Three lenses on trade

Three questions, three readings

World trade as a share of world GDP, 1870–2024

Net gain and redistribution

Comparative advantage: East and West

• “If there is one proposition with which virtually all economists agree, it is that free trade is almost always better than protection.”

Gains beyond comparative advantage

• Static gains = one-off reallocation; dynamic gains = faster growth

“Exceptions that prove the rule”

Trade as technological progress: Henry Martyn, 1701

“We can produce textiles at home; or we can obtain the same quantity of textiles from India by producing another commodity which we sell in exchange. If the latter takes less labor than the former, it is the same as if a better technology for supplying textiles has dropped from the sky.”Rodrik 2012: 48, on Martyn’s Considerations upon the East-India Trade (1701)

• Martyn’s examples: the sawmill (2 workers do the work of 30), the river barge (3 men move what 100 men and horses move on land)
• “three quarters of a century before Adam Smith and more than a century before David Ricardo”

Solar: technology traded in both directions

Public opinion on trade

“People with a strong sense of patriotism and communitarian attachments—to their neighborhoods, region, or nation—also dislike international trade, regardless of the type of jobs they hold or their educational level… Values, identities, and attachments matter.”Rodrik 2012: 51–52

Redistribution per $1 of net gain

• United States, average tariff below 5%, move to complete free trade: “more than $50 of income” reshuffled “for each dollar of efficiency or ‘net’ gain”
• At a 40% tariff the ratio “would have been around 6”
• “It’s as if we give $51 to Adam, only to leave David $50 poorer.”

Who loses, and for how long

The economist’s list of preconditions

“What Economists Will Not Tell You”

• The “arm-waving arguments”: (1) most people better off in the long run; (2) deal with complications “through other policies”; (3) losers can be compensated; (4) a moral case for “freedom to choose”
• Driskill: most writing by economists on the gains from trade is “a zealous prosecutor’s advocacy”

Two tests for opposition to trade

“A deserving argument against free trade must overcome at least one of the two hurdles mentioned above: the economic gains from freer trade must remain small compared to the distributional ‘costs’; and trade must entail practices that violate prevailing norms and social contracts at home.”Rodrik 2012: 61

• Test 2 examples in the chapter: “employing child labor, repressing labor rights, or using environmentally harmful practices”
• “Resistance to free trade is not just a matter of narrow self-interest or ignorance—at least not always.”

World trade ÷ world GDP, and the rise of South–South trade

• Developing economies’ share of world merchandise trade: 22% (1964) → 44% (2023)
• South–South exports: $506bn (1995) → $6.18 trillion (2024)

The puzzle: “the rush to free trade”

“Since the early 1980s, developing countries have flocked to free trade as if it were the Holy Grail of economic development.… The puzzle is why is it occurring now and why in so many countries all at once?”Rodrik 1994: 62, quoted in Milner 1999: 92

• “Countries as diverse as Mexico, India, Poland, Turkey, Ghana, Morocco, and Spain” (p. 91); Uruguay Round, 1994
• “many systemic theories, such as hegemonic stability and dependency theory, seemed to forecast growing protectionism” (p. 93)

Two models of trade preferences

• Smoot–Hawley 1930: pressure groups “hijacked the US Congress in 1929–1930” (Schattschneider, in Milner p. 95)
• “export-oriented industries and multinationals tend to favor freer trade” (p. 96)

Finance, labor, landowners: who wants trade with China?

• Factoral: the cleavage runs between classes — capital and land against labor in the US, the reverse in China
• Sectoral: owners and workers in the same industry side together — steel against soybeans

Voters and policy makers

Who decides: executives, legislatures, insulation

• Reciprocal Trade Act of 1934: “giving the executive branch greater control over trade… made trade policy less susceptible to these influences and more free-trade oriented”
• “In every successful reform effort, politicians delegated decisionmaking authority to units within the government that were insulated from routine bureaucratic processes, from legislative and interest group pressures, and even from executive pressure.” (Haggard & Webb 1994: 13)
• Caveat: insulated policy makers “may actually be protectionists, in which case insulation allows greater protection” (Mansfield & Busch 1995)

Regime type and trade

• “Debates over the impact of regime type on trade policy have just begun.” (p. 102)

Systemic theories: two test periods

What openness does to politics

• Liberalization “has a positive feedback effect on policy preferences and political strategies of domestic producer groups. As industries adjust… their characteristics change in ways that reduce the likelihood that they will demand protection in the future.” (Hathaway 1998: 606)
• Open economies have large governments: compensation for “the losers from trade” (Cameron 1978; Katzenstein 1985)
• “greater exposure to external risk, which trade promotes, increases the volatility of the domestic economy” (Rodrik 1997)

Milner’s somewhat unsatisfying answer

“changing preferences among political leaders and societal groups, institutional changes (especially democratization), and the increased influence of international institutions that supported trade liberalization may best explain the global rush to free trade witnessed since 1980.… None of our existing theories by itself seems to do very well in explaining this movement… and none appears to have predicted it.”Milner 1999: 111

GATT rounds and the US tariff

“Deep integration”

“Contemporary trade agreements go much beyond traditional trade restrictions at the border. They cover regulatory standards, health and safety rules, investment, banking and finance, intellectual property, labor, the environment, and many other subjects besides.”Rodrik, “What Do Trade Agreements Really Do?” Journal of Economic Perspectives 32(2), 2018

• US–Singapore FTA (2003): “Of its 20 chapters, only seven cover conventional trade topics” (Rodrik 2018)
• “21st century regionalism is largely about regulation rather than tariffs” — Baldwin, WTO Staff Working Paper, 2011
• Uruguay Round: developed countries’ tariffs on industrial products cut from an average of 6.3% to 3.8% (WTO)

US tariffs on China, 2018–2026

EU trade defense against China, 2013–2026

“Global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies. This is distorting our market.”Ursula von der Leyen, State of the Union, Sep 13, 2023 — announcing the EV investigation

Where the literature has gone since 1999

Three readings, three questions

Next

• Thu Oct 1: Week 6 discussion questions in the shared doc before class
• Tue Oct 6: Bhagwati 1998, “The Capital Myth”; Kirshner 2003, “Money Is Politics”; Oatley et al. 2013, “The Political Economy of Global Finance: A Network Model”
• Thu Oct 8: blue-book midterm

Meyer Burger net sales by region, 2008–2023

German PV-related jobs, 2008–2025

World module production shares, 2008–2025

Germany’s “resilience bonus,” January–March 2024

• Mar 26, 2024: ~500 Freiberg employees given notice

EU vote on duties for Chinese electric cars, Oct 4, 2024

• “could provoke a trade dispute from which no one gains” — Oliver Zipse, BMW CEO, Oct 3, 2024 · German carmakers: about one-third of sales in China
• Spain: pork probe Jun 17, 2024 → Sánchez in Shanghai, Sep 11: “We need to reconsider…” → abstains Oct 4