"The NYT Doesn’t Get It on Trade"

Dani Rodrik has managed to be able to debunk the economic orthodoxy, most notably in his area of expertise, namely trade and development, and still retain the respect of his peers. Of course, having tenure at Harvard (Kennedy School) doesn’t hurt. But Rodrik is also unfailingly articulate, fair-minded, and rigorous.

His latest post takes issue with a New York Times editorial today bemoaning the protectionist leanings of the leading Democratic Presidential candidates. Rodrik correctly points out that questioning our current trading arrangements or seeking better trade outcomes for the US isn’t protectionist.

In an earlier, and important post, Rodrik pointed out that the economic benefits of trade were almost certainly exaggerated by its advocates. Mind you, no one is saying free trade doesn’t produce gains in national incomes, but those gains are typically accompanied by dislocation and redistribution of wealth. That’s why the great unwashed economically illiterate are unhappy about it. They have legitimate issues that aren’t acknowledged until a backlash develops. Moreover, other countries seem to play the game to reach other objectives, namely, produce trade surpluses and protect their workers (via attenuating the disruptive effects of trade liberalization) while the US gives top priority to promoting corporate growth and profits. Those objectives bear examination.

From Rodrik:

The New York Times bemoans the lack of support that the existing trade regime gets from the field of Democratic presidential candidates:

Many Americans are experiencing economic anxiety. Wages for most workers are going nowhere. It is a sad fact that despite enormous gains in productivity over the past few decades, the wages of typical workers are only marginally higher than they were a quarter of a century ago. But throttling trade — say, by reconsidering existing agreements — would hurt a lot more people than it helped. There is scant evidence that trade has played a big role in holding down typical workers’ wages. There is abundant evidence that it has contributed substantially to America’s overall economic growth. It offers American producers access to foreign markets. It multiplies choices for producers and consumers. Foreign competition spurs productivity growth at home.

Trade, like technological change, can produce wrenching dislocations that hurt some workers. But trade barriers are not the proper tool to deal with these changes. What is needed is a bold strategy to rebuild a functioning safety net, deploying some of the vast wealth this nation has gained through globalization to assist those hurt by the forces of economic change. This will allow Americans to embrace globalization, rather than fear it.

Here’s what’s wrong with this argument:

1. It automatically equates any desire to reconsider trade agreements and take a breather on new agreements as “protectionist.”

2. It fails to recognize the ways in which technology and globalization interact to contribute to unequalizing trends in incomes, taking refuge in the defensive statement that “There is scant evidence that trade has played a big role in holding down typical workers’ wages.”

3. It follows up this statement with “There is abundant evidence that it has contributed substantially to America’s overall economic growth,” ignoring what every student of trade learns, which is that large gains from trade are possible only of there are also large amounts of income redistribution.

4. In portraying the conflict as purely one over incomes, it overlooks what is the greatest strain in the present regime of globalization–namely, the incompatibility between the scope of markets (straining to become global) and the scope of regulatory institutions (still national).

5. And as a consequence, rather than accept the need to rethink the existing rules of the game, the editorial takes refuge in the same stale recommendations that every trade liberalizer has been offering for the last quarter century at least–more safety nets, better training, and more progressive income taxation.

I do think those items in the NYT’s policy agenda have an important place on the policy agenda. My earlier book Has Globalization Gone Too Far? was largely about the need for a serious social-insurance complement to the trade agenda. But it is also time to recognize that the WTO rules need to become much more flexible to provide a better balance between international trade and domestic regulatory and other policy priorities–in other words, to assure domestic electorates that their values and preferences are not being sacrificed to the demands of some globalization agenda constructed, in any case, by a narrow elite.

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  1. Anonymous

    Bah humbug to this article! We need fair trade far more than free trade. Until we start manufacturing again, products that the world wants, dollars will continue to fly out of America, and come home to roost in an inflationary tidal wave that kills everyone.

