Article on Pieria: The Politics of Trade

I have an article on the site Pieria, arguing something I have argued before, but this time from an international perspective:

The reality of trade is that it is always, necessarily, regulated. There is no ‘free’ baseline, untouched by politics, history and culture, to which we can aspire. There are merely a series of political decisions, special interests and historical accidents, some of which are hidden, some of which are less so, but all of which have very real impacts on trade and specialisation

The article (naturally) contains an attack on comparative advantage:

However, although comparative advantage is – in the words of Paul Krugman – something of an “economist’s creed”, its relevance as a theory is incredibly limited: in fact, it has long been acknowledged that the theory explains a relatively small amount of international trade.

and goes on to argue for Bretton-Woods style institutions.

Obviously I’m not the first person to make these arguments (Chang and Rodrik spring to mind), but sometimes I worry those on the side of ‘protectionism’, which I’d broadly align with, get sucked into caricature arguments similar to those of their ‘free trade’ opponents. What we really need is an institutional perspective on development and trade.

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  1. #1 by Ramanan on July 23, 2013 - 2:05 pm

    Superb stuff!!

    I especially liked the line

    “In fact, paradoxically, making trade management more overt may be less restrictive in the long run.”

    This was also the position of Wynne Godley when he advocated import controls in Britain in the late 1970s. His (and Cripps’ and Kaldor’s argument was that it reduces propensity to import not total imports as a result of rise in incomes)

    • #2 by Unlearningecon on July 24, 2013 - 11:19 am

      Thanks

      Re: Wynne Godley: is there anything he can’t do?

      • #3 by Ramanan on July 24, 2013 - 5:04 pm

        he he. I guess he couldn’t make it to a chapter for himself in Pasinetti’s book Keynes and the Cambridge Keynesians. What an omission!

  2. #4 by thehobbesian on July 23, 2013 - 9:01 pm

    “However, although comparative advantage is – in the words of Paul Krugman – something of an “economist’s creed”, its relevance as a theory is incredibly limited: in fact, it has long been acknowledged that the theory explains a relatively small amount of international trade. For example, comparative advantage does not explain why electronics are produced in Southeast Asia; why the USA has Silicon Valley and a large airport industry; or why Germany produces great cars. Instead, these things are explained by government policies, luck and history. Believing that any new attempts to engineer competitive advantages disrupt the neutral baseline ignores this fact. ”

    Couldn’t you make the argument that these things are in fact in line with actual comparative advantage and that neoliberals just don’t understand how it actually works? If a country has advantage in some industry, whether its from something purely natural like climate or mineral deposits, or whether it is from some government policy, or just historical luck, the effect on the market and trade dynamics are still going to be the same. Where you have an advantage, you have an advantage, even if you bootstrapped your way into getting that advantage in the first place. And rather than saying that comparative advantage is wrong or limited in its application as a theory, we could simply say that comparative advantage is just misrepresented by neoliberals and can be induced by factors traditionally seen as exogenous. However, maybe this is just semantics. I agree with you that the notion that comparative advantage can only come from god given traits is fallacious and ignorant of how these things actually play out in the real world.

    • #5 by Unlearningecon on July 24, 2013 - 11:28 am

      Couldn’t you make the argument that these things are in fact in line with actual comparative advantage and that neoliberals just don’t understand how it actually works?

      I have made this point before, albeit briefly. Joan Robinson also spoke of how short-term inefficiency might be traded for long-term gains. Here is a comprehensive article on how comparative advantage does not imply what neoliberals seem to think it does.

      • #6 by thehobbesian on July 24, 2013 - 3:59 pm

        Reminds me of open reciprocity as opposed to closed reciprocity. In business you see this all the time with installment contracts of long term suppliers of goods and services to people and firms. If an oil company and a utilities company have a long term relationship, the oil company may choose to sell to them at a lower price than they may get from the market on a given instance simply because they want to maintain a good relationship with the utilities company, and the utilities company may pay more for a shipment then they could get on the market on other instances, and this loyalty helps them out in the long run. That’s just good business acumen. If you forsake potential allies you may get a short term advantage, but karma will forsake you in return at some point.

        Neoliberals seem to envision a hyper efficient market where everything is reduced to closed reciprocity, but this ignores how these relationships actually work. There are greater exchanges and quid pro quos underlying simple economic transactions of the goods themselves. Obviously open reciprocity is undeniable in things like installment contracts, but even in things that appear to be closed reciprocity may actually be open reciprocity in disguise. For example, brand loyalty like those seen with smokers, sure it is simple one time transactions of buying cigarettes which are occurring, but in reality it is a relationship that has a deeper, emotional element to it, and if you have ever smoked or know smokers, I think it is obvious that brand loyalty has psychological and emotional elements that penetrate far deeper than that which is normally attributed to homo economicus. These things exist all over the place, and of course their importance in international trade should not be overlooked. It pretty much is what Adam Smith was hinting at with the invisible hand, which by the way, has to be the single most misunderstood concept in all of economics.

