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Do Natural Disasters Stimulate Trade? by Chenmei Li

Do Natural Disasters Stimulate Trade? by Chenmei Li

Typically, disasters are seen as disruptions of normal economic activity and thus reducing trade. However, the existing empirical evidence for a negative relationship between disasters and trade is contradictory. On ...

Europe in Times of Deglobalization by Peter A.G. van Bergeijk

Europe in Times of Deglobalization by Peter A.G. van Bergeijk

The current phase of deglobalization is a challenge for social sciences. Peter van Bergeijk discusses what we can learn from previous deglobalizations. What do the periods of the Great Depression ...

Deglobalisation Series | Will deglobalisation save the environment? by Sylvanus Kwaku Afesorgbor and Binyam Afewerk Demena

Anti-globalists and some environmentalists argue that globalisation is harmful to the environment because it leads to an increase in the global demand for and supply of goods and increased energy production. If globalisation is perceived as harmful to the environment, then should we expect that the current deglobalisation trend in the Global North can reverse the harmful impacts that globalisation is seen to have borne on the environment?


 

An important global concern has been to understand the way in which the increasing pace of globalisation affects the environment. Although the literature has been fraught with contrasting results, there are many who strongly believe that increased globalisation has had a deleterious effect on the environment. A large number of environmentalists supporting this view base their argument on the premise that globalisation leads to an increase in the global demand for goods, resulting in increased production that exploits and depletes natural resources and the environment—what is known as the scale effect. On the basis of rising environmental concerns, an important question, then, is whether deglobalisation would produce the opposite effect. Put differently, if globalisation is harmful to the environment, then should we expect deglobalisation to inflict less harm?

Currently, this is an important question to ask considering the heightened anti-globalisation sentiments that have engulfed the Global North. In the recent past, we have not only witnessed Brexit, the election of Trump, and the Belgian opposition of the trade agreement between the EU and Canada, but, more recently, we have seen anti-globalisation sentiments reaching a climax even and especially in the United States (USA) that once was the strongest architect and proponent of globalisation. This has culminated in increased uncertainty and an a near-stalemate for NAFTA, with the US pulling out of Trans Pacific Partnership (TPP) trade agreement, proposing the erection of a wall the border it shares with Mexico, and hiking steel and aluminium tariffs as part of the ongoing trade war with China.

Untitled2The adverse effect of globalisation on the environment is supported by race-to-the-bottom hypothesis. This school supports the hypothesis that increased gains from globalisation is achieved at the expense of the environment by economies more open to global trade adopting looser environmental standards. Those who support this view of the detrimental impact of globalisation on the environment allude to how increasing globalisation creates global competition, resulting in an increase in economic activities that deplete natural resources. An increase in economic activities as a result of the thriving of economies of scale leads to increased emissions of industrial pollutants and to environmental degradation. The pressure on international firms to remain competitive forces them to adopt cost-saving production techniques that can be environmentally harmful.

Lower environmental standards

However, deglobalisation may not necessarily translate into the reduced emission of harmful gases such as CO2, SO2, NO2, but could actually produce the opposite effect. Through the technique effect, we know that globalisation can trigger environmentally friendly technological innovations that could be transferred from countries with strict environmental regulations to pollution havens. With globalisation not only entailing the movement of final goods, but also the transfer of intermediate, capital goods and technologies, multinational corporations with clean state-of-the-art technologies could transfer their green technologies to countries with low environmental standards. It is widely recognised that multinational firms use cleaner types of energy than local firms and thus attain more energy-efficient production processes. Thus, deglobalisation could mean a minimal transfer of these environmental-friendly technologies.

Domestic production means greater pollution

Moreover, the rise of anti-globalisation forces would mean less specialisation in sectors of countries with a comparative advantage. The gains-from-trade hypothesis states that this can result in the loss of the associated gains from trade and specialisation, resulting in the inefficient allocation of resources that would lead to the dissipation of scarce economic and natural resources. If every country has to produce goods to meet its domestic demand, this could result in duplication in the production process, with an associated increase in local emissions. Since some countries have weaker environmental standards, this could possibly worsen overall global emissions. For example, the imposition of economic sanctions on Iran (making Iran less integrated into the world economy) has triggered domestic production (of oil) that has resulted in immense damage to the environment. As a result of import bans, Iran started refining its own crude oil that contains ten times the level of pollutants of the oil it formerly imported.