  2. Anonymous

    I have a Christmas wish. Here it is. Every time the phrase “free trade” is used, it should be divided,for the purposes of the subsequent argument, into 2 components. The first is LABOR ARBITRAGE, the second COMPARATIVE ADVANTAGE. We all know the advantages of the second element – someone has a resource unavailable to us, a skill set or technological advantage which we lack, resulting in economic goods which we desire but cannot (or cannot as efficiently ) produce. I would like to see
    a well reasoned argument on the domestic economic advantage of labor arbitrage, when the flow is so nearly unidirectional (out).

  3. lambert strether

    Let me rephrase that “labor arbitrage” argument in more simplistic terms.

    Keynes said: “In the long run, we’re all dead.”

    So, tell me again why I care about “the economy,” which is long run, versus my personal economy, which is here and now?

    Especially when no matter how much harder I work for the sake of “the economy,” nothing changes, except for the worse?

  4. NC Jim

    someone has a resource unavailable to us, a skill set or technological advantage which we lack

    This is intuitive but what is not intuitive but equally true is that comparative advantage also works when both trading parties have high skills or technology. There is still an advantage to have the highest skilled partner do the production.

    Another observation. I am a student of wordsmithing, probably from the comedian George Carlin who is great at word usage (his description of the “death” tax as opposed to the “estate” tax is priceless and informative as the value of words in politics). Thus I notice that ,when income moves down the social classes, the Right calls it “income redistribution” or maybe “socialism” whereas ,if income moves up the ladder, it is called productivity (“right sizing” never “down sizing”) or free trade. I am sure you could think of many other examples of labels confusing reality (pro-life and pro-choice are not opposites (one can easily be both) but are presented that way).

  5. Anonymous

    In the least few months, and increasingly in the last few weeks, I’ve sensed a lot more dissatisfaction in this country with widening economic inequality. The blame seems to be pointed part at Wall St. run amok and part at “globalization.” (And if that word itself isn’t a great semantic turn, a la the ones referenced above. I mean, who could be so small-minded to be against “globalization”?). The “free trade” orthodoxy spouted by the New York Times was endorsed by both the Clinton and the Bush administrations (maybe on the advice of Goldman Sachs, et al.- er – I mean Sec. Rubin and Sec. Paulson). Maybe that’s why Hilary and Mitt are sinking. Eight more years of this kind of “free trade” and we’ll be living in a Northern Hemisphere verion of Brazil (both the movie and the country…).

  6. Juan

    anon @ 8:09 AM,

    Rather than accept comparative advantage as more than theoretically valid, it may be better to think of it as an ideological means to justify unequal exchange between more and less developed nations, i.e. an exchange in which the former obtain more for less and that this is dependent on an arbitrage between different average standards of living which includes and forms a basis to labor arbitrage.

    The history of the comparative advantage argument, from Ricardo to the present, is interesting, especially when it failed to hold in fact even during Ricardo’s time (Portugal, rather than gaining became locked into a series of impoverishing agreements with England and a net transfer from both itself and its then colony, Brazil; became locked into a relation of unequal exchange).

    In short, the U.S. and other developed nations have for a long time gained through the exchange of less value for more, i.e. there’s been net transfer of labor value from less to more developed*, something that the attached approaches via a terms of trade argument but can be more developed and need take account of the supranational aspects of transnational firms.

    When development, or maintainance, of one standard of living has become dependent on undevelopment elsewhere it might say something about limits.


