Dani Rodrik replies on free trade

Here is his long post, his introduction reads as follows:

The question, if I understand is correctly, is whether I
think trade policy–and in particular trade policy which departs from free
trade–can ever do some good in a world where purely political motives and
rent-seeking are rampant.  My answer is
yes, but let me build my case point by point.

Here is one of his closing paragraphs:

…let me note the irony in how a discussion on free
trade among economists quickly ends up being a debate on its politics–that is,
a debate on whether this or that trade policy which on economic grounds is
actually desirable can also be politically feasible.  We are way beyond our area of expertise.  Your
hand-waving is as good as mine.

Here is my original query.  Read his whole response, comments are open, do let us all know what you think…

Comments

i think the appropriate summary is : Tyler says that trade restrictions are, no matter what, a result of political rent-seeking, so we should just any provision for trade resticitons. rodrik says rent-seeking is inevitable, no matter what, but proper institutions should be designed to check it and that trade restrictions aren't always an obvious result of rent seeking but sometimes voter preferences.

although i am a die-hard loyal MR fan(from 2004) I think tyler's views are somewhat more simplistic here. rodrik's makes an important point about designing the right instituions and the right incentives. human beings will be human beings and we will look at ourselves in terms of tribal affiliations. trade restrictions will never go away(is all intra-US trade free?) so the right way forward is the alignment of the political incentives so as to make it co-incide with social welfare.

Tyler, your original query was in regard to the efficiency of protectionist trade policies, and Rodrik's essential answer, as an economist, was that efficiency is a political question, though he gave broad hints as to his own stance, or as he would say, he did a lot of handwaving.

The interesting question is, what exactly is meant by efficiency? It seems the original question, and cost-benefit analysis in general *is* probably ultimately a political question. His point is taken. However, in full view of the controversy of social-welfare analysis, it is a cop out to say this is a *purely* political question, if I understood the intent behind your original question. We can, for instance, ask the same question in the light of Pareto-efficiency, and we arrive at the answer 1.0 (with some complications if you take existing trade laws as given).

My own opinion is that interpersonal social welfare calculus has no solid basis in pure economics and becomes an arbitrary political tool, which may be the unintentional point to come out of this exchange. If you had phrased the question in light of Pareto optimality, would the political question have come up in the same way, or would Rodrik be pointing out that your framing of the question implies something about the nature of your political beliefs?

What I think is that Rodrik is a great addition to the top tier of econ-blogging. The two of you have a good dynamic going. Try and develop some friendly antagonism, and I'll get some popcorn.

Rodrik's comments can be summed up in phrase that I often use, "trade is a policy lever" Saying we should have free trade always, is like saying we should have no excise taxes, always.

Both generate losses but

1) We have priorities. Efficiency is but one of the goals we want to reach. If we can get equity or some other goal more cheaply through trade restrictions than some other means we should use it.

2) We live in a second best world. For non-economists that just means, the market doesn't work perfectly. Sometimes something that could do damage to a perfect market could actually help a non-perfect one.

Will: "shouldn't the normative implication be to remove or reduce those rigidities?"

Depends whether that gets you more bang for your buck. In your specific example, I think you're right, but that depends on an argument about the increasing ease of relaxing rigidities, which may not always be the case.

Karl: I though Rodrik's point was "that we do not have to throw up our hands and say “politics will screw everything up at the end.† The nature of the political equilibrium depends on the rules we select and the institutions we design."

Of course trade policy is rife with politics, but our role is to explain that all trade policy is harmful. The world's history can be explained as a battle between politics and economics. If once we accept that political control is inevitable, we have accepted defeat.

Karl: we don't live in a second-best world simply because markets are not perfect. We live in a second-best world because people think political control over markets makes them better. THAT is the mistake we must correct.

What? No libertarian sound bite BS rebuttal from the usual commentators. Hmmm, I wonder why†¦

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