The rise of ‘eco’ products

The notion of globalisation also has been used to create public awareness regarding labour and environmental standards through international campaigns culminating in the Fairtrade and Eco labellings, for example. The success of these public awareness programmes is based on the different preferences of consumers. Producers are able to increase their market access by producing eco-friendly products. Without international trade, consumers would have been presented with limited choices, and may have been forced to only purchase the domestic goods that may have been produced under loose environmental standards. Thus, globalisation can expand the choice of consumers, enabling them to select environmentally friendly products.

Indirect conservation mechanisms

Globalisation achieved through multilateral negotiations on the platform WTO has also demonstrated that although environment protection is not the WTO’s core mandate, it has indirectly stimulated enthusiasm within its member countries for sustainable development and environmentally friendly trade policies. The green provisions of the WTO provide general exceptions that allow countries to protect human, animal or plant life and conserve their exhaustible natural resources.

Apart from the WTO, regional trade agreements (RTAs) are another appendage of globalisation that promote environmentally sustainable policies. As countries seek to join RTAs, they are made to simultaneously embrace environmental co-operation agreements. Many countries (such as Canada and member states of the EU) have developed national policies whereby conducting environmental impact assessments before signing trade agreements is mandatory. Thus, trade agreements can only be signed when they are compatible with the environmental standards of individual EU member states. This thus compels partners to trade agreements to adhere to environmental provisions contained in the agreements.

Leaders and followers

We have seen over the years how countries such as China that used to be pollution havens have had tremendous gains in reducing their emissions, especially after becoming more integrated into the world economy. Because of globalisation and the incentives to increase its global market access for its products, China has moved away from its image as a top polluting country in the world to a global leader spearheading the fight against pollution. In 2017, China closed down tens of thousands of factories that were not complying with its environmental standards.

Untitled
Beijing workers’ stadium on smoggy and clear days from https://www.huffingtonpost.ca/entry/china-air-pollution-2014_us_568e592ce4b0a2b6fb6ecb73

In contrast, we have seen a country like the US that has been at the forefront of fighting against environmental damage slowly drifting away from this fight because of its embracing the anti-globalisation sentiments of the current president Donald Trump. Through its America First Energy Plan, the Trump administration has outlined its preference for polluting industries, the use of fossil fuels, and revival of the coal industry. This points to the fact that countries seeking self-sufficiency or expressing anti-globalisation sentiments may drift away from sustainable development practices towards industrial policies that may be injurious to the environment.

Restricting international trade may have a negative impact on the environment. Deglobalisation would isolate countries, making them less accountable toward other countries for protecting the environment. The gains associated with globalisation could be used as an effective bargaining strategy or as an incentive to demand environmental accountability from countries that want to benefit from global trading systems.


About the authors:

csm_SKA_Picture_Academic_4c02c69704Sylvanus Kwaku Afesorgbor is Assistant Professor at the Department of Food, Agricultural and Resource Economics (FARE), University of Guelph, Ontario, Canada. His research and teaching experiences are in the areas of International Political Economy, Globalisation and Development, Impact Evaluation, Applied Econometrics, and Food and Development.

downloadBinyam Afewerk Demena is a Teaching and Research Fellow at the ISS. His research interests are in the broad area of applied empirical research with a particular focus on applied micro-econometrics in development, international and fishery economics. In his PhD, he examined the impact of transmission channels of intra-industry productivity using applied micro-econometrics, meta-analysis, multi-country micro-panel data, and applied field research via on-site visits.

 

Deglobalisation Series | (de)globalisation and the fear of trade by Ana Cristina Canales Gomez

Deglobalisation Series | (de)globalisation and the fear of trade by Ana Cristina Canales Gomez

While the consequences of globalisation over health and nutrition can be contradictory, trade openness can be a relevant policy for reducing food insecurity. This relatively inexpensive action, when compared to technology ...

