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51. An Assessment of the Korea-China Free Trade Agreement

Author:
Jeffrey Schott, Eujiin Jung, and Cathleen Cimino-Isaacs
Publication Date:
12-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Of all the free trade agreements (FTAs) concluded by Korea with its major trading partners since the turn of the century, the Korea-China FTA may be the largest in trade terms. It is, however, far from the best in terms of the depth of liberalization and the scope of obligations on trade and investment policies. Korea and China agreed to liberalize a large share of bilateral trade within 20 years, but both sides incorporated extensive exceptions to basic tariff reforms and deferred important market access negotiations on services and investment for several years. Political interests trumped economic objectives, and the negotiated outcome cut too many corners to achieve such a comprehensive result. The limited outcome in the Korea-China talks has two clear implications for economic integration among the northeast Asian countries. First, prospects for the ongoing China-Japan-Korea talks will be limited and unlikely to exceed the Korea-China outcome. Second, Korea and Japan need to strengthen their bilateral leg of the northeast Asian trilateral and the best way is by negotiating a deal in the context of the Trans-Pacific Partnership.
Topic:
Economics, International Trade and Finance, Politics, and Bilateral Relations
Political Geography:
United States, China, Asia, and Korea

52. Toward a European Migration and Mobility Union

Author:
Jacob Funk Kirkegaard
Publication Date:
12-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
After surviving its worst economic downturn since the Great Depression and the near collapse of its common currency, Europe is now engulfed by hundreds of thousands of desperate migrants and refugees from the Middle East and Africa. It needs new and permanent migration institutions and resources not only to accommodate the influx of refugees but also to set up a new border control system throughout the region. These demands pose a challenge for European policymaking as serious as the euro crisis of the last five years. Kirkegaard proposes a migration and mobility union, to be implemented gradually, with the goal of comprehensively reforming European migration policy.
Topic:
Economics, Migration, Politics, and Refugee Issues
Political Geography:
Europe

53. Estimates of Fundamental Equilibrium Exchange Rates, November 2015

Author:
William R. Cline
Publication Date:
11-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The latest semiannual fundamental equilibrium exchange rate (FEER) estimates find that the US dollar is now overvalued by about 10 percent, comparable to levels in 2008 through early 2010 and again in 2011. Unlike then, the current strong dollar does not reflect a weak renminbi kept undervalued by major exchange rate intervention by China. Instead, China's current account surplus has fallen sharply relative to GDP, and its recent intervention has been to prevent excessive depreciation rather than to prevent appreciation. Additionally, declines in the real effective exchange rates (REERs) for major emerging-market economies and resource-based advanced economies, driven by falling commodity prices in recent months, have strengthened the dollar. Recent increases in the REERs for the euro area and Japan have removed their modest undervaluation identified in the last FEERs estimates in May, and the Chinese renminbi remains consistent with its FEER. The dollar's rise by nearly 15 percent in real effective terms over the past two years could impose a drag of nearly one-half percent annually on US demand growth over the next five years. As the Federal Reserve moves to normalize US monetary policy, it may need to consider a gentler rise in interest rates than it might otherwise have pursued, both to temper possible further strengthening of the dollar in response to higher interest rates and to help offset the demand compression from falling net export
Topic:
Economics, International Trade and Finance, Monetary Policy, and GDP
Political Geography:
United States and China

54. Stability Bonds for the Euro Area

Author:
Angel Ubide
Publication Date:
12-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The rules and buffers created in the last few years to enable the euro area to withstand another sudden stop of credit and market-driven panic in one or more of its member states are welcome steps, but they are widely recognized as inadequate. Ubide proposes creating a system of stability bonds in the euro area, to be issued by a new European Debt Agency, to partially finance the debt of euro area countries—up to 25 percent of GDP. These stability bonds should be initially backed by tax revenues transferred from national treasuries, but ultimately by the creation of euro area–wide tax revenues, and used to fund the operations of national governments. They could also be used for euro area–wide fiscal stimulus, to complement the fiscal policies of member states. Such bonds would strengthen the euro area economic infrastructure, creating incentives for countries to reduce their deficits but not forcing them to do so when such actions would drive their economies further into a downturn. The bonds would permit the euro area to adopt a more flexible or expansionary fiscal policy during recessions.
Topic:
Economics, International Trade and Finance, Monetary Policy, and GDP
Political Geography:
Europe

55. Inflation and Activity: Two Explorations and Their Monetary Policy Implications

Author:
Olivier Blanchard, Eugenio Cerutti, and Lawrence H. Summers
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Blanchard, Cerutti, and Summers explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the prerecession trend, suggesting hysteresis. The authors look at 122 recessions over the past 50 years in 23 countries and find that a high proportion of them have been followed by lower output or even lower growth. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. The authors estimate a Phillips curve relation over the past 50 years for 20 countries and find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. The paper concludes with implications for monetary policy.
Topic:
Economics, Labor Issues, Monetary Policy, Financial Crisis, and GDP
Political Geography:
Global Focus

56. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?

