

        “like saying that if, say, the Chinese government punches Chinese consumers in the face, the US government should retaliate by punching US consumers in the face.”

        Well, they’re also punching me in the face and the resources that weren’t devoted to the business and the employees it would have employed. If this were just our government involved it’d be a clear cut equal protection issue. Its two, so its really just an equitable equal protection issue.

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  2. Well, in this instance, the Chinese people want to buy things from me I’m willing to sell to them

    And buy things they do. US exports to China were $116 billion last year. There’s no more reason for trade in goods with China to balance, then there is for my trade with my barber to balance. I have bought a lot of haircuts from him, and he has NEVER bought anything from me. That’s 100% imbalance, neither of us suffers, and in fact we are both better off for that arrangement.

    And yes, that is exactly the same thing as a US trade deficit with China. Don’t let those arbitrary political boundaries and currency differences fool you. The dollars sent to China must eventually be redeemed by someone for goods, services, or capital assets in the US.

    … the Chinese government won’t let me.

    You probably meant to write “the Chinese government won’t let THEM.” the Chinese government has no control over you.

    With the intent to make the protecting country cease the protectionist policy. This apparently works as I noted above, the US enacted a protectionist policy, the EU enacted a retaliatory policy and as a result the US cease protecting the steel industry.

    That was pure political posturing before an election. Politicians playing games with people’s wallets. Note that Bush imposed the steel tariff to gain votes in Ohio by harming all US consumers and producers of steel products. In other words by punching them in the face. The EU cleverly targeted products from US states that Bush needed for support, thus raising prices for those products in the EU. In other words punching Eu consumers and producers in face. A tariff causes net harm to those who live in the imposing country. Always. Politicians do not have your best interrest in mind, they serve their own best interests. They are not your friends.

    Well, they’re also punching me in the face

    No, the Chinese government isn’t punching you in the face. You have no right to claim anybody’s business who can’t or won’t buy from you. This is merchantilism at it’s worst. If you make shoes would you call for government action to force everyone in your neighborhood to buy shoes from you? I hope not.

    … and the resources that weren’t devoted to the business and the employees it would have employed.

    You must be assuming that the highest and best use for those resources and labor is in making things to export to China. That’s not likely the case.

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