Deglobalisation Series | Financial deglobalisation: a North-South divide? by Haroldo Montagu

Deglobalisation Series | Financial deglobalisation: a North-South divide? by Haroldo Montagu

The Financial Crisis of 2008/09 led to a structural break in financial globalisation, setting cross-border capital flows back to the average of the 1990s. Do differences between cross-border financial flows ...

Deglobalisation Series | China: ‘restarting’ globalisation? by Chenmei Li

After benefiting from international trade and investment for the past 30 years, China’s global position is starting to change. This is perhaps most evident when regarding its position at the centre of an ongoing ‘trade war’ with the United States. Given its role as leader in international trade, will China be able to ‘restart’ globalisation and offer an alternative to globalisation and deglobalisation as defined by the West?


As developed countries appear to step back from globalisation, China senses an opportunity to step forward and set new rules for globalisation. A major component of the Chinese strategy to lead changes in how globalisation is thought of and practiced is the One Belt and One Road Initiative (OBOR) of the Chinese government. Aimed at improving infrastructure and connectivity between China and the world, this initiative comprises more than physical connections. The Chinese government argues that this initiative includes not just economic, but also socio-cultural linkages, ultimately leading to mutual benefits for all countries involved. The OBOR defines China’s idea of globalisation in a new era in which emerging economies backed by rising economic power and strong alliances are seeking greater influence on global issues.

2000px-One-belt-one-road.svg.png
Figure 1. Map of China’s One Belt One Road Initiative, with China in red and the land (black) and sea (blue) routes indicated. Source: https://en.wikipedia.org/wiki/One_Belt_One_Road_Initiative

China’s push for globalisation has evoked mixed reactions across the world, and Beijing has had to deal with multiple obstructions to its vision. Moreover, logistical and bureaucratic issues are plaguing countries participating in the OBOR. For instance, although China has signed bilateral cooperation agreements with Pakistan, Hungary, Mongolia, Russia, Tajikistan, and Turkey, with a number of projects planned under those agreements, the proposed projects have not been implemented. Most such projects are infrastructure-related, for example a proposed train connection between eastern China and Iran, which eventually may be expanded to Europe. Powerful Western economies and neighbouring Asian giants have remained cautious in their assessments and acceptance of the initiative.

Sustaining the benefits of globalisation

An important motivation behind the OBOR is the endeavour to continue to benefit from globalisation. Since 1979, China has implemented an Opening and Reforming Strategy. However, its export in percentage of GDP (trade openness) in 1980 was only 5.9% and outward Foreign Direct Investment (FDI) was 1.7 billion US dollars. Only after the 1990s China’s globalisation process really began. Joining the WTO in 2001 pushed its trade openness to the highest point—higher than the world average and the levels of the UK and US (Figure 2).

openness
Figure 2. Trade openness from 1960 to 2016 for four of the world’s largest economies, with the world average also indicated. Source: World Development Indicators (2018).

China is said to have been the largest beneficiary of globalisation until the economic crisis hit in 2008. After the economic crisis, the international market became weak and the Chinese economy could no longer count on export as its most powerful economic ‘carrier’ (besides investment and consumption). Immediately following the crisis, the Chinese government injected 4 trillion renminbi (RMB) into the economy and boosted short-term investment and consumption. Its long-term plan, which was not clear until 2012, is to further stimulate trade openness and integration into the world economy. China thus seeks to leverage the global market and resources to boost its economic growth.

At the helm of rebuilding globalisation efforts?

China does not only want to continue to benefit from globalisation, but also wants to lead the rebuilding of a global system where it could assume a leading role. The current deglobalisation phenomenon does not mean that the general globalisation trend will cease, because the core driver of globalisation is technology, which is advancing faster than ever. However, it does suggest a splintering (if not collapse) of the current globalisation system created after World War II and shaped to its current state largely by developed economies.