      • #7 by Unlearningecon on August 2, 2013 - 5:14 pm

        Agree completely. I actually wrote sometimes ago on how people and firms are predisposed to create relationships that supersede the need for exposure to market forces.

  3. #8 by Draco T Bastard (@DracoTBastard) on July 24, 2013 - 9:20 am

    Countries/societies don’t specialise – people do and they’re not very good at and they also need broad knowledge so that they can participate well within their democracy. Also, countries tend to have all the resources that their societies need within their own borders. Then there’s the question of what the purpose of the economy is for: Is it to supply everyone in the country/society with a reasonable living standard within ecological limits or is it to produce a profit?

    And then there’s the big question: If all countries develop to their full potential while having all the resources they need to produce what they need then would there be any international trade at all? The obvious answer is no. The reason for this is because no country could produce something cheaper than another country. Not even absolute advantage or economies of scale apply because a factory in one country is just as efficient as in another country and that efficiency is not altered by size.

    And then we have this:
    On The Loss From Trade

    An interesting model that suggests that with interests rate above zero, and possibly even below, trade results in a loss.

    All this would indicate that international trade isn’t particularly important as far as economies and the welfare of the people go.

    • #9 by Unlearningecon on July 24, 2013 - 11:34 am

      That’s an interesting perspective, but I’m not entirely sure it’s right. I have said before that comparatrive advantage may be applicable (only) to agriculture: for obvious reasons, Britain cannot produce bananas. International trade is at least required for raw commodities, in my opinion.

      • #10 by Draco T Bastard (@DracoTBastard) on July 24, 2013 - 1:47 pm

        I don’t think that international trade would disappear but it would definitely change and there would be no possibility of the politicians pushing the “export to wealth” meme that is completely uneconomic and leaves a country without any wealth (Real wealth is the resources, if you dig them all up and export them then what you have at the end is nothing).

        I actually think that international trade in raw resources should be banned. Doing so forces two rather important changes:
        1.) It would force countries back onto their own resources making them think more about the sustainability of those resources and
        2.) It would force greater development in countries that are presently exporting vast quantities of raw resources for minimal imports of completed products

        There would probably be other changes of course but I can’t think of them ATM.

        I think the end result of development will be minimal trade in products, a decrease in consumerism (especially once people realise that it’s unsustainable/uneconomic), an increase in exchange of information and an ongoing trade in luxury goods (A trade to Britain of bananas is, essentially, a trade in luxury goods. Something nice to have but not critical).

      • #11 by Unlearningecon on August 2, 2013 - 5:16 pm

        I actually think that international trade in raw resources should be banned. Doing so forces two rather important changes:
        1.) It would force countries back onto their own resources making them think more about the sustainability of those resources and
        2.) It would force greater development in countries that are presently exporting vast quantities of raw resources for minimal imports of completed products

        But what about those countries who simply cannot produce a certain type of staple? For example, Russia has always had problems with its reliance on the Ukraine as a ‘bread basket’.

  4. #12 by Leonida on July 24, 2013 - 11:57 am

    China is one of the most protectionist country in the world . Now compare the chinese performance with more “free-trade” countries that started at chinese level and are still third world hell hole.
    See what is happening in the EUzone and in Northamerica with the NAFTA

    The reality is that free-trade is not fair-trade but unequal trade,Paul Krugman is right when He says that free-trade is the “economist’s creed”,but actually this just proves that modern economics is based mostly in dogma

    • #13 by thehobbesian on July 24, 2013 - 4:01 pm

      Ever read Ha Joon Chong’s “Kicking away the ladder”? That is pretty much what he argued in regards to developmental economics.

  5. #14 by Luis Enrique on July 25, 2013 - 11:07 am

    why on earth would you want to “attack” comparative advantage, because you think it only explains a small proportion of trade? yes, it is only one of many possible reasons why mutual gains from trade may occur.

    What makes you think South Asia does not have a comparative advantage, relative to the USA, in assembling computer components?

    • #15 by Unlearningecon on July 25, 2013 - 12:26 pm

      why on earth would you want to “attack” comparative advantage, because you think it only explains a small proportion of trade? yes, it is only one of many possible reasons why mutual gains from trade may occur.

      Because a theory of trade must be equipped to explain as much of trade as possible, surely? Yet comparative advantage, for all its elegance, does not, unless you define it tautologically as ‘whatever countries end up producing’.

      What makes you think South Asia does not have a comparative advantage, relative to the USA, in assembling computer components?

      I see no reason to believe it based on conventional explanations of comparative advantage (resource endowments, culture). Instead, I think whatever ‘advantage’ they have has been actively engineered by policy. The theory of comparative advantage may explain trade taking productivity as a given, but it doesn’t really explain how higher productivity in a particular sector may come about.

