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  • Author: Chad P. Bown, Aksel Erbahar, Maurizio Zanardi
  • Publication Date: 02-2020
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper examines how trade protection is affected by changes in the value-added content of production arising through global value chains (GVCs). Exploiting a new set of World Trade Organization (WTO) rules adopted in 1995 that impose an exogenously timed requirement for countries to reevaluate their previously imposed trade protection, the authors adopt an instrumental variables strategy and identify the causal effect of GVC integration on the likelihood that a trade barrier is removed. Using a newly constructed dataset of protection removal decisions involving 10 countries, 41 trading partners, and 18 industries over 1995–2013, they find that bilateral industry-specific domestic value-added growth in foreign production significantly raises the probability of removing a duty. The results are not limited to imports from China but are only found for the protection decisions of high-income countries. Back-of-the-envelope calculations indicate that rapid GVC growth in the 2000s freed almost a third of the trade flows subject to the most common temporary restrictions (i.e., antidumping) applied by high-income countries in 2006.
  • Topic: Economics, International Trade and Finance, Global Markets, Finance, Trade
  • Political Geography: Global Focus
  • Author: Kevin Lai, Tao Wang, David Xu
  • Publication Date: 12-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Capital controls—or measures that governments take to restrict the amount of money that flows into and out of countries—pose significant challenges for firms that rely heavily on foreign financing to conduct business. This paper empirically evaluates effects of capital controls on trade across industries with varying levels of dependence on foreign capital. Mobilizing data on 99 countries from 1995 to 2014 across 27 industries, the authors find that industries more reliant on foreign capital tend to export much less in response to tightening of capital controls by exporting countries. Exports decline uniformly across all industries in response to tightening of capital controls by importing countries. The negative effects of capital controls on trade are less pronounced in countries with more advanced financial systems.
  • Topic: Government, International Trade and Finance, Capital Flows, Capital Controls
  • Political Geography: Global Focus
  • Author: Maurice Obstfeld
  • Publication Date: 10-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that US monetary policy faces. It considers three main channels. The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations. The second channel is the determination of asset returns (including the natural real safe rate of interest) and financial conditions, given integration with global financial markets. The third channel, which is particular to the United States, is the potential spillback onto the US economy from the disproportionate impact of US monetary policy on the outside world. In themselves, global factors need not undermine a central bank’s ability to control the price level over the long term—after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.
  • Topic: Economics, Government, International Trade and Finance, Monetary Policy
  • Political Geography: North America, United States of America
  • Author: Monica de Bolle, Jeromin Zettelmeyer
  • Publication Date: 08-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Since the mid-2000s, the platforms of major political parties in both advanced and emerging-market economies have increasingly emphasized policies that stress national sovereignty, reject multilateralism, and seek to advance national interests through measures that come at the expense of foreign interests. This paper documents this shift by evaluating the policy platforms of the largest political parties (about 55 in total) in the Group of Twenty (G-20) countries with regard to trade policy, foreign direct investment (FDI), immigration, and multilateral organizations. Preference shifts with respect to industrial policy, competition policy, and macroeconomic populism are also examined. In advanced economies, the biggest shifts were toward restrictions on immigration and trade and toward macroeconomic populism. In emerging-market economies, the largest preference shifts were toward industrial policies favoring specific sectors, macroeconomic populism, and industrial concentration. Trade protectionism and skepticism toward multilateral organizations and agreements have increased in both advanced and emerging-market economies. As of 2018, economic policy preferences in emerging-market economies were more nationalist and less liberal than in advanced countries, but the gap has narrowed. Right-wing parties tend to be more nationalist than left-wing parties in the areas of immigration restrictions, FDI restrictions, and antimultilateralism, but there is no significant difference with respect to trade protectionism.
  • Topic: Economics, International Trade and Finance, Nationalism, Politics, Populism, Macroeconomics
  • Political Geography: Global Focus
  • Author: Jacob Funk Kirkegaard
  • Publication Date: 09-2019
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: For years China has been one of the world’s most rapidly growing sources of outward foreign direct investment. Since peaking in 2016, however, Chinese outward investments, primarily to the United States but also the European Union, have declined dramatically, especially in response to changes in China’s domestic rules on capital outflows and in the face of rising nationalism in the United States. Concerns about growing Chinese influence in other economies, the ascendant role of an authoritarian government in Beijing, and the possible security implications of Chinese dominance in the high-technology sector have put Chinese outward investments under intense international scrutiny. This Policy Brief analyzes the most recent trends in Chinese investments in the United States and the European Union and reviews recent political and regulatory changes both have adopted toward Chinese inward investments. It also explores the emerging transatlantic difference in the regulatory response to the Chinese information technology firm Huawei. Concerned about national security and as part of the ongoing broader trade friction with China, the United States has cracked down far harder on the company than the European Union.
