Author: Vincent Geloso

Such a title might scare some of my fiscally hawkish readers who have – rightfully – identified me as a fiscal hawk. However, I really do believe that the information conveyed by debt/GDP ratios is only “trivial”. The information that holds more value to my eyes is government revenues as a share of GDP and debt as a share of government revenues.

These two pieces of information convey the most importants regarding solvency. If a country has a debt that is equals to 100% of its GDP, but whose government revenues are only 10% of the economy, then things are not as bad as they look. It means that this country might be able to tax more without hampering economic growth. However, if another government has a debt standing also at 100% of GDP but whose revenues already represent 50% of GDP, there is considerably less room for collecting ressources to pay the debt without hampering economic growth (hence obtaining less revenues than projected). I have written on this issue in the past (with Quebec in mind) and I believe it might be time to refocus the technical debate on these pieces of information rather than only Debt/GDP ratio.

Have you heard of the Doha round of trade liberalization in recent times? To be very honest, I have not either and its no surprise since it is dead. So if this round of trade liberalization negociations is dead, how do we pursue the reductions in trading barriers? The alternative often presented are Preferential Trade Agreements (PTAs). Under PTAs, two countries will negociate a free trade deal between the two of them (maybe more). They will reduce non-tariffs barriers and tariffs barriers for goods they produce. However, this is not free trade, it is managed trade.

Changing the value of trade barriers between two countries might just change relative prices. If the United States dropped their tariff on tires coming from China, but not India (who might be a more efficient producer of tires than China), production in China will increase but it will not increase overall and prices for imported tires may not decline as much as they could. This is why PTAs are not free trade, they are managed trade and they distort international trade. Moreover, such agreements are also subjected to “regulatory capture” with interest groups (lets say tires producers in China competing with Indian producers) convincing governments to pursue such a policy. Hence PTAs are mostly beneficial to certain industries in the participating countries and not as much as they could for consumers (and some argue detrimental).

Multilateral negociations can also block quite easily as we have seen with the Doha round of negociations, so how can we pursue trade liberalization? I think this 1998 paper by Sebastian Edwards might be quite insightful because it concerns the strategy of unilateral trade liberalization that Chile followed. The country chose to create a uniform tariff that would be applied on every good and services imported rather than negociating reductions for X and Y goods. Razeen Sally in an ECIPE paper also underlines quite intelligently how several developping countries (in East Asia) have opted to liberalize – unilaterally.  Of course I am biased in favour of such a policy since in the past, I have written in favour of using this approach in Canada (especially with regards to agricultural supply management schemes).

Here is my most recent interview on CHOI Radio X in Quebec city (in french) on the issue of the American debt ceiling debate, if you wish to consult it click on “Crise sur la dette aux États-Unis”.