1 Services Trade and Income Redistribution in the Trans‐Pacific Partnership Henry Thompson Forthcoming chapter in Mega Regionalism in the Asia Pacific: The Trans‐Pacific Partnership and the Path to FTAAP Edited by Peter Chow Edward Elgar Publishing April 2015 This chapter presents simulations of specific factors models focused on income redistribution due to potential price changes across services industries for each of nine countries negotiating or interested in the Trans‐Pacific Partnership. Communications and financial services are treated as traded with prices rising in exporting countries and falling in importers. Prices of non‐traded services increase in every country as demands rise with incomes. These price changes affect capital returns and wages of high, medium, and low skilled labor. Outputs including manufacturing and resource industries adjust as well. Sensitivity to constant elasticity substitution is discussed. Contact information: Economics Department, Auburn University, AL 36849, 334‐844‐2910, [email protected]
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Services Trade and Income Redistribution in the Partnership
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Services Trade and Income Redistribution
in the Trans‐Pacific Partnership
Henry Thompson
Forthcoming chapter in
Mega Regionalism in the Asia Pacific:
The Trans‐Pacific Partnership and the Path to FTAAP
Edited by Peter Chow
Edward Elgar Publishing
April 2015
This chapter presents simulations of specific factors models focused on income
redistribution due to potential price changes across services industries for each of nine
countries negotiating or interested in the Trans‐Pacific Partnership. Communications and
financial services are treated as traded with prices rising in exporting countries and falling in
importers. Prices of non‐traded services increase in every country as demands rise with
incomes. These price changes affect capital returns and wages of high, medium, and low skilled
labor. Outputs including manufacturing and resource industries adjust as well. Sensitivity to
constant elasticity substitution is discussed.
Contact information: Economics Department, Auburn University, AL 36849, 334‐844‐2910,
adjustments in wages and capital returns in Table 4 and Figures 8 and 9 are identical for any
degree of CES.
A proportional change in the vector of price changes scales the adjustments in wages
and capital returns. If the price changes in services industries were half as large, for instance,
adjustments in wages and capital returns would be half as large as well. Smaller increases in
prices of non‐traded services coupled with the same price changes in communications and
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financial services lead to greatly dampened wage effects. The effects of any hypothetical vector
of price changes can be examined online in Thompson (2015).
Output adjustments scale to the degree of CES substitution. Unreported output
adjustments are typically about half as large as the percentage changes in capital returns.
Weaker CES production would scale output adjustments accordingly. Output in
communications in the US expands about 18% and FN output expands about 20% with Cobb‐
Douglas production in Table 4 but by only half that much with CES = 0.5. The applied
substitution literature generally uncovers weak substitution consistent with this range of CES.
Conclusion
The present model predicts there will be substantial income redistribution due to
changing prices of services industries with free trade in the Trans‐Pacific Partnership. The
potential income redistribution from changing prices in services alone is perhaps larger than
may be appreciated. Anticipating the losers as well as the winners may facilitate policy to ease
the transition to free trade that raises but redistributes income.
The present simulations project unskilled wages will fall in the US and Canada, and
especially in Indonesia and Taiwan. Skilled wages will rise in the same four countries but fall in
Australia. Medium skilled wages will rise across all countries and especially in Indonesia,
Taiwan, and the US. Capital returns in communications and financial services will adjust
substantially according to the export opportunities or import competition. Rising incomes will
increase demands and prices of non‐traded services, accounting for a good deal of this income
redistribution.
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As an example of the viability of the present simulations, the growing US wage gap
between skilled and less skilled labor during recent decades was routinely predicted by factor
proportions models. Domestic tax policy could have mitigated the increasing wage gap due to
the increasing imports of labor intensive manufactures. While trade raises aggregate income,
anticipating income redistribution will be critical to the political success of TPP.
The income redistribution among labor skills in the present simulations will be only the
starting point as countries around the Pacific Rim integrate through regional trade and
investment. Adjusting capital returns will affect investment and exacerbate the present income
redistribution. The present models suggest services will play a critical role in trade and
development around the Pacific Rim.
References
Allen, R. G. D. (1938) Mathematical Analysis for Economist, MacMillan. Chang, Winston (1979) “Some Theorems of Trade and General Equilibrium with Many Goods and Factors,” Econometrica, 09‐26. Francis, John and Henry Thompson (2009) “Tariff Elimination and the Wage Gap in an Industrial Specific Factors Model,” Review of International Economics, 447‐60 Jones, Ron (1965) “The Structure of Simple General Equilibrium Models,” The Journal of Political Economy, 557‐572. Jones, Ron (1971) “A Three‐Factor Model in Theory, Trade, and History,” in Jagdish Bhagwati, et al (eds) Trade, Balance of Payments, and Growth: Papers in International Economics in Honor of Charles P. Kindleberger, North‐Holland. Malki, Mostafa and Henry Thompson (2014) “Morocco and the US Free Trade Agreement: A Specific Factors Model with Unemployment and Energy Imports,” Economic Modelling, 269‐74. Mayer, Wolfgang (1974) “Short and Long Run Equilibria for a Small Open Economy,” Journal of Political Economy, 955‐67.
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Mussa, Michael (1974) “Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run,” Journal of Political Economy, 1191‐203. Neary, Peter (1978) “Short‐Run Capital Specificity and the Pure Theory of International Trade,” Economic Journal, 488‐510. Samuelson, Paul (1971) “Ohlin was Right,” Scandinavian Journal of Economics 4, 365‐84. Takayama, Akira (1982) “On Theorems of General Competitive Equilibrium of Production and Trade ‐ A Survey of some Recent Developments in the Theory of International Trade,” Keio Economic Studies, 1‐37. Thompson, Henry (1989) “Do Tariffs Protect Specific Factors?” Canadian Journal of Economics
(1989) 406‐12.
