The wise Dani Rodrik knows that a Conversation with Tyler usually starts early

by on September 18, 2015 at 2:13 pm in Economics, Political Science | Permalink

Don Boudreaux had asked Dani why favor free trade within nations, but not always favor free trade across nations?  Dani wrote a long response here, self-recommending, do read the whole thing, but here is a brief excerpt:

So the national market and the international market are different. The defining characteristic of a national market is that it is deeply embedded in a set of social and political institutions – a common legal and regulatory framework provided by the nation-state. The international market is at best weakly embedded in transnational arrangements, and the arrangements that do exist such as the WTO and bilateral investment treaties are commercial rather than fully-fledged political/redistributive/regulatory arrangements.

On Thursday the dialogue will continue

1 Ray Lopez September 18, 2015 at 2:22 pm

An important post that P. Krugman would be interested in answering…Y !comments?

2 Kris September 18, 2015 at 2:35 pm

The international market is at best weakly embedded in transnational arrangements

If the international trading parties are fully aware of the risks and pitfalls, why not let them trade?

the arrangements that do exist such as the WTO and bilateral investment treaties are commercial rather than fully-fledged political/redistributive/regulatory arrangements

Doesn’t that description fit inter-state commerce within the US too? States with strong political support for unions differ in their regulatory arrangements from “right to work” states.

3 Thomas September 18, 2015 at 4:40 pm

Many words to say that some countries have lower wages and that’s ‘not okay’.

4 dearieme September 18, 2015 at 5:10 pm

Dear me, is that all he meant? Maybe he really meant that “when they mattered the British were free traders whereas the Americans have traditionally sheltered behind tariffs, and I’m American so there!”

5 Kris September 18, 2015 at 5:20 pm

But those low wage countries have low wages precisely because the economic activity in that country is too low to support higher wages, no? Disallowing international free trade would then keep those countries stuck in their situation; unless they find out they are sitting on vast untapped resources of something that other countries desperately need (like oil), low wages are their only competitive advantage to increase local economic activity.

6 Conscience of a Citizen September 18, 2015 at 2:39 pm

I am waiting for the first commenter to snark that Rodrik “obviously does not understand the theory of comparative advantage.” Come on, boys, you know you want to lead the doo-dah parade…

7 Paul September 19, 2015 at 6:22 pm

I used to think that way but came around to appreciate that he is wise. Seriously. Still teach comparative advantage as a starting/reference point though.

8 Urso September 18, 2015 at 2:41 pm

Profs. Cowen and Boudreaux absolutely blown away by the revelation that some nations are different than other nations. Picking their jaws up off the floor.

9 Ricardo September 18, 2015 at 3:05 pm

America is full of different cultures, with different “social and political institutions.” Should they not trade freely? (Hint: Jim Crow.)

10 JJ September 19, 2015 at 7:04 pm

Yes, nations ARE different — that’s what creates the opportunity for mutually beneficial trade. If all nations were the same, there would be no point to trade.

11 BenK September 18, 2015 at 2:46 pm

Trade among nations, not being the marionette of ‘political/redistributive/regulatory arrangements’ is clearly not to be trusted. Only bake pies where finger access is assured.

12 Tully September 18, 2015 at 6:44 pm

Yup, Rodrik is a statist and rejects “Free Trade” in its basic definition.

Why bother playing economics ‘gotcha’ with him and parsing his stream of consciousness responses? We already know his point of view. There’s nothing to be learned from him and he is certainly not open to changing his faulty beliefs. Boudreaux apparently needs blog material.

13 John L. September 18, 2015 at 6:54 pm

“Why bother playing economics ‘gotcha’ with him and parsing his stream of consciousness responses? (…) There’s nothing to be learned from him and he is certainly not open to changing his faulty beliefs.”
I really love the projection.

14 Thomas September 18, 2015 at 7:13 pm

Shorter John L.: Trading is bad.

15 John L. September 18, 2015 at 7:24 pm

Is this why we have a Coast Guard and lifeguards? Water is bad? Ask your masters what you are to parrot now.

16 Thomas September 18, 2015 at 11:02 pm

One thing is sure. If the third world can’t afford life guards, they shouldn’t be allowed to swim.

17 Doug September 18, 2015 at 3:42 pm

OT, but TCs prediction about the markets reaction to the Fed announcement seems to have been spot on.

