This paper studies the relationship between sovereign ratings and corruption indicators. The paper first shows a strong correlation between ratings issued by the three main rating agencies (Standard & Poor's, Moody's, and Fitch) and three commonly used corruption indicators. This correlation is robust to controlling for the fact that corruption is also correlated with level of development, amount of government debt, the current account balance, and an indicator of macroeconomic instability. However, the conditional correlation between corruption and sovereign ratings is not generally robust to controlling for the fact that corruption is correlated with other governance indicators. Moreover, using standard statistical techniques it is not possible to establish whether the observed correlation implies a causal effect going from corruption indicators to sovereign ratings. Next, the paper briefly describes the sovereign rating methodologies of the three main agencies and shows that they incorporate corruption indicators in their rating criteria. There are, however, differences in the way in which corruption indicators affect the ratings issued by the three agencies. While Fitch has well-defined quantitative criteria for incorporating corruption in its rating opinions, Standard & Poor's uses a qualitative assessment of the risks arising from corruption, and the criteria used by Moody's lie somewhere in between.
China's unique economic system poses increasing challenges to the world trading system and attracts growing academic and policy debates. WTO members have frequently resorted to antidumping measures in dealing with price distortions caused by Chinese government influence in the economy. The Appellate Body's decision in the recent EU – Biodiesel dispute starts to remove the flexibility of condemning state intervention and price distortions under the WTO Anti-Dumping Agreement through antidumping measures. This decision, read with the relevant WTO jurisprudence on the "ordinary course of trade" test and subsidies, suggests that price distortions resulting from state intervention should be addressed under other WTO rules. Therefore, it is necessary for WTO members to shift their focus to, and explore the capacity of, the other rules to overcome the challenges arising from China's state capitalism.
The 2016 U.S. presidential campaign made the North American Free Trade Agreement (NAFTA) a prime target in a heated and divisive debate that questioned the United States' participation in the international trading system. Though campaign rhetoric typically softens as a candidate takes office, this time may be different. President Donald Trump has called NAFTA “the worst trade deal ever negotiated,” and in May 2017 indicated his administration’s intent to renegotiate NAFTA. NAFTA is certainly not perfect, as all international agreements are the product of various political compromises, but it is also not the disaster its opponents claim. NAFTA was a good deal when it was made, but it has become antiquated due to rapid changes in information technology and global supply chain integration. In addition, some of its provisions were innovative at the time, but experience has shown us where improvements are needed. As a result, a renegotiation should not be feared, but rather seen as an opportunity to reinvigorate and revitalize North American integration for a 21st century global economy. In this paper, we highlight the new policy objectives the agreement can incorporate; discuss the institutional upgrades that can improve its functioning and reduce political friction; and consider how NAFTA could serve as a framework for thinking about trade agreements that come after it, much as it did when it made its debut. We argue that while there is no need to start a revolution in trade agreements through this renegotiation process, there is a real opportunity to upgrade those aspects of NAFTA that either do not work, are out of date, or could not have been imagined at the time the deal was originally negotiated. In doing so, we draw from recent innovations found in contemporary trade agreements, such as the Trans-Pacific Partnership (TPP), and the Comprehensive Economic and Trade Agreement (CETA), where appropriate. Overall, we conclude that while the challenges may be significant, and the context of the renegotiation a bit worrying, the opportunity to upgrade the NAFTA architecture should be welcomed.
This article investigates the impact of trade agreements on bilateral trade flows of manufactured goods. Compared to other studies, it enriches the analysis by decomposing gross trade flows into their value added components, and by considering the direction of trade flows and the content of trade agreements. The analysis reveals a clear pattern in the effects of economic integration on the degree and type of global value chains (GVC) participation. It shows that free trade agreements enhance GVC-driven trade between developed and developing economies whereby the latter assemble imported intermediates into final goods exports. Deeper integration fosters production fragmentation with a more balanced structure where even the less developed economies participate at more upstream stages and contribute more domestic value added into the supply chain. Finally, an analysis based on the content of FTAs reveals that liberalisation of trade in services is essential for the insertion of less developed economies in global value chains while investment provisions are crucial for their participation at more upstream stages of the value chain.
Participation in global value chains (GVCs) is a key element in the industrialization strategies of many developing nations. Many studies look at the determinants of GVC participation but most focus on do- mestic regulatory environments, the cost of doing business, and trade policy. This paper investigates the possibility that services also mat- ter by empirically testing for a link between higher GVC participation and services liberalization. Using the gravity framework, I examine the impact of services trade agreements on gross trade and GVC- trade (backward and forward participation). I find that services trade agreements promote both, but especially GVC-trade, although the ef- fects are heterogeneous: the impact is bigger for developing nation exporters. Moreover, I find that services agreements that allow the export of services without local presence (non-establishment rights) are particularly important in fostering GVC participation.
We propose a novel theoretical framework to study how environmental regulation shapes economic development in a developing country such as China. We develop a dynamic tax competition model in which local governments, located in development zones, use variation in taxes to attract workers to their jurisdictions. Their objective is to maximize tax revenue less local health costs that are proportional to local pollution. Our main result is that competition generates a reallocation of productive factors when national regulation is introduced. Local governments in more productive regions set greater production taxes than in other regions. This makes workers and output to shift from more to less developed regions of the country.
