Saturday, January 28, 2017

Ramanan — Dani Rodrik On Free Trade


I would argue that there is not enough homogeneity in the world yet to formulated a general case theory of trade that fits the diversity of facts enough to be useful as a policy tool.

Another problem that is seldom acknowledged is asymmetry of power. Nations are assumed to pursue their own national interest and asymmetrical power allows  powerful nations to achieve their interest at the expense of other nations if they so chose and there is a lot of social, political, and economic pressure domestically to do so.

As a result modeling international trade in terms of universally applicable principles is often more a matter of rhetoric (persuasion) rather than evidence-based reasoning (science).

Here I think the Chinese principle of social harmony is the wiser choice that the liberal principle of individual preference and and pursuit of interest "because freedom."

International conflict almost always has a strong economic component if not a foundational one. That was true historically under mercantilism, and it has changed much since abandoning the metals. Political power generates economic power, and economic power conditions political power.

Humans are territorial animals. We need to talk about this instead of assuming that an invisible hand will right the scales in a liberal world order of "free trade" and floating exchange rates. 

In the fist place, there is no really free trade owing to all the artificial boundaries that are imposed legally. This is what the recent trade agreements were really all about (TPP, TTIP and TiSA). The "free" was just rhetoric to persuade.

The "free" in "free trade" means free of government intrusion, which implies loss of national sovereignty to global forces and institutions.  This predictably leads to a global technocratic plutocracy ruled by transnational corporations and oligarchs. 

Workers in all countries get the short end of the stick, even though "everyone is better off" statistically looking at aggregates.

The Case for Concerted Action
Dani Rodrik On Free Trade
V. Ramanan

9 comments:

Matt Franko said...

"An individual country’s growth has a deflationary bias because free trade puts a rein on fiscal policy to achieve full employment."

It has a 'deflationary bias' because we are in an underlying surplus and can easily produce more than what is ever demanded domestically...

Then "it’s not comparative advantage which governs economic dynamics but absolute advantage" is correct but this statement assumes trade in the first place... so 'comparative advantage' cannot be used in a determination of whether a country should trade in the first place (which you see a lot of people doing these days) because it assumes a nation has in place productive capacity in excess of the domestic orders which, IF THERE WAS NO TRADE, a nation would never have...

eg, lets say the US is a closed economy has domestic orders for 90 million tons of coal per month, so the industry will provide 90 million tons per month... now the CA people say "if nation A can produce 120 million tons..." but nation A would only produce 120 million tons if there was already trade and the expected to export the surplus 30 mil. tons .. so this is some type of logical fallacy that has manifested because the CA theory was developed under the metals and was never updated...

CA only makes sense if a nation wanted to obtain gold/silver by exporting a surplus amount of product... otherwise a nations productive capacity would never exceed what was being ordered domestically...

These CA people dont know how to correctly identify the terms of the scientific investigation...

Matt Franko said...

iow Trump is saying "no trade!" and the libertarians at CATO and AEI are arguing with him that we should have trade because Comparative Advantage but CA assumes there is trade in the first place ...

John said...

Absolute advantage, absolutely correct.

PS. Matt, why don't you write as clearly as this all the time?

Matt Franko said...

I dont think what I have written is that clear...

It could be better written by a qualified writer... someone trained in writing... I have very little to no training in writing... all math/science/applied math/science...

Matt Franko said...

And then they start using Veblen goods as examples like we are stupid or something...

https://en.wikipedia.org/wiki/Veblen_good


"Hey we are in deficit of the French champagne! ... we're running out of the black sea bass!!!! Have you seen the prices on the new Bentleys!!!!!"

This needs to be looked into for Mexico the tequila is way up as is the Corona and Dos Equis... those people could easily take the 20% hit on their side....

Ignacio said...

Matt they think money comes from the sky or from trees, it has to be "extracted" or "traded". The Germans glorify this sort of thinking that's why they are obsessed with trade surplus, for example.

eg, lets say the US is a closed economy has domestic orders for 90 million tons of coal per month, so the industry will provide 90 million tons per month... now the CA people say "if nation A can produce 120 million tons..." but nation A would only produce 120 million tons if there was already trade and the expected to export the surplus 30 mil. tons

I have been watching this in Spain all my life re. trade with France. When quotas for internal demand were meet there was not necessity to produce more, then when trade was open and demand from French market increases in, let's say, the production in Spain sky rockets to meet the quota (prices stay pretty much the same because there was already underlying surplus and not near full capacity) and presto suddenly we have increased production by 10, 20 or 40%.

Sometimes you have an other interesting dynamic, for example due to problems and open market for electricity export in the last month the prices of electricity have increased sharply (50-60%) because "free trade" allows for the national corporations to sell production to France (where there are shortages due to France stopping operations in several nuclear plants). Is "free trade" producing price rises because there was enough production to keep supply at stable prices on here but not underlying surplus to sell to the neighbour right now.

Matt Franko said...

Ignacio good point but even in EU the trade produces foreign claims...

With US and Mexico, Mexico is happy to accrue USD balances no problemo just as if we were paying in gold and silver in the old days... and then it is saved in Mexican USD accounts and as Warren sez 'we cant consume all we produce...' because of the USD hoarding by Mexicans...

This is the problem that Trump has ie they accrue yuge balances of USDs... if they were to just figure out how to run balanced trade within a one year fiscal interval of time, Trump might pipe down and let it alone...

This might even be what Trump is signaling in his own way, but they might be too USD zombiefied to understand this...

He is used to getting counter offers but these people might be so greedy and incompetent they cant come up with one or even know how to do that...

m.ko said...

Ramanan is very right in pointing out the Rodrik's complete inconsistency. His confused and mystifying rhetoric seems to be the typical example of the apparent progressive who though maybe cant understand much, nevertheless he is astute enough to deceive the naive and serve his owners.
Moreover saying that the surplus of a country causes naturally deflationary bias in other eludes the political and economic problem.

Neil Wilson said...

"This is the problem that Trump has ie they accrue yuge balances of USDs."

Which shows that the tariff proposals are attacking the wrong place. What the US needs to do is make those USD hoards rot in foreign hands.

And you do that by taxing away all income from foreign held US assets. You make the assets worthless in income terms to a foreign holder and try and encourage them to cash in their chips.

If they won't do that because they are discounting your currency to allow them to issue their own, then that is there problem. There's no reason you have to reward them for using your currency to make their accounts look good.

All this means overturning the Foreign Direct Investment doctrine as well. Quite why foreigners are so much better at investing than domestic entities I'll never know.