  7. john c. halasz


    Assuming that “ideology” means a distortion or misrepresentation of norms and their factual conditions of application, such that there is a fraction of truth wrapped up in its lie, then there’s no contradiction between a component of functional validity to comparative advantage and the obscuring of ancillary or different effects of trade. That each country is most advantaged by concentrating its production effort in sectors where it has a higher relative labor productivity and exchanging a portion of that output with counterparty countries that have complementary relative labor productivity advantages might be true in terms of the overall increase in net distributable surplus production, while nonetheless the distribution of such gains might be highly unequal, domestically and internationally. Similarly, while formal equality of exchange and legal equality of rights and freedoms in terms of defined property-interests might be both functional and ideological conditions of capitalist exploitation of labor, that does not mean eo ipso that unequal exchanges might not be mutually, if inequitably, advantageous. (As Joan Robinson put it, worse than being an exploited laborer might be being an unexploited, i.e. unemployed, laborer.) Needless to say, that does not rule out either the organization of surplus violence to “guarantee” returns on invested capital and loans and re-enforce complicit local elites that operate in terms of such legal “norms”. But, on the other hand, developed economies, virtually by definition, are those with advanced technical endowments of capital, infrastructure, skills, legal-administrative systems and internally differentiated markets, whereas underdeveloped economies lack the technical know-how and infrastructure and the internally differentiated value-generating-and retaining structures to develop their resources, which, in fact, are often valorized as resources only in terms of the international markets dominated by developed nations and their corporations. It’s that large gap in labor productivity/standards-of-living and the corresponding technical and “competitive” barriers to entry that make for highly unequal terms of trade. Paradoxically, precisely because developed economies need the gains from trade much less than underdeveloped ones, their capacity to negotiate and capture gains from trade is correspondingly greater. So, yes, there is an unequal exchange of value going on, but only at the highly abstracted level of aggregate surplus-value analysis is it an unequal exchange of labor-values: more immediately developed labor “commands” a higher value that underdeveloped labor. (This is a somewhat different issue than the environmental/ecological despoilation deriving from unchecked resource-extraction, which, while not really abstractable from labor-and-exchange values and their unequal power-relations, is analytically distinct from them). Bluntly put, the extent to which the “development or maintenance of one standard of living has become dependent on underdevelopment elsewhere” might not be anywhere apparent within the developed system of exchange values.

    Labor arbitrage, which ii some sense and degree always occurs under capitalism, both domestically and internationally, is a different matter from gains from international trade via comparative advantage, however unequal the capture of such gains, even if intersectoral changes due to trade alter distributions of income and may offer further opportunities for labor arbitrage through the enhancement of the power of capital. Labor arbitrage, even if it involves relative gains to lower wage workers, does not involve any increase in the real distributable surplus product, but rather only alters the division of the surplus product between labor and capital, which, while via monetary illusions might appear as changes in nominal prices and increases in the “value” of financial assets/returns to capital, is not a real aggregate gain. In fact, when MNCs transfer production technology to offshore platforms in China or elsewhere to take advantage of low wage labor and cut their production costs, no real net gain in production occurs in aggregate, but rather losses to developed labor outweigh gains to underdeveloped labor,- (not to mention ancillary effects of regulatory and tax arbitrage),- such that, while short-run profits increase, the valorization of capital by labor, which must not only operate the production process that capital provides, but must sufficiently consume the output of production to provide adequate effective demand for the realization of capital investments from the revenue of sales, is increasingly put in doubt. In fact, wage pressures that incentivize technical improvements in capital stocks diminish with the perverse effect of valorizing less productive capital stocks, lowering output potential. And while infrastructure in underdeveloped countries might be vastly improved, allowing for further possibilites of domestic development, likely the infrastructure is developed to serve the needs and interests of MNCs, if not directly controled by them, and has limited local spillover effects. And the corollary of increasing income inequality in the distribution of the surplus product is an increasing financialization of the capital structure, for which the reduction of costs rather than the increase in value/output has become a primary objective, and thus an ever-increasing accumulation of fictional capital, which threatens to be destroyed in an oncoming crises off realization, (though who exactly shall bear those losses remains an open question).

    I’m not so much disagreeing with your compressed account as saying that the different partial components that get bound together in real complexes need to be analytically distinguished, factually, functionally and ideologically-normatively, to try and get some grip on the interactions that are going on. The redistributive effect of trade from comparative advantage, (which gains from trade I suspect are overstated in the usual accounts), are distinct from the redistributive effects of labor arbitrage, even if obscured by their simultaneity, and, of course, neither is a static state-of-affairs, but is dynamically changing. (Most recently, the terms of trade for resource producers has dramatically improved, however much that is distorted by speculative excesses and domestic inequities: some governments, at least, are feeling more capable of attempting to redress the issues). And, as well, I suspect that the classical capitalist drive toward the expansion of the scale of markets is given somewhat short-shrift in both accounts. But my point I suppose is that which measures might counteract or counterbalance which tendencies requires some analytic distinctness amidst real and ideological confusions.

    Regards and Froehlich Weinacht.

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