A progressive logic of trade

Dani Rodrik CAMBRIDGE – The global trade regime has never been very popular in the United States. Neither the World Trade Organization nor the multitudes of regional trade deals such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) have had strong support among the general public. But opposition, while broad, was diffuse. The difference today is that international trade has moved to the center of the political debate. The US presidential candidates Bernie Sanders and Donald Trump have both made opposition to trade agreements a key plank of their campaigns. And, judging from the tone of the other candidates, standing up for globalization constitutes electoral suicide in the current political climate. Following this year’s reform-free IMF meeting, former Fund official Ashoka Mody sizes up the best thinking about its post-crisis challenges. The populist rhetoric on trade may be excessive, but few deny any longer that the underlying grievances are real. Globalization has not lifted all boats. Many working families have been devastated by the impact of low-cost imports from China and elsewhere. And the big winners have been the financiers and skilled professionals who can take advantage of expanded markets. While globalization has not been the sole (or even the most important) force driving inequality in the advanced economies, it has been a contributor. What gives trade particular political salience is that it often raises fairness concerns in ways that the other major contributor to inequality – technology – does not. When I lose my job because my competitor innovates and introduces a better product, I have little cause to complain. When he does so by outsourcing to firms abroad that do things that would be illegal here – for example, prevent their workers from organizing and bargaining collectively – I may have a real gripe. Sanders has forcefully advocated the renegotiation of trade agreements to reflect better the interests of working people. But such arguments immediately run up against the objection that any standstill or reversal on trade agreements would harm the world’s poorest, by diminishing their prospect of escaping poverty through export-led growth. “If you’re poor in another country, this is the scariest thing Bernie Sanders has said,” ran a headline in the popular and normally sober Vox.com news site. But trade rules that are more sensitive to social and equity concerns in the advanced countries are not inherently in conflict with economic growth in poor countries. Globalization’s cheerleaders do considerable damage to their cause by framing the issue as a stark choice between existing trade arrangements and the persistence of global poverty. And progressives needlessly force themselves into an undesirable tradeoff. First, the standard narrative about how trade has benefited developing economies omits a crucial feature of their experience. Countries that managed to leverage globalization, such as China and Vietnam, employed a mixed strategy of export promotion and a variety of policies that violate current trade rules. Subsidies, domestic-content requirements, investment regulations, and, yes, often import barriers were critical to the creation of new, higher-value industries. Countries that rely on free trade alone (Mexico comes immediately to mind) have languished. That is why trade agreements that tighten the rules are in fact mixed blessings for developing countries. China would not have been able to pursue its phenomenally successful industrialization strategy if the country had been constrained by WTO-type rules during the 1980s and 1990s. With the TPP, Vietnam gets some assurance of continued access to the US market (existing barriers on the US side are already quite low), but in return must submit to restrictions on subsidies, patent rules, and investment regulations. Second, there is nothing in the historical record to suggest that poor countries require very low or zero barriers in the advanced economies in order to benefit greatly from globalization. In fact, the most phenomenal export-oriented growth experiences to date – Japan, South Korea, Taiwan, and China – all occurred when import tariffs in the US and Europe were at moderate levels, and higher than where they are today. So, for progressives who worry both about inequality in the rich countries and poverty in the rest of the world, the good news is that it is indeed possible to advance on both fronts. But to do so, we must transform our approach to trade deals in some drastic ways. Dani Rodrik is Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government. Copyright: Project-Syndicate.

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A progressive logic of trade