The Free-Trade Malaise

Vindication—and a change of heart—for a veteran contrarian who saw it coming

People rarely change their minds. They stick to their positions and invariably interpret new evidence in ways that confirm their prior inklings. Not only does the gut usually win out over the mind, it enlists the mind in its victories: lab experiments suggest that the more knowledgeable people are about an issue, the less likely they are to update their beliefs when faced with conflicting evidence. They have more resources to draw on to convince themselves they were right all along. Which is why, when knowledgeable people do change their minds, it’s worth paying attention.

In his recent book, Dani Rodrik, an economics professor at Harvard, does just that, quietly shifting his view on a question that has been central to his career. Nearly twenty years ago, for a special millennium issue of the Journal of Economic Perspectives, Rodrik was asked to predict how far global integration would go over the next century, and what form it might take. In response, he produced what may go down as his best-known idea: the globalization trilemma. Like all great ideas, it is at once intuitive and unsettling. Rodrik argues you can have any two of the following three things: fuller economic integration, democratic representation, and the nation-state—but not all three at once. If the world chooses to capture more of the gains from economic integration, say, by signing a series of ambitious trade and investment agreements, it must necessarily cede a bit of either the ability to respond to citizens’ demands in democratic fashion (say, on a minimum wage), or the preservation of the state as the locus of politics. At the limit, if we wanted full economic integration—an outcome which, it’s worth noting, has never once come close to arising in modern history—we would either end up in a type of golden straitjacket in which governments simply hew to market demands, or the nation-state would cease to be the relevant unit in global politics, and we’d arrive at some variant of global federalism.

At the time, Rodrik put his money on that last outcome. Over the next century, he speculated, global integration would continue apace, and the nation-state would lose its formal relevance. The democratic process would remain, but it would increasingly be transposed onto a global scale. Labour, environmental, and public health activists would continue to check the interests of exporters and multinational corporations, but all these groups would agree that they were best served by a common set of supranational rules, rather than conflicting sovereign ones. Rodrik was betting on global federalism because, as he conceded, it was also his preferred scenario. And while predictions are quickly tweaked, ideals usually aren’t.

Yet in Rodrik’s most recent book, Straight Talk on Trade: Ideas for a Sane World Economy, global federalism gets no mention. Instead, we’re told about the “false promise” of global governance—the term more commonly used today—and that “the best way in which nations can serve the global good…is by putting their own economic houses in order.” Rodrik now claims that the economy is not truly a global commons, the way the ozone layer or the oceans are, and that the economic problems of our day have little to do with a lack of global cooperation. In an era of “America First,” where the U.S. imposes high tariffs on its trade partners under the pretence of “national security,” this makes for jarring reading, coming as it does from a worldly, left-leaning economist. In this new telling, the nation-state has unique legitimacy, and any attempt to transpose decision-making onto the global level will backfire.

That initial hope in global governance and its recent rejection have a common origin in this case: the European Union. The EU is both the most ambitious bout of international integration ever attempted, and a perfect illustration of the trilemma. Its great achievement is the unprecedented creation of the European single market. But, as the Greek fiscal crisis has revealed, the EU is far from a unified democratic entity. Its supranational bodies are not meaningfully elected, and they allow a country like Germany to impose its preferred remedy of austerity on the Greeks, under the guise of a morality play where responsible Germans would be left to pick up the tab for Greek profligacy. All of which has contributed to Greece shedding a fourth of its economy since 2009. Germany never had to internalize those costs, because while the EU is a prime example of economic integration, it features no real political integration—or fiscal integration, for that matter. As long as that’s the case, cracks will appear in the union. Political constituencies in either Germany or Greece will push back. And recently, that pushback has taken the form of far right-wing nationalism. All this in what should have been the most likely setting for success: 28 neighbouring, relatively culturally homogeneous countries, united by a deep common interest in avoiding a return to centuries of warfare by tying their fates to one another. If democratic supranational politics couldn’t function here, its prognosis anywhere else seems unfavourable.

