Bonds That Bind: A PRODUCT SPACE APPROACH TO SOME INDUSTRIAL

POLICIES BEFORE THE WTO

Wouter P.F. Schmit JongbloedColumbia Law School

IPD/JICA Workshop June 5-6, 2014

Philosophical Basis for Growth

• 1. American Revolution: Man recognizes his fellow as equals before socio-economic opportunity

• 2. French Revolution: Man recognizes his fellow as brother

Economic Growth

• Through Efficient Resource Allocation– Static– Dynamic• Steady State Growth (balanced)• Import-Substitution-Industrialization (unbalanced)• Network (capacity proximity)

• Through Technology and Learning– Specialization– Diversification

Product Proximity• Ricardo Hausmann & Cesar Hildalgo (2007)

• Luciano Pietronero (2012)

“Nestedness” & the Product Space

Taking advantage of Density:

Getting Prices “Right” and “Wrong”

Diversification: Capacity Accumulation (Coordination)

Specialization: Factor Accumulation(Rationalization)

Country Footprints: Quality & Proximity

Fundamental Equivalence of Growth Policies:- “Catch up” or optimization growth- “Frontier” or transformative growth

Constrained Emulation:- Viability (Lin)- Proximity (Hausmann; Pietronero)

The Market Needs Help

• Industrial policies aid technological acquisition– Growth through learning not by “primitive

accumulation” of production factors• (Schumpeter, Solow, Stiglitz & Greenwald)

– Current international regulatory framework non-conducive:• Intellectual Property (TRIPS)• Industrial Policy (GATT / WTO)• Regional and Bilateral Treaties (FTAs & BITs)

Curious Case of Export Restrictions

• WTO Legal (Art. XI GATT)– “No prohibitions or restrictions other than duties,

taxes or other charges,[…], shall be instituted or maintained […] on the importation […] or on the exportation […] of any product .”

– Exceptions in Article XI & XX GATT minimalized.• Restrictive Case Law• Accession Protocol: China, Russia, Vietnam, etc.• Regional and Bilateral Agreements (EU – Morocco)

Economic Effect of Restricting Exports

• Static:– Distortion resource allocation (Lerner Symmetry)

• But;– 1. Unused market power (optimal tariff; inverse demand elasticity)– 2. External price volatility (investment disincentive; immature financial markets)– 3. Tariff threat (Voluntary export restraints – illegal; Safeguards Agreement)– 4. Domestic Redistribution (Uncertainty, Windfall, Peronism)

• Dynamic: - Balanced growth;

• Terms of Trade adjust to compensate over medium term• Resource misallocation (suboptimal production/consumption sets)• Institutional degradation (protection for sale)

- Unbalanced growth;• Tariff Jumping;• Big Push;• Infant Industry.

- Network growth; it depends (!)

Differentiate WTO Case Law:Contextual Applicability Accession Protocol

• WTO: Functional v. Aspirational (Broude)– Anachronistic: IADB; IMF; WB– Political economy emphasizes frontier growth: Getting prices “right” and “wrong”

• Subsidies for R&D are “non-actionable” (8.2(a) SCM Agreement)• Strong international Intellectual property protection

• Product Space country footprint should define:– “Developmental” v. “Commercial”

• Drafting History GATT / WTO Applicability Accession Protocol– Working group – Static distortion to international resource allocation

• Downstream effect:– China Raw Materials (coke, bauxite, magnesium, zinc, yellow phospherus)

• NOTE: Product Space core: Metal Products, Chemistry, Machine products

– China Rare Earth (rare earths, tungsten and molybdenum)• NOTE: Green technology, fuel cells, smart bombs, electric cars

Time to let go…J

Johan Cornz. Tromp King of Siam

While in Over-Time…

• The World Trade Organization is Retrenching:

– Dominant Supply Chains– Surge of Mega-Regionals– Embattled Multilateralism

Fit within my framework? New data!