Economics

The Case for Compensated Free Trade

Nov 14, 2018 Robert Skidelsky

According to Harvard’s Dani Rodrik, the nation-state, democracy, and globalization are mutually irreconcilable: we can have any two, but not all three simultaneously. In fact, there may be a solution to Rodrik's “trilemma.”

LONDON – Almost all liberals support globalization and oppose economic nationalism. They ignore the mounting evidence that, in its current form, globalization is dangerously incompatible with democracy.

In his 2011 book The Globalization Paradox, Harvard’s Dani Rodrik says that the nation-state, democracy, and globalization are mutually irreconcilable: we can have any two, but not all three simultaneously (he calls this a “trilemma”). All over the world, the “nation” has been revolting against globalization in the name of democracy.

That became clear this year when US President Donald Trump imposed the first of a widening set of tariffs against Chinese goods, with China retaliating in kind. Trump has also torn up two major international trade treaties and threatened to withdraw from the World Trade Organization.

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Robert Skidelsky

Writing for PS since 2003
207 Commentaries

Robert Skidelsky, a member of the British House of Lords and Professor Emeritus of Political Economy at Warwick University, was a non-executive director of the private Russian oil company PJSC Russneft from 2016 to 2021. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

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Andreas Stolz Dec 19, 2018

The concept is indeed interesting, but implementation would be incredibly difficult. How does an exporting company calculate cost without knowing if a tariff is applied or not? There are only two options: Full transparency and real-time data exchanged between all actors (good luck data protectors) or full chaos.
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Frank Tuijn Nov 18, 2018

It is easy for US to import as it creates unlimited amounts of dollars, the main currency in the World, out of thin air and US maintains extremely low interest rates to keep those dollars available.
Reasonable interest rates would drag US economy down because it hasn't developed a modern infrastructure nor maintained the existing infrastructure adequately. So will US continue to waste money, buy two type of Littoral Combat Ship in large numbers, both types being not fit for any purpose and continue to maintain a corrupt Military Industrial Complex?
A country imports technology to raise its economic level, sometimes without paying for it as US did in the nineteenth century, but that cannot serve to grow to become a World leader in technology. For that you need to develop that technology yourself and with China producing eight million engineers each year while US produces half a million and with MIT falling from the position of most prestigious technical university to third place the stealing of technology by China has ceased to be a major factor.
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Petey Bee Nov 17, 2018

Interesting concept. I think it's correct to conclude that some form of protectionism is a necessary compromise now, to forestall reactionary/nationalist politics. Structuring it by country-of-origin and in terms of budget deficit is logical enough.

More importantly, it's good to see recognition that corrective measures are needed, to fix the serious side effects from the neoliberal economic development model. (Productive though it may have been.)

At the same time, a protectionist policy as aggressive as this one, probably would have a hard time being the "central pillar" of such corrective measures. The element of increasing competitiveness of domestic labor activity is vital - equally important to blocking competition. The element of accepting the semi-permanent end of some of this labor activity and instead dealing with the human effects (e.g. reduced workweek) is also equally important.

Other questions:

Why would offshored economic activity return home rather than shifting to a third low-cost country-of-origin, just one without a trade surplus with the home market?

Does such a focused deficit reduction policy really align with US geopolitical goals? Would creating unemployment in Mexico be a good idea? Isn't it useful to have a trade deficit with countries like Japan and South Korea, to maintain the flow of $$ to them for the sake of geopolitical influence, in light of rivalry with China? What about Germany?

Balancing trade within the EU in such a forceful way raises some enormous issues. The EU as a whole, on the other hand, doesn't really suffer from a deficit problem.

As the author notes, the US is unique as it's the only deficit nation who can even consider trying to dictate terms to its trading partners without fear of consequences, and with China I wouldn't even be sure of that.
- Paul Friesen Nov 23, 2018
  
  I don't think protectionism will help. It will simply fail to improve the lives of workers. Tariffs on imports to the U.S. are unlikely to persuade many companies to move production back there, because companies will be uncertain if the tariffs will remain for long. It's a pretty poor bet to invest millions in plants designed for 50 years, based on conditions that may well change after the next election. And meanwhile, Americans will be paying more for everything and their sales to the rest of the world will fall because of higher costs and retaliation by other countries.
  
