Sunday, August 09, 2009

International Trade in Used Durables is a Substitute for "Cash for Clunkers"

As Lucas Davis and I document in this July 2009 paper, we already have a "Cash for Clunkers" program in place. It is called international trade in used durables. The U.S has been shipping millions of old, dirty vehicles to Mexico. We use an extensive data set on recent U.S/Mexico trade under NAFTA to document the patterns of used vehicle exports and investigate this trade's environmental consequences. The reason the posted paper does not have our names on it is because it is under review at a journal that wants the papers "blind". We document a classic "Roy Model" effect. Do you know the joke of the guy who transfers from Harvard to Yale and lowers the grade point average at both schools! We find this effect. When the U.S exports used vehicles to Mexico, average emissions decline in BOTH nations! The marginal U.S export is dirtier than the average u.s vehicle but is cleaner than the average Mexican vehicle. Nice! Now, to know how these exports affect total greenhouse gas emissions we need to know how many miles Mexicans drive with these vehicles and how long these vehicles live there. These are hard parameters to know but we do some back of the envelope calculations on that point.

The patterns we document are just the tip of the iceberg. All over the world, LDC citizens are using old durables to enjoy the same flow of services that we take for granted. Scrappage of older vintages would increase overall energy efficiency but would deny these individuals the access to cheaper products.

There are some interesting distributional issues here. The Cash for Clunkers will displace a fair bit of the exports to Mexico. The winners will be used vehicle owners in the U.S and new vehicle owners in the U.S. Owners of vehicles who receive $4,500 get a lot more than if they sold their vehicle to a middleman who turns around and sells it to Mexico. The losers will be poor people in the U.S and Mexico who will now face a higher price for purchasing low quality vehicles. How much higher? I expect to see some hedonic pricing papers soon using an event study methodology. Is environmental quality helped or hurt by disrupting this pattern of trade? Read our paper to see our views. The U.S tax payers will also have to pay higher taxes to pay for this program. There is the usual deadweight loss caused by this taxation.