In defense of the "free trade is always good" proposition,
In the ring, Dani Rodrik stumbles into a knockout punch from Don Boudreaux:
Don Boudreaux:
...If it's true that theory and evidence in favor of protectionism are sufficiently strong to warrant economists abandoning their conclusion that free-trade policy is generally sound, then why shouldn't economists -- led by Dani Rodrik -- also start exploring the potential benefits of intra-national protectionism? Surely a scholar not benighted with the free-trade "faith" ought to take seriously the possibility that, say, Tennesseeans could be made wealthier if their government in Nashville restricts their ability to trade with people in Kentucky, Texas, Rhode Island, and other states?...
I suspect that if someone proposed to Dani Rodrik that he explore the wealth-creating potential of state-level protectionism, he would refuse. He would likely (and correctly) say that it's ridiculous on its face to suppose that such protectionism would make the people of Tennessee as a group wealthier over time...
I score this for Don: a knockout.So in order to defend the hypothesis that mercantilism might be sound policy, I must attempt to smack down Brad DeLong (always a dangerous endeavor). Very clever,
The argument that Boudreaux uses is this: "If mercantilism is good policy at the nation level, why isn't it good policy at the U.S. state level?" DeLong finds this argument convincing. I do not, because I think it conflates two very different notions of what "good policy" means.
Suppose that trade policy is like a Prisoner's Dilemma game between two countries, where "cooperating" represents free trade and "defecting" represents mercantilism. The outcome that maximizes the total payoff - the Pareto optimal outcome - is for both countries to adopt free trade. But mercantilism is a dominant strategy.
Applying this conjecture to the case of U.S. states, there is a federal government that explicitly disallows states from pursuing most mercantilist policies (export subsidies, import taxes, etc.), thus forcing the Pareto-optimal outcome. But there is no world government, so nations should be mercantilist, since it is rational to play dominant strategies. As a result, in this conjectured world, it is perfectly reasonable to disallow mercantilist policy at the state level while pursuing it at the national level. Thus, DeLong and Boudreaux's point does not seem obviously right to me, since there may be strategic aspects to international trade.
Now, you may ask, in what model would trade policy really be a Prisoner's Dilemma? Well, I can think of one off of the top of my head - the New Economic Geography, my favorite development theory. In the international-trade version of this theory, countries undergo development one by one, not all at the same time. Beginning a development explosion requires investment from developed nations. Thus, whichever country with the lowest unit labor costs in the exportable goods sector (net of transport costs) will be the first to develop. In this world, undeveloped countries can compete to be the next country to develop, by subsidizing their exports (even though this subsidy can create a global inefficiency). Trade policy is a Prisoner's Dilemma between undeveloped nations.
I am not claiming that this is the world in which we live (but it might be!). I am simply making a point: Just because a world of free trade is the best possible world doesn't mean that free trade policy is always optimal for a country to adopt. I have not made an airtight case for mercantilism in this post, but I think I've addressed one of the main arguments against it.
Didn't Dani Rodrik also make the point that imposing first-best policies in second-best world conditions would lead to the worst of all worlds? It seems to me that a very strong point of Rodrik's (which I have not seen DeLong or others address) is that pining away for first-best policies when the conditions for first-best policy success does not exist is not very sound. The point of "One Economics, Many Recipes" seems to me to be that second-best policies are how anything ever gets done - including the U.S.
ReplyDeleteMerchantilism may make sense if a country's goal is not to maximize the real incomes of it's workforce but rather to maximize the nations world power. If you were running China and wanted China to be a world power capable of challenging the US - it might make perfect sense to hold down domestic consumption and steer the surplus into building up foreign exchange reserves. Foreign exchange reserves certainly make more sense than an arms race building aircraft carriers.
ReplyDeleteWhen you hear the phrase "free trade is always good", you should ask good for who, and in what way?:
ReplyDeletehttp://www.vanderbilt.edu/econ/faculty/Driskill/DeconstructingfreetradeAug27a2007.pdf
And on free trade within the US itself:
http://www.interfluidity.com/v2/79.html
Trade theory appears to ignore real option value.
ReplyDeleteHome, specialising in the manufacture of cloth, has options for developing many other manufactures, some of which may be of high value.
Foreign, specialising in wine, could produce other land-based products. But these are less suited to Foreign's climate than is wine (or Foreign would grow them already), and/or subject to greater competition than are manufactures. Foreign is stuck in a development trap, unless it invests the proceeds from selling wine in building a manufacturing sector.
Erik Reinert makes this point at length in "How Rich Countries Got Rich ... and Why Poor Countries Stay Poor."
US counties recognise the point: even if states are prohibited from offering subsidies to manufacturers, counties are not. And they do offer them.
You know, it would also be privately optimal for people with last names starting with "A" to confiscate the property of "S" people. I consider this an important contribution to our thinking about the advisability of name-based expropriation.
ReplyDeleteYES! Protectionism works! Ask China! Chinese average taxes on imports are 27% -- US taxes on imports average 1%!
