Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik
Book Summary
Globalization must respect national autonomy. Globalization has failed to “deliver effective economic policies for growth and inclusion” (263) and it “has not lifted all boats” as its champions promised that it would (2). In light of this, the nationalist and populist backlash against globalization should not be surprising. Globalists assumed that globalization would bring widespread benefits, but the conventional wisdom on globalization was wrong. Economists bear some responsibility for this: they oversimplified models during public debates. Leaders should not respond to the backlash against globalization with protectionism. Rather, they should support policies that balance the need for international cooperation with greater respect for national sovereignty.
The conventional wisdom on globalization is wrong.
Countries can grow without liberalizing. China—the clearest counterfactual—has grown by pursuing “a variety of policies that violate current trade rules” (3). Rodrick also authored a 2005 study that found that “fewer than 15 percent of significant economic liberalizations produced growth accelerations, and only 16 percent of growth accelerations were preceded by economic liberalization” (55-6).
Free trade has losers—namely, low-skilled domestic workers. Standard economic theories on comparative advantage suggest that “trade agreements do not create jobs; they simply reallocate them across industries” (211)—often to other countries. Meanwhile, the “big winners” under globalization have so far been “financiers and skilled professionals” (2). Globalization has thus been a “key contributor” to rising inequality in developed nations (2).
Globalization has not deepened global integration. Today, national allegiances are stronger than both global or even local ties (21). Brexit and the Greek financial crisis also show that the European Union—an “unprecedented experiment” in multinational cooperation (46)—remains fractured, despite decades of economic integration. National sovereignty continues to remain important in this era of “hyperglobalization” (4).
Globalization does not necessarily spread Western values. Russia, Hungary, and Turkey, for example, are “illiberal democracies” (172): they hold elections, but their elections are neither free nor fair and their citizens (especially minorities) lack fundamental civil rights. Countries can be democratic without be liberal.
Manufacturing might not be a reliable and “rapid escalator to higher income levels” any longer (153). As manufacturing becomes more automated, the sector will demand high-skilled rather than low-skilled labor and developing countries will lose their comparative advantage. This could be a problem for “late industrializers” (153).
Globalization has not produced the benefits it promises because the theories about globalization are wrong.
Economists are responsible for these misconceptions.[1] Economists have made several mistakes:
Economists have long ignored politics. They “think of national borders as a hindrance” and “deride the nation-state [as] the source of the transaction costs” that inhibit free market operations (17). But ignoring politics has been a mistake. First of all, people are deeply patriotic and they resist attempts to “transcend national sovereignty” (64). Secondly, initiatives that benefit the global community—such as freer trade—often run counter to national interests.[2] Policies should account for this and economists need to incorporate political economy into their models.
Economists “often forget . . . that economics is . . . a highly context-specific discipline” (114-5). In public debates, economists have been “overconfident” and glossed over “real-world complications and nuances” (118, 123). However, “there is virtually no question in economics to which ‘it depends’ is not an appropriate answer” (115). Choosing the right model for a situation is an “art” and a “craft” to which the discipline has devoted little attention (146). In an upper-level economic class, “a direct, unqualified assertion about the benefits of free trade [is] transformed into a statement adorned by all kinds of ifs and buts” (120).[3] Economists need to be upfront about the limits of their models.
Economists have not advocated for policies that would compensate those hurt by trade agreements. They have been “dismissive of the distributional consequences of trade agreements—consequences that their own models predicted so well” (114). Again, economists failed to account for political economy:
“Before a new policy—say a trade agreement—is adopted, beneficiaries have the incentive to promise compensation. Once the policy is adopted, they have little interest to carry out the compensation they promised—either because reversal is costly all around or because underlying balance of power shifts toward them.” (206)
The result is that, in the U.S., adjustment assistance programs have fallen by the wayside. Promises to compensate those hurt by trade agreements “have very little credibility today” and “the time for compensation has come and gone” (206).
The backlash against globalization should not be surprising, and economists bear some responsibility for it.
Good global governance respects national sovereignty. The international community will need to cooperate in order to address twenty-first century challenges like climate change. Successful initiatives will balance international cooperation with respect for national autonomy. Rodrik proposes seven guiding principles:
“Markets must be deeply embedded in systems of governance” (222). That is, governments should take an active role in regulating markets.
“Democratic governance and political communities are organized largely within nation-states, and are likely to remain so for the foreseeable future” (223).
“There is no ‘one way’ to prosperity” (223).
“Countries have the right to protect their own regulations and institutions” (224).
“Countries do not have the right to impose their institutions on others” (224).
“The purpose of international economic arrangements must be to lay down the traffic rules for managing the interface among national institutions” (225). International regulations should “help vehicles of different size and shape and traveling at varying speeds navigate around each other, rather than impose an identical car or a uniform speed limit on all” (225).
“Nondemocratic countries cannot count on the same rights and privileges in the international economic order as democracies” (225). It is fair for countries to restrict trade with those that do not share their values (for example, countries that permit child labor or have inadequate environmental protections). Trade provides a natural incentive to liberalize.
Instead of blindly pursuing free trade, international arrangements should seek to foster fair trade.
Globalization has not delivered the widespread benefits its “cheerleaders” promised (3). The conventional wisdom about globalization was wrong. Economists encouraged these misconceptions by oversimplifying models during public debates and by failing to incorporate political economy into their models. Future globalization initiatives should balance international cooperation with respect for national sovereignty. Good globalization respects national autonomy.
Notes
[1] “Are economists responsible for Donald Trump’s shocking victory in the US presidential election? . . . [E]ven if they may not have caused (or stopped) Trump, one thing is certain: economists would have had a greater—and much more positive—impact on the public debate had they stuck closer to their discipline’s teaching, instead of siding with globalization’s cheerleaders” (i).
[2] “It is impossible to have hyperglobalization, democracy, and national sovereignty all at once; we can have at most two out of three” (5).
[3] Rodrik also argues that mercantilism may be a valid alternative to the classic comparative advantage theory of trade.