Double standards on trade?

In response to my summary on trade and prices, DM asks an important question, which goes right to the heart of the debate on globalization:

Let us say an new barber moves into my neighborhood. He offers the same quality service as my old barber, but is cheaper. So I use the new barber.

A factory in China can make the the same socks, but for less than a factory in North Carolina. So I decide to buy my socks from China.

Why is it that Dani wants interfere with my sock purchases, but not where I get my haircut?

First of all, let me be clear that I am not advocating that we interfere with purchases of socks from China (or anywhere else) as a rule. But I do believe there are circumstances under which such an interference would be warranted--and that is why DM's question is germane.  Elaborating on why gives me an opportunity to revisit a theme I have already written on.

DM thinks we should not apply a different set of standards to exchanges involving international trade than we do to those that are purely domestic.  I agree!  What I think he overlooks is that in fact we do encumber domestic exchanges with a lot of restrictions, and in some cases even outright prohibitions.  Domestic laws prevent you from selling yourself into bondage, to hire out your children for factory work, to flout minimum wage requirements, to exceed maximum hours of work, to employ workers in conditions that violate mandated health and safety requirements, and so on.  DM's new barber would not remain in business long were he not to comply with standards set by the local health board--regardless of whether DM would want to use him or not. These are instances of what the political philosopher Michael Walzer has called "blocked exchanges."  In each of these instances, one could have made an argument that it is improper for the state to come in between two consenting adults. Maybe DM thinks these domestic restrictions should be removed as well. But no matter.  The point is that restrictions do exist in domestic exchanges as well.  Individuals are never completely free to sign certain contracts.

The reasons that we routinely restrict and regulate domestic exchanges are manifold. Sometimes we do so to uphold deeply held norms and values (as with anti-slavery laws). Sometimes we want to redress bargaining imbalances (as with a lot of labor legislation).  Sometimes we worry about informational shortcomings (as with health and safety standards).  When we try to disassociate international trade from such concerns, we in fact create a double standard: it is not OK for me to displace American workers by employing child labor at home, but it becomes OK for me to do the same by employing child labor abroad. (A society may of course choose to condone the latter after due consideration of the alternatives for children in the exporting country; my argument is just that there cannot be an automatic presumption to that effect.)

There are of course many instances when international trade does not impinge on social and moral considerations at home, and such difficulties do not arise.  But treating international trade just like domestic exchanges does raise difficult questions of fairness and distributive justice.  It is hardly a solid justification for free trade. 

Comments

[paine]

dr

you might also mention
exchange rate distortions

and further notions of social progress
as measured in hours to produce an item or service
might be going backward
after cross border trade commences
if wage rates "over there "
are sufficiently lower

of course global productivity might be rising as under employed folks over there join the new wage based production sector

[GA]

This is exactly the point made in France against the "Polish plumber": he provides the same service more cheaply because he is prepared to accept less social benefits.

The argument used is often that the newcomer shouldn't be allowed in for his own good, which is patently nonsense (as with your point about the potential benefit to the exporting country from having lower labour standards).

The tricky bit is that every person (or interest group, or region, or country) has their own view of what is acceptable, often going beyond minimums set by laws and regulations.

Political systems provide mechanisms for translating those expectations and pressures into new laws and regulations.

[Peter]

This is a very nice post. The general point is that there are two distinguishing characteristics of international trade compared to domestic trade. One is that it involves trade across governance regimes, with the consequences you have emphasized. The other is that it involves trade across currency regimes (at least in most cases). This can have macroeconomic consequences (positive and negative) for societies that do not arise when trade occurs within a currency, and it can also justify intervention.

It never ceases to amaze me that economists will resort to models in which there is nothing international about trade at all, and then use them to argue that international trade is no different from any other. It gives tautological thinking a bad name.

[john]

Do you think that we do not use child labor in developed countries because there are laws against it, or because our economies have created enough wealth so that families no longer have to require their children to work? I think a problem with your argument is that by denying other less developed countries the ability to employ child labor (at least by denying consumers the right to purchase their output), we can consign those countries to a lesser developed status (while forcing families there to starve or depend on prostitution, etc., in order to survive).

The broader point is that with free trade, these countries with less regulatory and tax burdens will force the developed countries to lower their regulatory and tax burdens as well. It sounds like you are trying to provide an intellectual argument to allow onerous western systems to remain in place.

[Brent]

Good domestic regulations are those which enhance domestic society. Your work, Professor Rodrik, emphasizes the importance of institutional arrangements tailored to a specific country's needs. So why refuse to trade with countries with do not have similar regulations to ours, unless those regulations would enhance those societies?