Trumpism and Brexitism are both symbols of the deglobalisation phenomenon but are not evidence that the traditional leaders of globalisation are deglobalising their economies. Instead, such symbols show the recognition of the need for a new globalisation system by both ‘traditional’ world leaders like the US and UK as well as emerging powers who were largely excluded from the last global rulemaking process and now hold a share of the world GDP so significant that they cannot be ruled out again.

However, globalisation in China has always been selective, well-managed, and restricted mainly to economic and trade-related activities. Besides its achievement regarding global trade, China shows little achievement or/and willingness to be globalised in terms of, for example, finance, human resources, and culture. The exchange rate is under careful control. English education in China is mandatory since middle school, but the real usage of English is still quite limited. China is known to be the most difficult country for foreigners to attain residence permits, and to date it blocks direct access to the global internet. These are all signs that Beijing is not too eager to participate in all forms of globalisation.

China needs to tread carefully

And thus its attitude may jeopardise China’s idea of globalisation through the OBOR initiative. The explanation often used by Chinese government for the selectivity related to the initiative is its desire to minimise the negative effect of Western-Defined Globalisation and to respect China’s special country situation. However, China’s attitude towards the OBOR must be open-minded and holistic, both tolerable of and acceptable to a wide range of ideologies.

The Chinese government seems to realise that and is promoting the OBOR as ‘the most inclusive globalisation system’. Formally, the OBOR emphasises five key areas of cooperation, including economic, financial and social exchanges, and the private sector is encouraged and expected to be the main driver of the initiative. Unfortunately, the current situation suggests that OBOR has been largely driven by state-owned enterprises and government-level trade agreements, and is limited to global trade. The areas that are not engaged by the plan, such as culture, education, data sharing and immigration, are likely to hinder China’s efforts towards globalisation, especially in a digital world where technology is developed at such a high speed.

In conclusion, China will continue to seek leadership in restoring the globalisation system, with the OBOR initiative as its core measure. However, both traditional leaders and other emerging powers still have a say in how and whether the globalisation system is re-established. Consensus may not have been reached between countries, but the globalisation trend is likely to continue—and at a faster pace due to new technologies. If China truly wants to become a major global leader in the quest to ‘restart’ globalisation, private sector involvement in areas other than trade need to be encouraged through a more open-minded attitude.


Also see: Deglobalisation 2.0: Trump and Brexit are but symptoms by Peter. A.G. van Bergeijk and Challenges to the liberal peace by Syed Mansoob Murshed


untitled.pngAbout the author:

Chenmei Li is a Project Analyst at Institute of New Structural Economics, Peking University—one of the top 25 think tanks in China. She is working on economic transformation of developing countries (especially in Africa) and China’s engagement with LDCs. She received a Master’s degree from the ISS in 2016.

 

 

The imperial intentions of Trump’s trade war babble by Andrew M. Fischer

The imperial intentions of Trump’s trade war babble by Andrew M. Fischer

In defence of his trade war with China, Trump claims that ‘when you’re $500bn down you can’t lose.’ The problem with this stance is that persistent US trade deficits with ...

Deglobalisation Series | Challenges to the liberal peace by Syed Mansoob Murshed

Deglobalisation Series | Challenges to the liberal peace by Syed Mansoob Murshed

We may have reached a stage where economic interactions have become so internationalised that further increases in globalisation cannot deliver greater prospects of peace. But the logic of the capitalist ...

Deglobalisation Series | Backtracking from globalisation by Evan Hillebrand

While globalisation still enjoys strong support in the Global South, major economies in the Global North now seem less enthusiastic about its purported benefits. This article explores how the United States through its previous policies came to backtrack from globalisation, showing that it is an altogether unsurprising development.


From the perspective of the United States (US), embodied in US president Donald Trump’s recent discourses, the liberal international trading system faces at least three major economic and socio-political challenges going forward: (1) income redistribution, (2) the rise of Asia and a potential shift in comparative advantage, and (3) the rise of China and the national security argument. Given the growing domestic unease with free trade and the fact that these exacerbating issues are worsening, I suggest that US policies will become less supportive of globalisation.