In other respects, Rodrik has doubled down on his original ideas, and it’s the rest of the world that has caught up with him. So much so that reading him today sometimes feels like going to see an exhibit of Impressionist paintings; it all seems rather quaint—wholesome, even—and one forgets how incendiary this stuff was when it first appeared. By now, the study of economic development has progressed enough that the motto “one size does not fit all” might as well be emblazoned on the front steps of the World Bank, which has progressively turned toward customized micro-level projects. But at the time of the 1990s Washington Consensus—which was called a consensus for a reason—Rodrik was among the few sounding the alarm about a top-down, checklist approach to development. As legions of well-meaning development experts were busy selling (some would say imposing) a package of standard reforms for developing countries—currency devaluation, fiscal discipline, trade liberalization, unrestricted capital flows—Rodrik was arguing that the development paths countries followed were varied enough that no single recipe could be optimal, and that simultaneously imposing a series of deep reforms could actually cause more harm than good. Local context mattered: property rights, say, would mean little if there was a decade-long backlog in the court system. Today those water lilies adorn grandma’s umbrella, but at the time, they were widely mocked. Rodrik’s triumph lies in the extent to which his early ideas have become common wisdom.

Dani Rodrik is among the discipline’s contrarians-in-chief, a function he shares with the Nobel Prize-winner Joseph Stiglitz, with whom he agrees on a number of issues. These days, both are increasingly skeptical that solutions to economic problems will be found at the international level. It’s heartening that some of the contrarians’ views do still have the power to unsettle. And nowhere more so than with respect to international trade, which is the issue that Rodrik has increasingly devoted himself to. Rodrik’s main complaint, contained in the book’s title, is over the lack of “straight talk” on trade, and the results this has on the agreements themselves. There’s some truth to this, though I tend to think the emphasis on earnestness may be misplaced, and that Rodrik underestimates the political forces at play.

The problem starts with how policymakers sell trade agreements to their constituents. Ask a politician why Canada recently joined the Trans-Pacific Partnership (TPP), and you’re likely to get some well-rehearsed patter about growing Canadian jobs and expanding market access for our exporters. Here’s the awkward truth: Neither of these has much to do with what academics studying trade would identify as the actual objectives of such agreements. The scholarly view is a tad more perverted, and far more interesting: trade agreements are about defeating your own worst impulses. And the worst impulse of democratic leaders is to give in to demands from powerful lobbies that help them stay in power, even when it comes at the expense of the rest of the country. In Canada, no politician can get elected without proudly vowing to protect the dairy industry from foreign competition, even as Canadian households pay $200 more a year for dairy products than they would otherwise—a burden borne disproportionately by low-income Canadians. The only way of tackling domestic politics such as these is to find an outside perch: an international treaty. What politicians see as the price of international agreements—the concessions they force us to make to foreign exporters—­academic observers see as the point. Trade agreements allow countries to push forth beneficial reforms that are otherwise blocked by powerful interests. By comparison, there is little academic support for trade agreements having much of an effect on jobs, either up or down. In the scholarly view, trade agreements are about consumption: lower prices and more choice.

But this argument does not play particularly well on the political stage. That’s because consumption is not a political issue. There is no party of consumers, but there are parties of workers. Consumers do not picket for cheaper dairy products, and the price of yogurt does not determine their votes; meanwhile, dairy workers do mobilize for protection from cheaper organic yogurt from New Zealand and so they get it.

Releasing oneself from the grip of powerful political lobbies sounds like just the thing the left is usually concerned with. And while critics like Rodrik are quick to point out that those powerful interest groups can exert influence on the agreements, too—intellectual property rights are a case in point—politicians are undoubtedly more insulated from their influence during international negotiations than in the day-to-day course of policymaking at home. Consider Japan, which has long imposed duties of 778 percent on foreign rice, making the price of rice in Japan multiples higher than in neighbouring countries. That makes growing rice in Japan artificially attractive, so the government also has to pay rice farmers not to do it, so that a third of all fields lie fallow. The system is a significant drag on the economy, but policymakers have been unable to change it, so great is the political power of the rice lobby. Enter the TPP: Part of Prime Minister Shinzo Abe’s enthusiasm about the agreement is precisely because it strengthens his hand vis-à-vis the rice lobby. For the first time, Japan has been able to reform its policies on rice in a way that reflects consumer interests.

