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This edition was written by Alex Conner, Tristan Loa, Georgia Nabors, and David Wessel.
Examining the impact of U.S. tariffs on manufacturing from 1870 to 1909, Alexander Klein of the University of Sussex and Christopher Meissner of the University of California, Davis find no evidence that higher tariff rates increased labor productivity in the manufacturing sector during this period. On average, tariffs increased the number of workers employed, total output, and value-added of manufacturing firms. They also increased entry of new manufacturing establishments, which led to a reduction in the average firm size. The authors conclude that tariffs reduced international competition, enabling smaller, less efficient firms to enter and operate. They also argue that powerful firms likely lobbied for inefficient trade protection policies.
Using confidential U.S. Census Bureau data from 1997 to 2007, Nicholas Bloom of Stanford and co-authors find that local labor markets more exposed to Chinese imports experienced larger shifts from manufacturing to service jobs. Most of the manufacturing losses occurred within firms that simultaneously cut employment in their manufacturing operations and expanded employment in services. High human capital areas, such as much of the East and West Coast, experienced significant job gains as a result of the China Shock, as increases in service sector jobs more than compensated for losses in manufacturing jobs. In contrast, regions with lower human capital and a high dependence on manufacturing, such as much of the South, faced plant closures with few offsetting gains in service jobs. The China Shock, the authors argue, redistributed jobs from manufacturing in lower-income areas to services in higher-income, higher-human capital areas, but did not reduce overall employment.
Kevin Corinth of the American Enterprise Institute, David Coyne and Craig Johnson of the U.S. Treasury, and Naomi Feldman of Hebrew University use confidential U.S. tax return data to compare two major place-based tax policies: the New Markets Tax Credit (NMTC) and Opportunity Zones (OZ). Both policies restrict investment to eligible low-income census tracts, but OZ investors decide in which tracts to invest while the Treasury picks where the NMTC money is invested. Total OZ investment is unlimited; total NMTC investment is capped by law. From 2019-2022, investors put $82 billion into OZs while just $13 billion was invested through the NMTC. The authors find that 65% of NMTC investments and 49% of OZ investments were allocated to the bottom quintile of census tracts ranked by median income. But they also find that the OZ program increased investment in areas that were already drawing rising private investment, often tracts in more prosperous counties and high-growth regions, suggesting that OZ investment would have occurred even without the program.
"Global cooperation and the integration of global markets, in particular, were instrumental in driving decades of world growth. For many low-income countries and emerging markets, this integration into the global economy was a crucial contributor to their development. It provided them access to affordable imports, extensive export markets, and foreign technology. Now, however, geo-economic fragmentation is weighing on the outlook for global growth," says Shaktikanta Das, Governor of the Reserve Bank of India.
"The geopolitical risk index has spiked sharply in 2024 amidst increases in trade restrictions and financial sanctions. This has reversed the substantial benefits from global economic integration. There are now fears of de-globalization and increasing regionalization. This could dampen the convergence of emerging and developing economies to better living standards. Geopolitical risks are also imparting heightened volatility to capital flows and asset prices. They are also undermining the efficiency of the global payments systems.
Finally, there is the apprehension that if geo-economic fragmentation continues unabated, countries may seek to become less reliant on the international financial infrastructure and global standards. Fragmentation of the international monetary system could have serious implications for markets. New parallel systems that lack inter-operability may emerge, which means higher transaction costs and other inefficiencies. Strengthening crisis preparedness to deal with the fallout from these tensions, including unanticipated ones, should be a policy priority for emerging market economies. The global financial safety net must be reinforced through mutual agreements between countries. This may include regional safety nets, currency swaps, fiscal mechanisms, and precautionary credit lines from international financial institutions. If these things do not happen, emerging economies will have to substantially augment their own safety nets and buffers."
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