US withdrawal: surprising or expected?

In our 2011 article, “Backtracking from Globalization” (1), my coauthors and I discussed the declining support for globalisation in the United States and elsewhere. Since then the trend has gotten worse.

But why shouldn’t it? The US, after all, has only had a liberal trade policy for 60 or so years. In its early years, US policy focused on high tariffs, large subsidies to key industries, and infrastructure investment designed to create an industrial economy for the sake of military and economic power (sounds not too dissimilar to China today). The US moved to a freer-trade stance when the US was economically dominant and an expansion of global markets seemed as if it would be economically beneficial.

The US free trade strategy was also based on political theories and grand strategy. After World War II, trade expansion was seen as a good way to bolster Europe economically, tie it to the West, and strengthen the West against the Soviet Union. The US spurred the creation of the GATT/WTO in an effort to bring all countries into a democratic rule-based system under the assumption that trade would help all countries prosper under US leadership. Since 1980 or so, the US has tried to lure China into the world market system to foster interdependence and peace. In many respects, that policy can be considered a great success—ushering in a vast improvement in the material standard of living almost everywhere and many decades of great-power peace. China also did turn away from its Maoist phase of development.

 Ebbing enthusiasm for globalisation

Support for globalisation, however, is clearly headed in a negative direction and the ebbing of enthusiasm has been particularly dramatic in the United States. Recent polling data from the Pew Foundation and the Council on Foreign Relations (2) show that there is still support for international trade, but a majority worry that trade generates labor market costs in terms of job destruction and lower wages. This worry helped elect the current US president and his administration talks more about fair trade than free trade: ‘Nothing about the theory of comparative advantage would lend itself to a defense of a status quo that imposes higher barriers to exports on American producers than on foreign producers’ (Economic Report of the President 2018: 219) (3).

It is important to understand that it is not ignorance that has led US policy in this direction.

Many voters were lured to Donald Trump’s “America First” pitch because of a perception that wages were stagnant and communities were hurt because of globalisation. In reality it is more than just a hunch: income distribution in America has worsened and academic research by Paul Krugman (4) and others attributes some of that worsening to trade, although the magnitude of trade’s contribution is (and always will be) in dispute.

Support for globalisation has to some extent rested on the theory of comparative advantage, but that theory has never been the “slam dunk” argument that enthusiasts have made it out to be. It depends on so many assumptions that do not fit the current world economy, so the theory should only be relied upon as a general principle, not the decider of every policy dispute. Paul Samuelson (5) claimed in 1972 that the aggregate gains from trade are not necessarily positive. He expanded on this idea in his (2004) paper, ‘Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization’, saying that growth in the rest of the world can hurt a country if it takes place in sectors that compete with its native exports—where it has comparative advantage.

The rise of China

Relative, and even absolute, per capita GDP can fall in such a situation (6). Whether China’s rise can actually diminish the US is not clear, but the current Chinese government continues to employ active trade policies to push its industries up the value chain, aiming explicitly at sectors that have been the mainstay of US industrial pre-eminence. Samuelson says that ‘economic history is replete with examples like this, first insidiously, and later decisively’, pointing explicitly to British manufacturing being overtaken by US industry after 1850.

In addition to the economic threat posed by China, the US government has long worried about the security threat posed by China’s rise. The US-China Economic and Security Review Commission is an organisation chartered and funded by the US Congress and dedicated to the proposition that China poses a multifaceted threat to the US. It yearly issues a massive report that cites declines in the US defense industrial base, insecurity of defense supply lines, financial threats, Chinese ownership of critical US facilities, cyber threats, and other problems—all related to China. In the most recent report (7), it lists 26 recommendations for congressional action, many of which would amount to new trade restrictions.

Trade policies, while often rooted in interest groups scrambling for distributional gains, are also related to national economic and security concerns. In the past, pragmatic national interests have pushed trade policy in varying directions. There is no reason now to believe that the US is giving up on international trade, but there is every reason to believe that for a variety of national interests it will be much less enthusiastic about globalisation in the future.