Yet that isn’t how politicians sell agreements to their constituents. Instead, they present a good trade agreement as one that increases job numbers, which leads their opponents to claim that a bad agreement is one that will cost jobs. Neither finds much support in economic theory.

But academics, it turns out, sin as much as politicians. An economics professor asked by a journalist whether the TPP is good for Canada will reflexively respond “yes,” and hurry away. Asked the same question in a graduate seminar, that same professor is likely to mount a systematic challenge to the assumptions underpinning the naive conclusion that “trade liberalization is always beneficial.” Climate scientists, given the fraught politics, likely have a similar one-word answer when asked in public settings whether climate change is real. But an academic climate change conference likely sees heated debates about measurement error and the many issues with the built-in assumptions of statistical climate models. That’s not to take away from the overall conclusion; it’s only to say that scientific consensus emerges from ongoing internal debate and conflicting results. Unveiling that messiness can be seen as acting against “the cause.” In the case of trade, the fear is that any nuance will be seized on by the protectionist hordes. One can bemoan the hypocrisy and call for “straight talk,” as Rodrik does, but the hypocrisy comes from an understanding of the public arena’s constraints: theoretical wrinkles make for bad sound bites. Trade skeptics happen to have the upper hand in this respect: It takes fewer words to say that the trade deficit means Mexicans are stealing jobs than to explain why countries are unlike corporations, and trade deficits are not, by themselves, either good or bad, and therefore—where did that journalist go?

In the case of trade, one such wrinkle, long overlooked, comes from economic models’ focus on the “average citizen.” And while trade agreements may indeed be beneficial to the “average Canadian,” no such animal exists in the wild. There are Canadians who work in the finance sector in Toronto and eat organic yogurt, and there are Canadians who work in the dairy industry in Sainte-Anne-des-Plaines, say, and drive pick-up trucks. The first group will likely be better off after the TPP, while the second (which theory tells us should be smaller) may well be worse off, at least in the short term.

Just how short that short term is turns out to be the crux of the matter. On this question, a number of scholars have recently done that unusual thing of changing their minds in the face of new evidence, and I include myself among them. Until recently, the assumption was that while the dairy industry in Quebec may suffer from opening up to competition from organic dairy from Australia, those workers will swiftly find new work in another growing sector, and we’ll all end up better off. The term of art is a reallocation of resources, and the gains from trade rely on it. But what we’ve learned of late is that the reallocation is far from swift. A series of studies looking at the U.S. has shown that areas most exposed to trade competition from China, especially, have experienced decreased earnings, lower employment, and increased disability claims, even a decade later. The losses in the losing industries have not been offset by gains in winning industries nearly as fast as we thought, and the effects will be generational. You won’t be surprised to hear that such trade-exposed areas also disproportionately voted for Trump in the U.S., and Brexit in the U.K.

Which is to say that I’ve been chastened. When journalists ask me whether the TPP is “good for Canada,” I now have a more sheepish answer. I respond, “Which Canada?” Because whether or not such agreements are beneficial in any meaningful sense depends on our ability to redistribute some of the benefits, from the majority that gains to the minority that stands to lose. Canada happens to be quite good at this, given its strong social safety net. But it remains a massive looming policy challenge, especially with further labour market shocks, such as artificial intelligence, on the horizon. And it is not just a problem for individual countries: U.S. behaviour over the last year has been that of a country externalizing its domestic pains, rather than dealing with them domestically. Trump passes a tax reform bill that helps the wealthy, and then lashes out against NAFTA on the basis of its costing working-class jobs. Domestic troubles have a way of spilling over borders. The danger emerges when countries “putting their own economic houses in order” do so at the expense of the house next door.

