Economy & Business

Anything-but-Straight Talk on Trade

(Reuters photo: Mike Segar)
A Harvard economist’s new book offers an unconvincing argument for government intervention in the American economy.

Dani Rodrik is on a mission to save globalization — not from its enemies, but from its biggest boosters and its own excesses.

For a couple of decades now, and in his new book, Straight Talk on Trade: Ideas for a Sane World Economy, the Harvard economist has been warning us that globalization has gone too far. Efforts by economic elites to eliminate barriers to trade and capital flows have created a “hyperglobalization” that has undermined the sovereignty of nation-states and the economic security of the working class, feeding an anti-globalization backlash that led to the Trump presidency, among other developments.

Advocates of the free market will find things to cheer in Straight Talk, including Rodrik’s succinct explanation of how anti-dumping laws are abused by producers in rich countries to keep out competing imports. But in his broader critique of current policy, Rodrik is too clever by half, preferring to score rhetorical points rather than engaging in the more serious academic arguments over trade and globalization. By mischaracterizing his opponents to dismiss them, rather than systematically addressing their arguments, he undermines his position.

Straight out of the box, Rodrik stacks the deck with loaded terms to describe the people and ideas he opposes. He calls those who think the world needs more economic freedom and openness, not less, “globalization’s cheerleaders,” indicting their willingness to “parrot the wonders of comparative advantage and free trade.” He argues that these folks’ “obsession with hyperglobalization” and “reigning market fundamentalist ideology” blind them to “the danger of globalization running amok.” He accuses those who support free-trade agreements such as the Trans-Pacific Partnership of engaging in “propaganda” and “shading of research” in pursuit of “free-market nirvana.”

On a more substantive level, Rodrik’s underlying thesis is that economies that have pursued a mixed menu of state intervention and market reforms have outperformed those that have more fully embraced free markets and openness to trade and capital flows. There is a long paper trail of studies looking at the relationship between economic growth and the variables of economic freedom and openness, but he chooses not to engage the literature. Instead, he argues through selective comparisons. China is his favorite example to prove that a mixed economy with lots of state intervention is the model for success. “Much of China’s economic miracle is the product of an activist government that has supported, stimulated, and openly subsidized industry producers — both domestic and foreign,” he asserts.

Yes, China’s growth in the past 30 years has been spectacular, and yes, its government continues to intervene in its economy, but does that demonstrate that government intervention is the source of the growth? China’s government was even more interventionist 30 years ago, before the boom. And there are plenty of poor countries that have seen the same sort of interventions only to remain mired in poverty.

What’s changed in China in the past 30 years is its aggressive moves toward a more free and open economy, as piecemeal and incomplete as they have been. And one could plausibly argue that the types of intervention Rodrik applauds have in fact retarded and distorted China’s growth, contributing to its mounting levels of debt and a legacy of inefficient state-owned enterprises.

Rodrik ignores or brushes aside inconvenient counter-examples such as Hong Kong, Singapore, and Chile — three spectacular economic success stories that did not rely on state intervention. Regarding Hong Kong, an example Milton Friedman often cited to show the power of markets to improve human well-being, Rodrik can only note that its government plays a large role in providing land for housing. That seems a minor point when set against its open economy and laissez-faire approach to industrial development and finance. If hyperglobalization is the reigning ideology anywhere, it is Hong Kong, and the results are enviable.

On the basic economic issue of the “gains from trade,” Rodrik avoids the straightforward arguments that would counter his thesis. While economists disagree about a lot, there is almost unanimous agreement in the profession that eliminating barriers to trade will raise a nation’s general economic welfare. Rodrik dismisses that consensus by saying that the evidence for it is inconclusive. He then quickly abandons discussion of the general welfare to focus on whether everyone benefits from free trade, and if not, who wins and who loses. Of course, no economist would argue that everyone is better off when trade barriers are eliminated — previously protected industries and their workers will always suffer in such cases, at least in the short to medium term. The real policy question in our more globalized era is what steps a society can take to smooth the transition toward a more open economy, whether through income support, job retraining, better education, or other domestic policies.

In fact, for Rodrik, the answer to every problem seems to be more government intervention and less personal freedom to engage in commerce, whether domestic or across borders.

Rodrik contends that the liberal model of free trade and free markets has been “severely tarnished” by the rise of inequality and plight of the middle class in the West, with medium-term growth prospects “bleak” and unemployment “a major headache and preoccupation for policy makers.” But open, advanced Western economies such as that of the U.S. have actually been performing reasonably well of late. We have problems, but the basic contours of our economic system are not among them.

The real aim of the book becomes more apparent when Rodrik complains about the austerity that has been imposed on Greece by its debtors. He doesn’t blame the profligacy of the Greek government, but the general forces of globalization for infringing on Greece’s “right as a nation to determine their own economic, social, and political path.” He ignores the fact that other nations should be able to exercise their own sovereignty over whether to transfer funds to bail out Greece, and under what conditions. Instead of austerity, he would prefer “some good old-fashioned Keynesianism.”

In fact, for Rodrik, the answer to every problem seems to be more government intervention and less personal freedom to engage in commerce, whether domestic or across borders. Among his more novel proposals would be the establishment of government-run investment funds in promising new technologies, with the dividends from the assumed profits distributed to the general citizenry so that the fruits of technological advancement can be more widely shared. This demonstrates not the slightest bit of skepticism about the ability of government officials to pick just the right start-up companies and technologies, while ignoring ample evidence that governments are ill-equipped and face the wrong incentives for such endeavors, and that politics often determine who gets funded.

Rodrik also favors enacting trade barriers to prevent “social dumping.” Such barriers would be designed, by and large, to keep out goods from poor countries that are supposedly competitive only because of their lower environmental and labor standards. But he fails to consider that those lower standards are primarily a result of lower productivity. Nor does he consider that special interests in rich countries could easily capture the social-dumping process for purely self-interested purposes.

In its 274 pages of supposedly straight talk on trade, Rodrik’s book contains no mention of the measurable consumer benefits produced by free trade, especially those that accrue to lower-income families who spend a larger share of their budgets on tradable goods such as food, clothing, and shoes. There is no mention of the dramatic reduction in global poverty during the past 25 years of rapid globalization, when the number of people living in absolute poverty has dropped by more than 1 billion. In his critique of NAFTA and other trade agreements, he makes no mention of the tariff reductions and resulting trade and economic growth from rounds of successful trade negotiations.

Despite critical words about President Trump at certain points in the book, Dani Rodrik seems to share many of the basic assumptions of our president when it comes to the global economy. It’s just that his arguments are more clever and less straightforward.

READ MORE:

Free Trade Opposition: Myths are Abundany

The Radiating Mischief of Protectionism

Globalization Can Be Good for American Workers

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