  Much better to focus on measures to really help workers as labour everywhere is increasingly replaced by machines. Mechanisms to distribute the wealth are essential. One good way to do it would be a basic income or negative income tax scheme, paid for by sales taxes on all the goods that are increasingly produced by robots.
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Edward Lane Nov 17, 2018

I have a tough time accepting that "the trigger for America's turn to economic nationalism is its widening trade deficit..." for, among other reasons, other countries with rising nationalism have not experienced a widening trade deficit. Rather, in my opinion, the rise in nationalism comes directly from the growth in economic challenges that have reached the breaking point. As a result, people have lashed out to newcomers, be they legitimate immigrants or not, and to those who have been in charge as the economic dislocations have occurred like a slow-moving train. As a result, people have sought solutions, for example, by electing Donald Trump president, by rejecting leaders like Angela Merkel, and by voting for Brexit, that have the appearance of correcting the perceived causes of the problem, namely, immigration and international trade.
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j. von Hettlingen Nov 17, 2018

Robert Skidelsky says the plan launched by Russian economist and mathematician, Vladimir Masch deserves “serious” attention, because it has offered some radical solutions to the problem of free trade, that has led to the current standoff between China and the US. Masch has “advocated an ingenious ‘compensated free trade’ (CFT) plan as a way to achieve legitimate protectionist aims without disrupting the world economic system.”
The author points out the backlash against free trade in Western democracies, prompting Harvard economist Dani Rodrik, to illustrate the “trilemma” of nation-state, democracy and globalisation in his 2011 book The Globalization Paradox. This ménage à trios is “mutually irreconcilable: we can have any two, but not all three simultaneously.” It explains why we are seeing “the nation has been revolting against globalization in the name of democracy.”
At the forefront of Trump’s economic nationalism stands America’s widening trade deficit – $566 billion in 2017. He complains about other countries robbing the US like a piggy bank, stoking widespread hostility toward globalisation and multilateral trade agreements, which were to blame for the millions of manufacturing jobs in the US being outsourced to low wage countries, thriving at their expense.
The author says Trump’s protectionism also “has a geopolitical root.” Like many in America, Trump sees China’s strategic “Made in China 2025” plan as a threat to US hegemony, because it seeks to boost a high-tech industry “aimed at transforming China into a dominant global leader in the industries of the future.” Momentarily Beijing still needs to acquire advanced technologies from the US to achieve its goal. “If MIC25 is successful, the US will have a depleted economic and political future.” Beijing aspires to overtake the US as the world’s largest economy and be its equal militarily in the coming years.
Mash’s plan advises a country to set a “ceiling” for the trade defict every year and impose “limits” on the surpluses of its trading partners. As an example, the US exports goods and services to a certain country totaling 7 billion dollars a year. “If the deficit limit for that country is set at 3 billion, the country’s exports to the USA may amount up to 10 billion. If the country wants to increase its exports to 12 billion, and the stipulated percentage is 80 percent, its government must pay to the US Treasury 1.6 billion”. More importantly, it is crucial to have congressional approval to set the budget, debt limits and trade deficit limits.
However, some believe it is important to help those who are victims of globalisation. But in the American case, they say, it is not simply that the winners have failed to compensate the losers. It is much worse: winners have used their profits in this pay-to-play political system to bribe politicians and pay for policies to protect interests and build on their gains furthermore at the expense of the losers, whose grievances are being capitalised by populists.
The author seems enthused about Masch’s “smart” protectionism, which he says, “has several advantages over crude tariffs.” Most of all “it would automatically prevent trade wars.” The question is whether China would compensate the US for its trade surplus. What would Mexico, Canada or the EU say about it?
Perhaps the US should start with doing its homework, like protecting labour rights and pay workers a living wage. Reform the World Trade Organisation and ensure that it moves towards an acceptable standard for the protection of labour. Perhaps the government should tax goods that US companies produce with cheap labour overseas, or to levy a tax on outsourcing and offshoring of manufacturing.
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Mike Robinson Nov 16, 2018

If "only one nation – the US – has the clout to ..." (which assertion Lord Skidelsky neglects in any way to justify) then it is not a global policy change at all; merely a sideways jab at what the United States, specifically, has done.

Fundamentally, the problem here is one that would be very familiar to John Ruskin: nations "considered price alone" and began to shop on the international market for goods at the exclusion of maintaining their own domestic ability to produce them. "International trade" became more meaningful than "domestic production." Companies also shut down domestic production factories to open factories in other countries who could then "import" those parts and assemblies tariff-free, thus avoiding the need to hire "expensive labor."

It no longer made sense, according to these very senseless people, to "bloom where you are planted." The companies even moved their corporate headquarters to tiny Caribbean islands and officially became "foreign corporations" while retaining their palatial office buildings in New York and elsewhere. Just a way to say that "the field in which you ARE planted" is somehow "not my field."

Exporting products to a country to a point that is ruinous to that country's domestic ability, and then paying money to the ruined country's government, does nothing to address the ruin itself. Currency-units are no substitute for jobs. The goods continue to be imported, jobs continue to be lost, and bankers pay other bankers money that the workers will never see.

Tariffs work in a simple way by causing the imported goods to become more-expensive than domestic alternatives, thus encouraging the re-development of those alternatives in lieu of continued exports. Products that are now being exported might be sold to another country or diverted back to the exporting country's own domestic activities. Tariffs do change the financial equation and, by doing so, also change the import/export behavior, but that is what they are expressly intended to do.
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Paul Friesen Nov 16, 2018

Trade is not the problem. Workers in rich countries are suffering due to the rise of automation, and that rise will continue.Rich country governments need to deal with this rise with methods to reduce inequality. A highly feasible way to do this is by providing a basic income, paid for by sales taxes. This would result in an economy in which there is still an incentive to work, but in which the strength of that incentive could be calibrated to the need for labour. It would result in a society that is less harsh and unforgiving, where loss of a job would be less of a problem, but where any job at all would lead to more income. It would be far simpler to run than the current mess of different programs for the unemployed that exists in most countries.