ReplyDeletePLUS! Local protectionism in China over the last three decades was enormously helpful. Andrew Wedeman has a chapter on this for the Chinese auto industry.
Free trade is a TOTAL DISASTER: ask Poland-Lithuania and the Dutch Republic how they fared in the 1700's against mercantilist England and Prussia.
Liberalism is the ideology of losers. China trumps the US; Germany trumps 19th century England; 18th century England trumps the Dutch Republic.
QED
Work for what? Back when you needed a pot of gold to keep an army in the field it worked.
ReplyDelete"[I]n fact, it is often said that free trade is the only area of policy where economists agree." Indeed, and as Krugman and Wells remark in their introductory textbook, "What's striking...is that many non-economists disagree: tariffs and import quotas to keep out foreign-produced goods are favored by many voters." Some economists, including possibly Krugman and Wells, find this state of affairs perplexing, but it isn't really. As commenter #3 points out, the question about free trade is, good for whom? What many Americans know or at least believe about free trade is that it has cost their jobs or cut their wages.
ReplyDeleteYou're making the point that free trade isn't necessarily the best strategy for a country even by aggregate standards. That's a good point, and I'm surprised it isn't already widely appreciated. I'd also like it to be widely appreciated that arguing for policies on the basis of their aggregate effects without attention to how their benefits and costs are distributed is folly. It isn't just that the great unwashed masses don't understand economics, bless their hearts. It's that there's no good reason for them to support policies that in practice tend to make the rich richer and the poor poorer, even if they're great for some other overall figure of merit.
I think the states argument is a cop out. For this to be a reasonable comparison we would also have to insist that workers from Tennessee get work permits and visas if they wish to get a job in Kentucky. In fact, it is really the notion that we have such strong protectionism over immigration that shows the big lie that is free trade. Why should underwear have more freedom than a human being?
ReplyDeleteInteresting post but I don't feel like you actually addressed the question. Sure, the states are in one big free trade zone because the Constitution requires it. But the states (a) agreed to that condition and (b) could, if motivated, change it via the amendment process. For over 200 years, it has stood. If the economics of mercantilism were so obvious, why has that provision been so robust? I think that's the question that was being asked, and I think you didn't really speak to it.
ReplyDeleteNicely argued! I think that Brad has, in fact, been smacked.
ReplyDeleteSRW's argument referred to by anonymous 6:33 isn't nearly as good, because it just argues that free trade between states does not exist in point of fact, and does nothing to refute the conventional normative judgment.
"If the economics of mercantilism were so obvious, why has that provision been so robust?"
ReplyDeletePlease note that this wasn't really true; see Brad Delong's comments on meat packing in Chicago for an example (can't find the link). Basically, powerful interests had to use their leverage over the Federal government to override many state and local laws.
And that's on top of informal local and state actions, where there might not have been written laws, but.........
It could be argued at the national level, that many businesses want to act morally towards their workforce (pay them a fair wage, don't endanger or pollute them, don't discriminate against them etc). However, in a market, companies tend to compete on price and quality of product, not on the standards of working conditions, and workers often have little choice in where they work.
ReplyDeleteThis means that such businesses end up being out-competed by more cut-throat competitors who don't care for the well-being of their work force.
So on a national level we have a government that we (normally) demand act to protect workers. This allows those businesses that want to act morally, to do so.
But with free trade, this is jeopardized as companies can outsource to countries with lower labour standards. This problem is exacerbated by the existence of unfree countries such as China, where workers can't organize to protect themselves.
In other words, even with the development issues raised in the post above, standard free trade can result in a worse than best outcome. To get a better outcome, you would need a super-national body to set labour standards.
Why do you imagine that mercantilism is beneficial for either nation? Blocking the import of sugar, as we do now, for example, does not benefit Americans. It benefits only American beet-sugar farmers.
ReplyDeletethis is a long-horizon repeated game. the prisoner's dilemna is probably irrelevant in that case.
ReplyDeleteAnonymous said: "this is a long-horizon repeated game. the prisoner's dilemna is probably irrelevant in that case."
ReplyDeleteThis is only true if decision makers are capable of thinking about long time horizons. Personally, not convinced that they are.
Gilroy0 said: "Interesting post but I don't feel like you actually addressed the question. Sure, the states are in one big free trade zone because the Constitution requires it. But the states (a) agreed to that condition and (b) could, if motivated, change it via the amendment process. For over 200 years, it has stood. If the economics of mercantilism were so obvious, why has that provision been so robust? I think that's the question that was being asked, and I think you didn't really speak to it."
This doesn't make any sense to me. There might be an incentive for states to cheat, depending on how difficult/risky cheating is. Turns out it won't work in the legal system we currently have. There is, however, very little if any incentive that I can identify for states to move away from the globally optimal situation they currently find themselves in.
Time has come for a global tax system because beggar thy neighbour paradigms such as mercantilism cause loss of income globally.
ReplyDelete