      • #16 by Luis Enrique on July 25, 2013 - 1:50 pm

        afaik, comparative advantage is mainly used to demonstrate the non-obvious possibility of mutual gains from trade in the absence of trading partners having differing absolute advantages (gains from trade being obviously possible in that circumstance). However, I think you need to revise your belief that comparative advantage has little explanatory power. Have a careful read of this:

        http://home.uchicago.edu/~kortum/papers/JEP_3_2_2012_final_tabfig_appendix.pdf

        you ask: “a theory of trade must be equipped to explain as much of trade as possible, surely?” – that answer depends on why trade happens. If, for the sake of argument, trade occurs for three reasonably conceptually distinct reasons, and these reasons account for roughly a third of observed trade each, then why not have three theories of trade that each explain a third of trade (as opposed to “as much as possible”)? Perhaps you should think of comparative advantage in this fashion – one of a set of theories of trade that between them explain a lot.

        You seem to repeatedly rub up against theories that take X as given, and object that we should rather be explaining X. But there’s nothing wrong with doing both. So fine, the theory of comparative advantage does not explain high higher productivity in a particular sector came about. That’s because it’s doing something else: explaining how trade may be mutually advantageous if comparative advantages exist.

        What does the US trade with China? Let’s say China supplies computer assembly services and the US computer design services. For whatever reason, perhaps “actively engineered by policy” or perhaps not, it might very well be the case that the US has an absolute advantage in both but that it is comparatively better at design. So where does your idea that comparative advantage probably only applies to agriculture come from?

      • #17 by Unlearningecon on July 27, 2013 - 12:39 pm

        I will look at that paper properly when I get the chance.

        If, for the sake of argument, trade occurs for three reasonably conceptually distinct reasons, and these reasons account for roughly a third of observed trade each, then why not have three theories of trade that each explain a third of trade (as opposed to “as much as possible”)?

        Which distinct reasons are would these be, though? It seems to me that trade is usually done based on the perception that it will be ‘mutually beneficial’.

        For whatever reason, perhaps “actively engineered by policy” or perhaps not, it might very well be the case that the US has an absolute advantage in both but that it is comparatively better at design. So where does your idea that comparative advantage probably only applies to agriculture come from?

        (1) My problem is that this is often used as a rationale for blanket free trade, when previously protectionist policies could have been useful to attain observed productivity;

        (2) The agriculture reference is because differences in productivity agriculture are, surely, “innate”, which is how productivity is often explained in stories about comparative advantage (e.g. in the article you linked to)

        Btw, Luis, I am well aware that many mainstream models off are trade have both winners and losers. But I wasn’t even really attacking ‘mainstream economics’ in this article.

      • #18 by Luis Enrique on July 29, 2013 - 2:58 pm

        Which distinct reasons are would these be, though? It seems to me that trade is usually done based on the perception that it will be ‘mutually beneficial’

        sure, but there are various possible reasons why trade might be mutually beneficial. Aside from obvious things like people having tastes for foreign varieties etc., there are differing comparative productivities (comparative advantage), differing factor endowments (Heckscher–Ohlin – really a development of comparative advantage) and increasing returns to scale / agglomeration, plus all the more recent heterogeneous firms stuff

        http://www.princeton.edu/~reddings/papers/NBERWP16562.pdf

        I think you can think of these as distinct theories of trade that are not mutually exclusive but providing a variety of reasons why trade may occur.

  6. #19 by Vicencmp on July 26, 2013 - 8:12 am

    I read in Joel R. Paul “Es realmente libre eñ libre comercio? (Is it really free the free trade?): (translation)
    “Comparative advantage is irrelevant for the majority of international markets”
    “International commerce has contributed to the world’s inequality in income”
    “International trade offer static marginal gains that are overtaken by sunk costs (in human and financial capital) and by social costs derived from the competence”

    A. Emmanuel says that countries like USA were protectionist and only have been favourable to free trade when they began to have superiority. They also protected their high wages in relation to Europe. Free trade brings to the developped countries higher income due to the differences in wages.

    The relations in commodities prices would benefit the developped countries.
    (Singer-Prebisch)
    One of the reasons might be the comparative higher growth of productivity

    Vicenc Melendez-Plumed

    • #20 by Unlearningecon on July 27, 2013 - 3:01 pm

      The thing is, as Joe Stiglitz and others have repeatedly pointed out, the US doesn’t even practice free trade now, and its trade deals are a complete sham.

      Ultimately it’s all about differences in power. China can afford to be protectionist because they are powerful enough. Almost nowhere else could get away with that behaviour.

  7. #21 by Luis Enrique on July 26, 2013 - 11:17 am

    if you’d like to see a very mainstream model in which free trade does bad things, take a look at thsi paper

    http://www.econ.umn.edu/~tkehoe/papers/TradeGrowthHO.pdf

  8. #22 by 7x7 on July 26, 2013 - 7:06 pm

    Thought provoking article. I can’t help but notice that you used a pseudonym there. Any particular reason?

    • #23 by Unlearningecon on July 27, 2013 - 12:58 pm

      It’s really just for professional reasons.