18 Warren September 18, 2015 at 3:48 pm

Dani seemed to have completely ignored the effects on foreigners and consumers in his analysis. Suppose that free trade eliminates jobs domestically. Don’t foreigners that now have jobs count for anything? Aren’t consumers better off? Why does he only care about producers (at least in this post)?

19 Kris September 18, 2015 at 5:23 pm

Don’t foreigners that now have jobs count for anything?

Not to the voters who elect lawmakers who then frame the rules and permissions regarding commercial activity.

20 Tom Warner September 18, 2015 at 4:28 pm

So basically a European point of view, that trade should be as free as political regimes are integrated and convergent. A valid point of view, but as a matter of practice as trade became freer within Europe it also became freer between Europe and the rest of the world. The idea that southern Europeans deserved protection from eastern Europe who deserved protection from Asia in line with their levels of assimilation and convergence with core Europe has not carried much weight, even where that kind of thinking is far more popular, and I’m not sure how it could have. And the United States actually handles its regional productivity differentials much more with long drawn out migration than redistribution.

21 Urstoff September 18, 2015 at 5:02 pm

Okay, so in what situations would these considerations justify being against free trade?

22 Michael G. Heller September 18, 2015 at 8:47 pm

Rodrik’s comment quoted by Cowen seems oblivious to the well-theorised Weberian-Schumpeterian historical sequence of modernisation in which the sociopolitical institutions and legal-regulatory frameworks are largely — though by no means exclusively — the outcome *initially* of demands of market interests and national-international market forces. This is one of the arguments I made in my book ‘Capitalism, Institutions, and Economic Development’.

The best way to strengthen WTO-like international legal-regulatory good governance is for leading capitalist trading nations to lower their barriers to trade, and for the government of the USA (the superpower) to strongly and un-hypocritically advocate free trade and global classical-liberal legal-regulatory governance. In other words, free trade is the path to creating the institutions whose absence Rodrik has noted.

Rodrik’s implied argument that we should wait for the transnational regulatory institutions to be created — and only then liberalise international trade — is a close relative of Krugman’s bankrupt argument for postponing structural reform until the ‘good times’ have arrived.

The solution: liberalise markets first, good global governance will follow…

23 er September 18, 2015 at 10:18 pm

can you ensure a free market internally if you have a free one externally?

24 BC September 18, 2015 at 11:10 pm

Interesting theses by Rodrik. I would ask the following follow-up questions.

On the migration-limits hypothesis, how would Rodrik apply this to NAFTA:
(1) It doesn’t apply; NAFTA is beneficial to both the US and Mexico. (2) There are barriers to migration from Mexico into the US. Thus, NAFTA creates lots of great jobs in the US, but Mexicans are unable to migrate to the US to fill them. (3) Ron Paul’s fears have come to fruition. Border security prevents Americans from migrating to Mexico to fill all of the jobs that NAFTA sent down there. This would be the interpretation that one would have to believe if one simultaneously wants to apply the migration-limits hypothesis and believes that NAFTA sucks jobs from the US to Mexico rather than the other way around.

On the impact of differing regulations across nations that create “unfair trade practices”, what some call the race-to-the-bottom, which is closer to Rodrik’s assessment of the current state of the world: (1) Given all the increases in free trade over the past few decades, environmental and other regulations do indeed cause job losses in developed nations. Those that care about American jobs should call for a moratorium at the very least on all new regulations, if not a rolling back of many, unless and until all of these free trade arrangements are reversed. A good threshold might be that when and if trade protectionists finally agree that we don’t have too much free trade, then and only then will it be safe to reinstate the environmental and other regulations; or (2) The negative economic impact of regulation is overstated. The world can tolerate much more free trade before race-to-the-bottom becomes an issue.

25 Ricardo September 18, 2015 at 11:57 pm

Rodrik was careful to point out in his post that the case for free trade depends on context and the context with which he engages most often is that of a developing country. When they were poor, Taiwan and South Korea strategically used tariff barriers to protect certain sectors and it is not at all clear they were wrong to do so. Korea in particular has produced firms that are world-class today but that started out in protected sectors. Of course, the U.S. did the same thing in the 19th century.

It is hard to make the “infant industry” argument for a highly developed economy but it becomes a bit easier when the country is very poor and doesn’t have much in the way of economies-of-scale industry.

