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An interesting exchange between Tyler Cowen and Dani Rodrik on attitudes to free trade. Tyler puts protectionist sentiment partly down to atavistic nativism:

Despite all these gains [from free trade], the prevailing intellectual tendency these days is to apologize for free trade. A common claim is that trade liberalization should proceed only if it is accompanied by new policies to retrain displaced workers or otherwise ameliorate the consequences of economic volatility.

Yes, the benefits of a good safety net are well established, but globalization is not the primary source of trouble for most American workers. Health care problems, bad schools for our children or, in recent times, bad banking practices have all produced greater disruptions — and these have been fundamentally domestic failings.

What’s really happening is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature — namely, our tendency to divide people into “in groups” and “out groups” and to elevate one and to demonize the other. Americans fear that foreigners will rise at their expense or “control” some aspects of the economy.

Dani attributes it to the fact that international markets are insufficiently “embedded”:

Domestic trade takes place within thoroughly embedded markets; there are clear rules and they apply to all transactions equally. International trade, on the other hand, is conducted in only weakly embedded markets: the rules either do not exist or apply unevenly. I believe this is the fundamental reason why their consequences are often perceived so differently.

Let me make this concrete. If Harvard fires me and hires Tyler Cowen instead, I would feel bad for sure. But I would not blame Tyler or Harvard, because I would assume that the decision was made on fair grounds: we compete under the same ground rules, and if Tyler beat me to it, it must be because he deserves it.

But suppose instead that Harvard hires John Plagiarizer, who has a much longer vita and larger citation counts than either one of us, because… well because he is a flagrant plagiarizer. I think I would have pretty good reason to feel cheated.

An extreme example? Let me make it less so. Suppose that I am an experimental psychologist instead of an economist and the person Harvard hires in my place is someone who has accumulated a long vita by virtue of not having to abide by human subjects review standards. (You can find out a lot about human behavior through torture.) Would I not feel treated unfairly? You bet I would.

The international trade counterpart of this hypothetical is the worker who loses his job because his company decides to move to a country where, say, labor rights are routinely violated. So the “us” and “them” characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on.

I’m with Tyler, though I would put the case a bit differently. For many workers, suspicion of particular manifestations of free trade (the ones that might cost them their jobs) is rational–just as, for many workers, fear of labour-saving technology is rational. The question is, why is it permissible to demand that trade be restricted, but impermissible to demand the same of technological progress? One answer is: because it can be, whereas technology, one supposes, cannot be stopped. A second answer is that the overall benefits of free trade are subtler than the overall benefits of new technology, even though just as real. A third answer is that it is always politically advantageous to cast foreigners as cheats (evidently, even if you are also promising to restore America’s standing abroad), and that is Tyler’s point.

Dani’s response strikes me as odd (and not just because of the presumably unintended implication that torture is less “extreme” than plagiarism). Is opposition to outsourcing noticeably milder for jobs that go to Europe than for those that go to India? Is this a distinction that is ever even made? Minimum wages in Europe are mostly higher than in the United States, and labour rights in general better protected. I cannot see that this fact does much to assuage the feelings American workers have about outsourcing–though it should, if you agree with Dani that fear of regulatory arbitrage is the main thing underlying anti-trade sentiment. If an American’s job goes to Ireland, let’s say, the victim still feels cheated, because his US company has preferred to hire a foreigner. That is still a case of “putting profits before [American] people”.

Also, if Dani’s regulatory arbitrage idea is correct, how do you account for protectionism in poor countries? Tyler makes this point in his response to Dani. It is not so hard to explain, if you think xenophobia-as-permission-to-complain is what counts.

One more thing. Dani notes that trade where violation of labour rights does not play a role “probably constitutes the bulk of world trade”. In other words, fear of regulatory arbitrage is in most cases a mistake. On Dani’s view, correcting that misunderstanding would seem to be an urgent priority. Why isn’t it?

June 11th, 2008 in Current Affairs | Permalink