Thompson, Henry (1994) “An Investigation into the Quantitative Properties of the Specific Factors Model of International Trade,” Japan and the World Economy, 375‐88. Thompson, Henry (1995) “Factor Intensity versus Factor Substitution in a Specified General Equilibrium Model,” Journal of Economic Integration, 283‐97. Thompson, Henry (1996) NAFTA & Industrial Adjustment: A Specific Factors Model of Production in Alabama, Growth & Change, 3‐28. Thompson, Henry (1997) “Free Trade and Income Redistribution across Labor Groups: Comparative Statics for the US Economy, International Review of Economics & Finance, 181‐92. Thompson, Henry (2004) “Robustness of the Stolper‐Samuelson Factor Intensity Price Link,” in Handbook of International Trade, edited by Kwan Choi, Blackwell. Thompson, Henry (2005) “Income Redistribution, Trade Prices, and International Capital in
Simulated Trade Models,” in WTO and World Trade: Challenges in a New Era, edited by Geunter
Heiduk and Kar Yiu Wong, Springer Verlag.
Thompson, Henry (2006) “The Applied Theory of Energy Substitution in Production,” Energy Economics 28, 410‐425. Thompson, Henry (2015) www.auburn.edu/~thomph1/TPP.xlsx Thompson, Henry and Hugo Toledo (2001) “Bolivia and South American Free Trade,” The International Trade Journal, 113‐26.
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Thompson, Henry and Hugo Toledo (2005) “FTAA and Colombia: Income Redistribution across Labor Groups,” International Review of Economics and Finance, 203‐12. Thompson, Henry and Hugo Toledo (2007) “General equilibrium production with constant elasticity of substitution,” Keio Economic Studies, 27‐36. World Economic Forum (2015) http://reports.weforum.org/global‐competitiveness‐report‐
2014‐2015/
World Input‐Output Database of the EU (2015) www.wiod.org/new_site/data.htm
Table 1. Countries
TPP Interested
Austraila AUx China CHm
Canada CNx Indonesia INm
Japan JPx Korea KOm
United States USx Taiwan TWm
Mexico MXm
Table 2. Industries
Services Manufacturing
Utilities UTN Food FD
Construction CNN Textiles TX
Motor Vehicle MVN Leather LT
Wholesale WHN Wood WD
Retail RTN Paper PR
Hotels, Restaurants HRN Coke CK
Inland Transport TIN Chemicals CH
Water Transport TWN Plastics PL
Air Transport TAN Minerals ML
Transport Services TSN Metals MT
Communication CMT Machinery MC
Financial services FNT Electrical EL
Real Estate RED Transport Equip TQ
Rental RND Other Mfg OM
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Public PBD
Education EDD Resource
Health HLD Agriculture AG
Social SCD Mining MN TTraded NNon‐traded DDomestic
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Table 3. Comparative Static Price Elasticities of Wages
CM FN CM FN CM FN
AUx CNx JPx
wS ‐0.006 0.032 0.020 0.056 ‐0.006 0.032
wM 0.006 ‐0.001 ‐0.0003 ‐0.005 0.006 ‐0.001
wL 0.018 0.013 0.001 0.068 0.018 0.013
USx MXm CHm
wS 0.015 0.016 0.003 0.010 0.036 0.015
wM ‐0.014 ‐0.031 0.002 0.004 0.009 0.011
wL ‐0.002 0.008 ‐0.002 ‐0.008 ‐0.001 ‐0.001
KOm IDm TWm
wS ‐0.001 0.001 0.018 ‐0.020 0.008 0.009
wM 0.006 0.003 0.010 ‐0.061 0.010 ‐0.122
wL 0.013 0.044 ‐0.026 0.144 ‐0.011 0.153
Table 4. Income Redistribution due to TPP Price Changes
AUx CNx JPx USx
wS ‐3.07 4.73 1.97 6.06
wM 4.78 4.86 5.72 10.4
wL 7.60 ‐2.80 7.69 ‐1.21
rCM 32.1 33.3 23.6 35.4
rFN 37.1 39.4 29.4 39.3
MXm CHm KOm IDm TWm
wS ‐0.68 ‐0.38 0.29 10.1 7.74
wM 1.77 3.19 7.81 18.7 23.9
wL 2.87 0.04 9.81 ‐37.0 ‐23.7
rCM ‐27.4 ‐26.1 ‐55.7 ‐46.4 ‐43.8
rFN ‐26.6 ‐27.7 ‐42.4 ‐24.6 ‐44.8
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Figure 1. Exporters versus Importers
Figure 2. Factor Shares in Communications CM
0
1
2
3
4
5
6
AU CN JP US MX CH ID KO TW
y GCI Internet Finance
0
0.2
0.4
0.6
0.8
1
AU CN JP US MX CH ID KO TW
K S M L
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Figure 3. Factor Shares in Financial Services FN
Figure 4. Industry Shares in Communications CM
0
0.2
0.4
0.6
0.8
1
AU CN JP US MX CH ID KO TW
K S M L
0.00
0.01
0.02
0.03
0.04
0.05
AU CN JP US MX CH ID KO TW
S M L
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Figure 5. Industry Shares in Financial Services FN