26 dearieme September 19, 2015 at 6:00 am

Was the American tariff tradition any part of the reason for the success of the industrial trusts that made such fabulous wealth for Carnegie, Rockefeller and so on?

27 Peter Schaeffer September 21, 2015 at 2:08 am

d,

“Was the American tariff tradition any part of the reason for the success of the industrial trusts that made such fabulous wealth for Carnegie, Rockefeller and so on?”

Really a bunch of points here. First, the U.S. steel industry was protected by tariffs for many decades (eventually U.S. production costs fell low enough for the U.S. to be a major exporter). By contrast, the U.S. was an oil exporter in the years when Rockefeller was building Standard Oil. Second, U.S. experience in recent decades (and other countries) shows that “free trade” ideology leads to greater, not less inequality. Certainly, “free trade” is a key part of the worldview of today’s cosmopolitan elite who are quite willing to see their country go down the drain for personal gain.

A reasonable conclusion is that 19th century U.S. inequality would have been greater without tariffs.

28 Dismalist September 19, 2015 at 12:47 am

When they were protected,Taiwan and South Korea were poor. When they strategically lifted tariff barriers, enabling the exploitation of economies of scale, they became rich. 🙂

29 carlospln September 19, 2015 at 8:51 pm
30 js September 21, 2015 at 5:25 am

You are right. when trade was consumer-led the nations were poor. But when it was state-controlled – which luckily was competent enough to limit trade only to technology (for leap-frogging to the latest tehcniques and machines) and intermediates – they became rich. So definitely free trade to a very limited extent is much better than free trade across the board. Conclusion – Free Trade is Better?

31 Mike Hammock September 19, 2015 at 9:40 am

Let’s assume that Rodrik is right, and that free trade is usually not a first-best policy, because of all the special conditions that must apply for free trade to be a first-best policy.

How likely is it that real world governments will be able to identify the right kinds of conditions for the right kinds of trade restrictions in the right places? How likely is it that real world governments, under the influence of special interest groups, will be able to choose the right level of protection in the right places, and achieve the most efficient outcome?

32 JJ September 19, 2015 at 7:09 pm

exactly. The follow up question to his response to DB is: how much of our barriers to trade, both at present and historically, reflect an attempt to correct for all of the “market failures” he identifies — and how much just represents standard interest group politics (i.e., concentrated benefits, diffused costs)? How can anyone pretend to engage in a serious discussion of trade policy w/o explicitly recognizing the political economy of trade policy.

33 template September 19, 2015 at 2:57 pm

Rodrik: “The boundaries of a nation are defined by shared sense of collective purpose, as embodied, in part, in that nation’s common laws and regulations and in its instruments of solidarity. ”

Sold. Close the borders, start deporting. Pronto.

34 Khalil Hegarty September 21, 2015 at 7:07 pm

Looking at Rodrik’s full response, he makes a lot of assumptions that can’t be considered universal:

One thing that can happen within a nation – and not across nations – is that the workers in that region can migrate to other regions and therefore partake in the benefits of trade that accrue elsewhere. That is how, for example, Southern states in the United States adjusted to the industrial dominance of the North.

This isn’t the case in countries such as Indonesia or China (and many other places) where domestic migration and human movement is controlled. Similarly, this:

Another thing that happens is that there is an overarching state that will engage in transfer payments and other policies that aid the lagging region.

This makes the assumption that the ‘overarching state’ will inevitably distribute wealth evenly, whereas the disparities between urban and rural revenue distribution can be stark, thinking specifically of Thailand (where it is used to prop up a middle-class voter base for Thai royalists) and, historically, Indonesia, where most of the 14,000 islands that aren’t Java (including Sumatra, geographically the largest island) have for the most part been ignored and suffered economically as a result.

I think this all boils down to the assumptions in this statement:

The boundaries of a nation are defined by shared sense of collective purpose, as embodied, in part, in that nation’s common laws and regulations and in its instruments of solidarity.

This is true of a strong state, but the majority of the world’s states are in fact weak. Governments are not accountable, they are absent rule of law, democracy is ineffective. They are not defined by a ‘collective purpose’; they are merely defined by an arbitrary political boundary. In other words, Professor Rodrik views a nation state as politically homogeneous; whereas in many cases they are rife with division that can be equal to or worse than international political divisions.

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