  • Topic: Economics, International Trade and Finance, National Security, Foreign Direct Investment, Investment
  • Political Geography: China, Europe, Asia, North America, United States of America
  • Author: Lee G. Branstetter, Britta Glennon, J. Bradford Jensen
  • Publication Date: 06-2019
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: For decades, US multinational corporations (MNCs) conducted nearly all their research and development (R&D) within the United States. Their focus on R&D at home helped establish the United States as the unrivaled leader of innovation and technology advances in the world economy. Since the late 1990s, however, the amount of R&D conducted overseas by US MNCs has grown nearly fourfold and its geographic distribution has expanded from a few advanced industrial countries to many parts of the developing world, creating an innovation system that spans the globe. Like many aspects of globalization, including the offshoring of manufacturing over recent decades, the globalization of R&D raises concerns about US competitiveness and loss of technological leadership. At the same time, the spreading geographic location of innovation presents opportunities for US-based companies if the right policies are adopted to seize them. The research presented in this Policy Brief demonstrates that US innovators continue to remain involved in important ways in US MNCs' global R&D activities, and fears of a hollowing out of US capacity to innovate—based probably on previous fears about the hollowing out of US-based manufacturing—may be overstated. Indeed, the large and growing pool of highly educated scientists and engineers in the developing world could increase the rate of global productivity growth, to the advantage of US-based companies and the world in general. The authors conclude that a productive way to capitalize on the globalization of MNC R&D is not to oppose it but to combine emerging-market talent with MNC experience so that innovation can flourish to improve global living standards and fuel economic progress.
  • Topic: International Trade and Finance, Science and Technology, Multinational Corporations, Risk, Private Sector
  • Political Geography: North America, Global Focus, United States of America
  • Author: Chad P. Bown
  • Publication Date: 04-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: In 2018, the United States suddenly increased tariffs on nearly 50 percent of its imports from China. China immediately retaliated with tariffs on more than 70 percent of imports from the United States. This paper assesses what happened in 2018 and attempts to explain why. It first constructs a new measure of special tariff protection to put the sheer scope and coverage of the 2018 actions into historical context. It then uses the lens provided by the 2018 special tariffs to explain the key sources of economic and policy friction between the two countries. This includes whether China’s state-owned enterprises and industrial subsidies, as well as China’s development strategy and system of forcibly acquiring foreign technology, were imposing increasingly large costs on trading partners. Finally, it also examines whether the US strategy to provoke a crisis—which may result in a severely weakened World Trade Organization—was deliberate and out of frustration with the institution itself.
  • Topic: Economics, International Trade and Finance, World Trade Organization, Bilateral Relations, Trade Wars, Donald Trump, Imports
  • Political Geography: China, Asia, North America, United States of America
  • Author: Edwin M. Truman
  • Publication Date: 04-2019
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: The International Monetary Fund (IMF)—a quota-based institution—faces a test of its survival as the linchpin of the global financial safety net. Its roughly $1.4 trillion in total financial resources is scheduled to begin to shrink in 2020. In 2015, IMF members committed to strengthening IMF financial resources in the 15th General Review of Quotas, which will end in December 2019. Over the past 25 years, the United States has led the way for a gradual redistribution of IMF quota shares toward faster-growing emerging-market and developing countries. Any significant redistribution of quota shares requires an increase in total quotas. Because of its share of votes in the IMF, the United States must agree to any change in quotas. The Trump administration, however, has signaled that it favors no such change. If the United States does not reverse its stance, IMF members will lose an opportunity to strengthen the institution at a time of global financial uncertainty. Truman says the United States could still change its position and recommends how other member countries should press it to do so.
  • Topic: International Trade and Finance, Politics, International Monetary Fund, Global Political Economy, Donald Trump, Economic Cooperation
  • Political Geography: North America, Global Focus, United States of America
  • Author: Edwin M. Truman
  • Publication Date: 01-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: After the Obama administration's four failed attempts to win congressional approval of the 2010 quota and governance reform for the International Monetary Fund (IMF), it is time to recognize that implementation of the agreement may be indefinitely delayed. The international community must therefore prepare for the likelihood of a new world order in which the IMF augments its funding and reforms its governing structure without US participation. This Policy Brief examines four options for the IMF: First, wait for the US Congress to pass the necessary legislation. Second, complete a new, augmented IMF quota and governance package and again wait for the United States to give its formal approval. Third, bypass the US Congress and risk losing the US veto over a few important decisions on the structure of the IMF. Fourth, let the Fund adopt a reform and financing package within a structure that potentially excludes US participation and eliminates the US veto in the new entity.
  • Topic: Economics, International Trade and Finance, International Monetary Fund, Governance, Reform
  • Author: Ryan Rutkowski
  • Publication Date: 01-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Faced with slowing economic growth, Chinese policymakers now recognize that the service sector of the economy—transportation, communications, finance, and health care—could spur economic activity and employment. The catch is that China must reform these and other areas to accomplish this goal. Chinese leaders have outlined an ambitious agenda for reform, but myriad vested interests could slow or block their plans. This Policy Brief evaluates the steps taken so far and the difficulties that lie ahead in implementing them. If policymakers fail to reform and open up the service sector, they run the risk of seriously impairing China's growth prospects.
  • Topic: Economics, International Trade and Finance, Labor Issues, Financial Crisis, Reform
  • Political Geography: China