References:
(1) Hillebrand, E.E., J. Lewer and J. Zagardo (2011) ‘Backtracking from Globalization’, Global Economy Journal 10(4).
(2) Poushter (2016) American Public, Foreign Policy Experts Sharply Disagree over Involvement in Global Economy. Pew Research Center, http://www.pewresearch.org/author/jpoushter.
(3) Council of Economic Advisors (2018) Economic Report of the President. Washington, D.C. https://www.whitehouse.gov/wp-content/uploads/2018/02/ERP_2018_Final-FINAL.pdf
(4) Krugman, P.R. (2008) ‘Trade and Wages, Reconsidered’, Proceedings of the Brookings Panel on Economic Activity. Spring conference. Available at: (http://www.princeton.edu/~pkrugman/pk-bpea-draft.pdf).
(5) Samuelson, P.A. (1972) ‘Heretical Doubts About the International Mechanism’, Journal of International Economics, 2(4): 443-453.
(6) Samuelson, P. (2004) ‘Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization’, Journal of Economic Perspectives 18(3): 135-146.
(7) U.S.-China Economic and Security Review Commission (2017) 2017 Report to Congress. Washington, D.C. Available at https://www.uscc.gov/sites/default/files/annual_reports/2017_Annual_Report_to_Congress.pdf

Also see: Deglobalisation Series | Is anti-globalisation only a preoccupation in the Global North? by Rory Horner, Seth Schindler, Daniel Haberly and Yuko Aoyama


UntitledAbout the author:

Professor Evan Hillebrand taught international economics at the Patterson School of Diplomacy and International Commerce at the University of Kentucky. His most recent book is Energy, Economic Growth, and Geopolitical Futures (MIT Press, 2015).

 

 

Deglobalisation Series | Is anti-globalisation only a preoccupation in the Global North? by Rory Horner, Seth Schindler, Daniel Haberly and Yuko Aoyama

Deglobalisation Series | Is anti-globalisation only a preoccupation in the Global North? by Rory Horner, Seth Schindler, Daniel Haberly and Yuko Aoyama

A remarkable 'big switch'  has emerged from the turn of the millennium in terms of attitudes towards and discourses over globalisation. But while the world is currently witnessing a new backlash ...

Micky Mouse economics: how trade theory fails but policy still sells its fairytale benefits by Irene van Staveren

Micky Mouse economics: how trade theory fails but policy still sells its fairytale benefits by Irene van Staveren

Income inequality is rising globally. Trade has not delivered on its promises. Statistics and econometric analyses begin to show this failure in the global south as well as in the ...

Weight gains from trade in foods: evidence from Mexico by Osea Giuntella, Matthias Rieger and Lorenzo Rotunno

Originally published on VoxEU.org on 02 February 2018

The majority of obese adults are now found in developing countries. This column presents new evidence on the effects of trade on obesity in Mexico. The results indicate that across Mexican states, a one standard deviation increase in the unhealthy share of food imports from the US increases the likelihood of individuals being obese by about 5 percentage points. As developing countries around the world open up their food markets to industrialised countries, they may be accelerating their ongoing nutrition transition and imposing high future costs on their health systems.


Obesity is not the first health challenge that comes to mind when thinking about the global south. Obesity is rather associated with the Global North, particularly the US (think soda drinks, fast food, and lack of exercise). But this conventional wisdom is passé. The majority of obese adults – those with a body mass index of 30 and more – are now found in developing countries (Ng et. al 2014). The Global South is in the midst of a health and nutrition transition (Popkin and Gordon-Larsen, 2004). While communicable diseases and undernutrition are on a (slow) decline, non-communicable diseases and overnutrition are taking hold of populations, and they are doing so rapidly.

Given the known health risks (such as diabetes and cardiovascular diseases) and economic costs of obesity, what can policymakers in the Global South do to prevent obesity in epidemic proportions? Important lessons may come from countries that have already undergone this transition and from examining potential drivers that are amenable to public policy. The much-discussed case of Mexico is ideal for such an exercise.