Trying to take jobs back from poor countries is not only unethical, but it is highly doubtful if it will even help rich countries. As poor countries become richer, they also become consumers. Even if we can slow down the spread of industry, we would be losing that market.

Rich countries need to solve their own problem of automation leading to rising inequality. They should not try to do it on the backs of the people of poor countries.
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David Punabantu Nov 15, 2018

Free Trade with America's "exorbitant privilege" goes against the grain. Economics 101. Adam Smith's Supply and Demand doctrine talks of Country X with Commodity X with Currency X. It is the supply of Commodity X and it's demand bought by Currency X that creates a price. If Country Y wanted Commodity X then Country Y would have to change its Currency Y into Currency X to buy Commodity X. That is why a Euro cannot buy anything directly from the US until it is changed into a US dollar. A US dollar cannot buy anything from the EU until it is changed into a Euro. But for Africa, Latin America, Asia minus China and Japan the US dollar buys directly their commodities by passing national currencies and thus violating Adam Smith's market doctrine. So you may talk of deficits in monetary terms, but the US ends up with surpluses of resources obtained at prices outside the market economy because of its "exorbitant privilege" which is not market driven. The one value policy across the world of the US dollar creates the deficits and surpluses as it is not market driven. The IMF fixed cross rates goes against the free market system. The IMF fixed cross rates are based on the exchange rate of the US dollar against the Sterling pound. On the 30th of March 2018, the Sterling pound value to the US dollar was £1 equal to US$1.404. The Euro value against the Sterling pound was £1 was equal to €1.140 while against the US dollar it stood at US$1 to €0.81169. By dividing €1.140 by €0.81169 it gives the cross rates of 1.404. When looking at the North Korean Won its Sterling pound value stood on the same day at KPW1,263 while its US dollar value at KPW900.69 giving a cross rate of 1.403. For the Japanese Yen on the same day the JPY149.067 for the Sterling pound manifested and JPY106.185 for the US dollar giving a cross rate of 1.404. The same picture is seen in the Indian Rupee INR65.06 per US dollar against INR91.36 per Sterling pound to give a 1.404 cross rate. The Canadian Dollar CAD1.288 per US dollar against CAD1.809 per Sterling pound to yield a cross rate of 1.404. The Ethiopian Birr ETB27.56 per US dollar against ETB38.69 per Sterling pound gives 1.404 as a cross rate. The Chinese Reminbi CNY6.272 per US dollar against CNY8.812 per Sterling pound gives a similar cross rate as all currencies across the world do. The question is do all money markets across the world have day in and day out the exact liquidity of Sterling pound and US dollars to reflect the exact exchange rate between the UK and US as reflected in the IMF fixed cross rate system. The reality on the ground is IMF fixed cross rates distort the market and value and thus undermining free trade. It removes value to create and perpetuate debt . The IMF needs to more to Free Floating Cross Rate to reflect the real position of currencies within markets and let currency arbitrage equalise quotations between markets. As for China it is simple. The difference between China and the US is clearly seen in economic policy. A look at what former editor of the Financial Times Mr Crowther wrote in his book"An outline of money" he wrote , " “if a purchaser is someone who want D-marks in order to pay for German exports, the fact that he can get his marks cheap is equivalent to a reduction in the price of exports; it will stimulate sale in exactly the same way as an ordinary depreciation of the exchange rate” (Crowther (1951) p.260).
China has depreciated the price of its products to stimulate inflows, while western economic philosophy has been depreciate currencies to stimulate inflows as echoed by the IMF. China follows "who want D-marks in order to pay for German exports" ..by having "who wants Chinese Rhiminbi in order to pay for Chinese exports" ...Although Chinese firms quote their exports in US dollars payments are settled in Chinese Reminbi to the firms as a result of Chinese foreign currency regulations. Free trade in theory and practice have a huge gap. Take a look at the London Metal Exchange (LME). The LME in a single day handle US$10 billion as 85 percent of the world's base metals pass through it. It is fed by the London money markets that handle US$1.5 trillion plus a day. The LME only allows the US dollar, the Sterling pound, the Euro, the Japanese Yen and in 2015 the Chinese Reminbi as accepted currencies to buy up all of Africa's mineral wealth despite Africa supplying the LME with base metals for centuries. In other words African currencies are banned from purchasing their own production. Is that what Adam Smith said?
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Olga Butorina Nov 15, 2018

Great idea. Similar to what Keynes suggested in his International Clearing Union. Current account deficits have been and still are the core problem for the European monetary system and the euro area.
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