Maybe because we feel it undermines domestic regulations (by forcing us to deregulate) or harms our economy (if we don't deregulate). But refusing to trade with these countries will undermine the foreign regulatory structure or harm their economies. If the country is poorer, harm to its economy will have a greater human impact than harm to ours. In the same way, harm to its regulatory structure will be worse than harm to ours.

Of course, if we believe that the threat of trade restrictions will promote positive regulations in other countries, we should do so. Otherwise, I do not see how it is ethical to restrict imports from poor countries with different regulatory structures from ours.

[KY Choong]

Dear Professor Rodrik - thank you for this weblog. I look forward to following your blog.

I think we all agree that more international trade would be good for the world as a whole, particularly if it is accompanied by measures to protect social equity. My concern, perhaps misplaced, is that the developed world seems to preach "free trade" to the rest of the world when it suits them, and then withdraw to "regulated trade" when it suits them. Like "Coca Cola" or "Olympics", "free trade" is a brand with its own brand equity, and can be employed for good or for ill. It would be desirable to get the brand concept right and in this regard, "free trade" could mean many things to many people. The meaning may possibly evolve over time, but it's important that its target audience does not feel betrayed. Perhaps the solution is to champion "free trade" plus domestic measures to protect social equity, rather than champion "regulated trade".

[Asif Dowla]

We do not use child labor? Really? What about migrant labor's children working in the vegetable fields. Our law allows exception to the Amish community from child labor regulation on cultural and religious ground. Why could we not accord the same courtesy to poor countries on survival ground? Isn't this double standard? Instead, we get evengelical and do not realize the unintended consequence of our behavior. Our sanction on child labor only leads to worst outcome as these children work in much more exploitative profession such as being a scavenger or prostitute. This is an example of 'bounded morality." We are telling poor countries we do not want your children to produce my soccer balls, but they can work as a prostitute.

[Arnoldo]

Other coutries will develop their own norms of course. But, in accepting trade from nations that don't apply similar labor laws, health and safety regulation, minimum wage, child labor rules, etc., we place our products at competitive disadvantage. We create pressure to remove the regulations that protect domestic workers from dangerous conditions and unfair treatment. The free trade movement of the last 20 years set the stage for conditions that have throttled American manufacturing and diminished organized labor. The net result is a increased concentration of wealth, stagnant workers' wages, increasing financial insecurity, less free time and a drive to dismantle the federal and state regulatory apparatus. At some point the loss of good jobs and the dismantling of American industrial capacity becomes a national security issue. Today you can't buy and American made TV, PC or DVD player. We will still be able to make our own military hardware in 20 years? Or will building the complex electronics required be an offshore activity?

[Brent]

Arnoldo, when the US loses more by importing from these poor countries than the poor countries lose from being cut off, I might be in favor of restrictions on this kind of trade. We are not at that point, however, especially in terms of military technology.

[Tom P]

"First of all, let me be clear that I am not advocating that we interfere with purchases of socks from China (or anywhere else) as a rule."

Interfere being a broad word, I ask "Why not?". Technology allows us to do some powerful things, and the security requirements of the post-9/11 era actually allow us to leverage the deployed technology.

Why can't this be an economic question? (I happen to find the "Economists' blindsopts" tag interesting in this case). Let's continue to use socks as an example. If today there is a tariff of N (may be zero in many cases) why not set that tariff in order to produce competitive industries? Why not set a default (high) value, and allow importers to reduce the default by performing source-tracing of their materials (similar to a negative VAT, in some ways). If they can show the factories are clean, non-polluting, etc., then the tariff reduces. If the factory meets US standards, the tariff is zero.

Given the desire for sealed containers in international shipment (alreday driven by national security), general technology (so many industries are already have electronic relationships, adding new data isn't hard), and some reasonable level of air/water/?? quality measurement, this doesn't seem expensive. I imagine a reasonably priced enforcement system could be developed that wouldn't overburden industry.

Such a solution has the negative perception of exporting our laws, but it does place our local industry on a more level playing field internationally, by equalizing costs.

If you *really* want to go further, then delete the entire US corporate tax system and basically set up a "tax to pollute" system. (Yea, I know this becomes a political hot potato; thus making it impossible) Service industries pay no taxes, which produces a huge incentive to locate knowledge industries (technology development, banking, software development, research) in the US.

Of course, I also have no idea whether a tariff structure of that form would be "WTO-legal"

(Note I don't believe this is "as doable" with child labor or other items where there is a major social component to the decision and we have to avoid making such decisions for others.)