That’s precisely what trade agreements are designed to avoid. They are promises countries make to each other not to act against their own long-term interests—by putting up trade barriers in a way that leads everyone else to do the same, as happened during the interwar period, further deepening the Great Depression. Or by giving in to demands from the dairy lobby for additional protection, in a way that hurts one’s own consumers. Rodrik’s point is that countries should deal with these issues themselves, because they are the first to benefit from their own good economic policy; the problem is that they might be unable to. As Jean-Claude Juncker, the president of the European Commission, famously put it, “We all know what to do. We just don’t know how to get re-elected after we’ve done it.”

The challenge of selling an unpalatable solution is common enough. I know that running is good for me. But I’m unable to make myself do it, especially in the mornings. So I make a pact with a friend: we go running together every morning, and whoever is the no-show doesn’t hear the end of it. The stroke of brilliance at the heart of international agreements is the understanding that politics cannot be circumvented; it has to be harnessed. So if governments give in to the demands of some domestic interest group, others are formally authorized to retaliate by doing the same. In response to the recent U.S. threat of imposing duties on steel, the EU has already warned it would raise barriers on American bourbon, a move that turns bourbon makers against American protectionism. Trade agreements enlist one mercantilist impulse to fight another mercantilist impulse. This mixing of liberal ends with mercantilist means seems to irk Rodrik’s aesthetic sensibilities—but I venture to say that it’s just the kind of innovation he is looking for in other places. A whole chapter in the book is devoted to innovative forms of public-private partnerships, but what is lost in the blanket dismissal of global governance is just what a radical and innovative solution international agreements represent.

Critics like Rodrik and Stiglitz are also troubled at how trade agreements are no longer just about trade. It’s true: contemporary trade agreements have provisions covering, for example, what constitutes a legitimate health standard. The notion of international treaties reaching into such areas of traditional sovereign control seems troubling: it rings of the loss of democratic agency implied by the trilemma. But what is the reason behind the expanding scope of these treaties? Surely trade negotiators are not looking for more issues to wrestle over.

The reason, which Rodrik glosses over, is that clever people adapt to existing rules. And the private sector has adapted to half a century of tariff-abating trade agreements by turning to regulation to gain an edge. Germany and Austria recently decided that all paperwork relating to freight trucks passing through their countries must be translated into German, a move aimed largely at Poland. Poland, in turn, has changed its retail tax system to advantage local stores over large international chains from countries like Germany. Last year, France implemented a law that required all dairy and meat products to be labelled with their country of origin, rearing, and processing. It worked: French milk imports from Belgium fell by a quarter. Italy has now copied the French regulation and applied it to pasta: labels will be required to show the origin of the wheat used.

I cite these examples first to offer a flavour of what the current battleground looks like: Trade competition is being fought through labelling requirements, arcane safety-testing guidelines, and obscure regulatory annexes—the more obscure the better. And second because this is happening within the EU, that most ambitious of economic-integration experiments. That the EU is prone to such protectionist regulation among its own member-states offers a sense of what the rest of the world is up against.

Such regulatory protectionism is what modern trade agreements try to grapple with. But the trilemma is then posed anew: to close the loopholes through which the gains from economic integration seep out, one must decide what constitutes legitimate regulation, which is usually the prerogative of national governments. The question is, how much of this international meddling do the gains of further economic openness merit? Finding the right balance is something that can be achieved through democratic decision-making, but citizens must be aware of the stakes on both sides.

Rodrik is right that the veneer of global integration has been tarnished. And when one of globalization’s chief observers goes from rooting for global federalism to calling on everyone to start by “putting their own economic houses in order,” one should take note. The European experiment is struggling. Policymakers ignored those who stood to lose from integration for too long. Those costs have come into sharp relief in countries that have turned to populist nationalist candidates. But as we look for solutions, as we discuss new exotic forms of public-private partnerships, let’s not overlook the deep innovation at the heart of global governance. International treaties use politics to extricate ourselves from politics, and that’s a unique trick.
It is too soon to dismiss their potential.