Obesity and trade: The case of Mexico

Mexico’s obesity rates increased from 10% to 35% over the period 1980-2012 (according to our analysis sample including adult females). And among the already obese OECD countries, Mexico ranked second in 2015, surpassed only by the US (OECD 2017).

Coinciding with these profound changes in population health, Mexico has opened itself to trade in foods mostly with the US. Currently over 80% of Mexican food imports are American. In Figure 1, we show the evolution of Mexican imports of foods and beverages from the US over time. While overall food imports have increased dramatically, food that is typically considered unhealthy has surged quite spectacularly. Notably, exports of ‘food preparations’ are 23 times larger in 2012 compared to 1989.

Figure 1 Mexican imports of food and beverages from the US over time

In Figure 2, we classify Mexican imports from the US as unhealthy or healthy food using the United States Department of Agriculture (USDA) Dietary Guidelines (for instance, ‘dark green vegetables’ are recommended for increased consumption, while ‘refined flour and mixes’ are advised for reduced consumption). US exports to Mexico of both food groups have increased since the late 1980s, but unhealthy food groups at a much faster rate.

Figure 2 Unhealthy and healthy Mexican food and beverage imports from the US

Such trends naturally raise the suspicion of a possible, causal link running from greater consumption of US foods to rising obesity prevalence (e.g. Jacobs and Richtel 2017, Rogoff 2017). However, to date no paper has attempted to estimate a direct causal relationship between obesity and trade.

Estimating weight gains from trade in foods

In a new working paper, we quantify the impact of US food exports on individuals’ likelihood of being obese across Mexican states over the period 1988 to 2012 (Giuntella et al. 2017). To this end, we match several rounds of anthropometric and household expenditure surveys with product-level food trade data. Our main results are based on female adults for which data are available over this long time span.

We calculate the unhealthy share of food imports from the US by differentiating food items using the USDA Dietary Guidelines for Americans. We then allocate these aggregate food imports (healthy, unhealthy) to Mexican states. More specifically, we exploit variation in Mexican states’ historical expenditure by food products prior to trade integration. Our identification strategy assumes that aggregate trade shocks heterogeneously impact sub-national units as a function of time-invariant or ‘baseline’ variables (e.g. Dix-Carneiro and Kovak 2017, Autor et al. 2013). Note that there is substantial heterogeneity across Mexican states in obesity rates and historical food expenditure patterns, which further motivates our modelling approach.

Our empirical models also control for a host of state (such as food prices, GDP, FDI, migration) and individual covariates, as well as state fixed effects and state-specific time trends. In a second empirical strategy, we relate long-run differences in obesity rates at the state level to changes in unhealthy food imports conditional on baseline covariates. We instrument US exports of unhealthy foods to Mexico with corresponding US exports to other countries. And alternatively, we use ‘gravity residuals’ singling out the comparative advantage of the US in unhealthy food production relative to Mexico (akin to Autor et al. 2013).

Quantifying weight gains from trade in foods

We find that a one standard deviation increase in the unhealthy share of imports (equivalent to a 14 percentage point increase) raises the likelihood of obesity by about 5 percentage points. The effect amounts to 18% of the sample average in obesity. Findings using long-run difference models and IV estimates, as well as gravity residuals, are qualitatively similar – pointing to a plausibly causal effect.

Our main finding passes a series of robustness and placebo checks:

  • Plausibly unrelated imports from the US (such as apparel products) do not impact obesity.
  • The effects associated with food imports from the rest of the world are insignificant and small, underlining the specific importance of US foods for obesity.
  • Likewise, unhealthy Mexican food exports to the US are not correlated with obesity.
  • Similar patterns emerge if we employ food imports from the US for final demand.
  • Overall (the sum of healthy and unhealthy) food imports do not correlate with obesity, highlighting the importance of differentiating ‘unhealthy’ and ‘healthy’ US foods.
  • Our main results are robust to dropping Mexican states one by one.
  • Similar patterns are obtained using body mass index (in quantile regressions) or overweight as outcome variables.

