Thursday, March 1, 2012

Free Trade Ad Absurdam

The last thing a defender of free trade should want is to find herself on the same side as Jagdish Bhagwati.  Exactly because the arguments against laissez-faire on the international front are so strong, we need someone to remind us what is at risk when we mess with trade.  Too bad Bhagwati isn’t the guy.  In Defense of Globalization in particular was a big disappointment.  We tried using it in class to provide some friction to the alter-globalization voices, but students just tore it apart.

His latest screed in defense of trade orthodoxy comes on with the force of a handful of packing peanuts flung angrily into space.  Let’s look at his arguments.

“The first misconception is that exports create jobs, while imports do not....”  His rebuttal is that exporters often use imported parts, and shippers create jobs when they ship imports.  But what is the counterfactual here?  If he is opposing the idea that we should simply stop imports at the border and suffer without them, then he has a point.  His argument says nothing, however, against policies designed to replace imports with domestically produced products.  Moreover, it is absolutely the case that an import constitutes a leakage from a national macroeconomy, while an export constitutes an injection.  That’s not mercantilism, it’s basic accounting.

“Second, the credo “Trade, not aid” has given way to the mistaken belief that trade matters less than foreign assistance.”   Huh?  The problem with trying to manage trade flows is that it leads to an excess of foreign aid?  Where did he come up with this?  In reality, (1) rich countries have flagrantly failed to meet the aid targets enshrined in the Millennium Development Goals, and (2) it is the poorest countries, where current account deficits are structural and persistent, that the need for trade policy is most acute.  (Specifically, these countries need strategic investments, stakeholder-oriented pubic and private sector governance reforms and industrial policies to achieve external sustainability.)

“Third, many believe that manufactures deserve preferential support.”   Here Bhagwati makes the error of conflating a specific preference, for manufacturing, with a general preference for achieving approximate balance between imports and exports, whatever the sectors.  But let’s give him the benefit of assuming that a belief in the importance of manufacturing is more interventionist than, say, an exaggerated attachment to intellectual property protection.  What is his case against singling out manufacturing?  Simply that lots of famous people say you shouldn’t do this.  I’m not kidding: read the original.  There isn’t a single substantive point in his missive that considers the pro-manufacturing position and rebuts it.  Actually, manufacturing is important, not only for potentially high-productivity jobs but also for the kind of innovation that depends on bringing abstract ideas and hands-on skills together.  I’m writing this from Germany, and I can guarantee that preferential support for manufacturing is gospel over here, and that it works.

“Finally, the financial sector has come to be viewed as the bane of morality....The quasi-Marxist view that our morality stems from our economic position overlooks the moralizing role of family, religion, culture, and art.”  And now we get the ethical case: reject quasi-Marxism and pay no attention to the extraordinary concentration of wealth in a few hands.  In passing, we should note that he gets the Marx part absolutely backwards: Marx claimed repeatedly that ethical systems are relative to historical period and social position, and that one could not deduce the desirability of socialism from the ethical superiority of workers over capitalists.  (Granted, he did make lots of snide remarks about the rich, but he also spread his cynicism around to other classes.)  The main point, however, is that the ethics of plutocracy is almost orthogonal to debates over trade policy.  One can stuff finance back into a little box, with modest pay and privileges, and leave trade alone, or one can be a trade hawk and a finance dove.  This final argument isn’t an argument at all.

Face it, Bhagwati isn’t even listening.  He has no idea what the arguments are of those who worry about trade and social standards, or trade and ecological sustainability, or trade imbalances, inequality and the volatility of global finance.  He has written many clever papers based on a set of implausible assumptions (like trade always balancing at the margin), and he has no clue how to respond to those who question those assumptions.  My students, who think his priors are bonkers, found only incoherent bluster.


Noah Smith said...

Peter, you had better stop being so good at smacking down fools, or I'm going to lose all my readers to you! ;)

Joe said...

"His latest screed in defense of trade orthodoxy comes on with the force of a handful of packing peanuts flung angrily into space"

That's great!

Fernando said...

"Moreover, it is absolutely the case that an import constitutes a leakage from a national macroeconomy, while an export constitutes an injection."

Why does it matter?
An import may be a leakage of money which doesn t take real resources to produce, but it s an injection of real goods.
The government can compensate any leakage with a tax cut or spending increase.