Author:
Olivier Blanchard, Gustavo Adler, and Irineu de Carvalho Filho
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. The authors study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, they look at the response of different countries to plausibly exogenous gross inflows and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, they find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
Topic:
Economics, Emerging Markets, Foreign Exchange, and Monetary Policy
Political Geography:
Global Focus

57. Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

Author:
Olivier Blanchard, Jonathan D. Ostry, Atish R. Ghosh, and Marcos Chamon
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging-market policymakers, however, believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, the authors extend the set of assets included in the Mundell-Fleming model to include both bonds and nonbonds. At a given policy rate, inflows may decrease the rate on nonbonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. The authors explore the implications theoretically and empirically and find support for the key predictions in the data.
Topic:
Economics, Emerging Markets, International Trade and Finance, and Monetary Policy
Political Geography:
Global Focus

58. Further Statistical Debate on "Too Much Finance"

Author:
William R. Cline
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Cline critiques OECD findings on "too much finance," which seem to imply that the optimal amount of credit in an economy is zero, given the linear specification of the main tests. If these results were taken literally, there would be a radical policy implication: Growth would be maximized by completely eliminating credit finance. He then finds that the negative impact of additional finance on growth is reversed when the appropriate (purchasing-power-parity) per capita income is applied and country fixed effects are removed. Separate tests for countries with intermediated finance below and above 60 percent of GDP show a significant positive effect of finance on growth in the lower group but an insignificant effect in the higher group. He also responds to critics of his earlier study.
Topic:
Economics, International Political Economy, International Trade and Finance, and GDP
Political Geography:
Global Focus

59. The Influence of Foreign Direct Investment, Intrafirm Trading, and Currency Undervaluation on US Firm Trade Disputes

Author:
J. Bradford Jensen, Dennis P. Quinn, and Stephen Weymouth
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The authors investigate a puzzling decline in US firm antidumping (AD) filings in an era of persistent foreign currency undervaluations and increasing import competition. Firms exhibit heterogeneity both within and across industries regarding foreign direct investment (FDI). Firms making vertical, or resource-seeking, investments abroad are less likely to file AD petitions and firms are likely to undertake vertical FDI in the context of currency undervaluation. Hence, the increasing vertical FDI of US firms makes trade disputes far less likely. Data on US manufacturing firms reveals that AD filers generally conduct no intrafirm trade with filed-against countries. Persistent currency undervaluation is associated over time with increased vertical FDI and intrafirm trade by US multinational corporations (MNCs) in the undervaluing country. Among larger US MNCs, the likelihood of an AD filing is negatively associated with increases in intrafirm trade. The authors confirm that undervaluation is associated with more AD filings. However, high levels of intrafirm imports from countries with undervalued currencies significantly decrease the likelihood of AD filings. The study also highlights the centrality of firm heterogeneity in international trade and investment in understanding political mobilization over international economic policy.
Topic:
Economics, International Political Economy, International Trade and Finance, and Foreign Direct Investment
Political Geography:
United States of America

60. The OECD's "Action Plan" to Raise Taxes on Multinational Corporations

Author:
Gary Clyde Hufbauer, Eujiin Jung, Tyler Moran, and Martin Vieiro
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Hufbauer and colleagues critically evaluate the Organization for Economic Cooperation and Development’s ambitious multipart project titled Base Erosion and Profit Shifting (BEPS), which contains 15 "Actions" to prevent multinational corporations (MNCs) from escaping their "fair share" of the tax burden. Spurred by G-20 finance ministers, the OECD recommends changes in national legislation, revision of existing bilateral tax treaties, and a new multilateral agreement for participating countries. The proposition that MNCs need to pay more tax enjoys considerable political resonance as government budgets are strained, the world economy is struggling, income inequality is rising, and the news media have publicized instances of corporations legally lowering their global tax burdens by reporting income in low-tax jurisdictions and expenses in high-tax jurisdictions. Given that the US system taxes MNCs more heavily than other advanced countries and provides fewer tax incentives for research and development (R&D), implementation of the BEPS Actions would drive many MNCs to relocate their headquarters to tax-friendly countries and others to offshore significant amounts of R&D activity.
Topic:
Development, Economics, International Political Economy, and International Trade and Finance
Political Geography:
Global Focus