Health inequality and trade

Weight gains due to trade vary across socioeconomic groups. As illustrated in Figure 3, women with low levels of education face a greater risk of trade-induced obesity – their obesity risk is 5 percentage points higher than that of more educated women in a Mexican state with average exposure to unhealthy food imports. This differential goes up to 8 percentage points as the state’s trade exposure rises by 14 percentage points (one standard deviation). This interaction effect between education and trade is robust to the inclusion of state-time fixed effects (that is, purging the main local effect of trade exposure). The results are consistent with the well-known hypothesis that more educated individuals are more efficient producers of health investment than less educated ones. This educational gradient may be exacerbated in food environments where individuals are faced with more unhealthy food choices (Mani et al. 2013, Mullanaithan 2011, Dupas 2011).

Figure 3 Inequality between education groups in obesity risk and unhealthy food imports

Income, prices, and tastes

Having established a direct impact of US food exports on obesity prevalence in Mexico, we next turn to exploring possible mechanisms. Trade impacts incomes, prices, and tastes (due, for instance, to exposure to a foreign lifestyle and advertisement), all of which may drive the observed impacts on obesity. First, note that our main effect is robust to controlling for state GDP per capita, the total share of expenditures on unhealthy foods, as well as the relative prices of healthy versus unhealthy goods. Second, estimating demand equations over healthy and unhealthy food groups, we find that exposure to unhealthy foods from the US has redirected overall expenditure towards unhealthy foods. This observed shift is robust to controlling for real income and prices (for a similar empirical strategy, see Atkin 2013). In other words, trade with the US appears to influence tastes for relatively unhealthy foods. Increased variety of unhealthy foods boosts demand. These patterns are in line with a shift to ‘Western’ food consumption and increases in body weight among East Germans following the fall of the Berlin Wall (Dragone and Ziebarth 2017).

Policy implications

Nations have a lot to gain from trade. But weight gains and the associated health losses from trade in foods have been largely omitted from the equation. As developing countries around the world open up their food markets vis-à-vis industrialised countries – which tend to have a comparative advantage in more processed and less healthy foods – they may accelerate their ongoing nutrition transition. Obesity may put high costs on future health systems and the economies of the Global South.

Undoing the nutrition transition is likely harder than moderating it in the first place. Obesity and unhealthy food habits tend to be persistent. The Mexican experience is informative for countries in the Global South. Integrating nutrition and other health concerns into the formulation of food trade policies is paramount,[1] and such concerns should feature high up on the agenda in future trade negotiations.

Our findings suggest that differentiating between healthy and clearly unhealthy imports may help slow down secular trends in obesity around the world.


References

Atkin, D (2013), “Trade, tastes, and nutrition in India”, American Economic Review 103(5): 1629-1663.
Autor, D H, D Dorn and G H Hanson (2013), “The China Syndrome: Local Labor Market Effects of Import Competition in the United States”, American Economic Review 103(6): 2121-68.
Colantone, I, R Crino and L Ogliari (2017), “Import competition and mental distress: The hidden cost of globalization”, mimeo.
Dix-Carneiro, R and B K Kovak (2017), “Trade Liberalization and Regional Dynamics”, American Economic Review 107(10): 2908-46.
Dragone, D and N R Ziebarth (2017), “Economic Development, Novelty Consumption, and Body Weight: Evidence from the East German Transition to Capitalism”, Journal of Health Economics(51): 41-65.
Dupas, P (2011), “Health behavior in developing countries”, Annual Review of Economics 3(1): 425-449.
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Endnotes

[1] Related studies provide evidence for adverse effects of manufacturing imports on the health of workers – see for instance, Colantone et al. (2017) and the associated VoxEU column, McManus and Schaur (2017), and Pierce and Schott (2016).   

Picture credit: Adam Clark


giuntella2Osea Giuntella is Assistant Professor of Economics at the University of Pittsburgh.
riegerMatthias Rieger is Assistant Professor of Development Economics at the  International Institute of Social Studies, Erasmus University Rotterdam.rotunno_4Lorenzo Rotunno is Assistant Professo of Economics at the Aix-Marseille University.