Tyler Cowen asks me the following question:
We can, in principle, rank policy areas along a spectrum. Assign a "10" to the most efficient policy-generating areas and assign a "0" to the least efficient. Don't worry too much about what the scale means, this is Blog Land
Where do you put trade restrictions along this scale?
His own answer is as follows:
I give them a 1.5, at best a 2. I think trade restrictions are hardly ever generated by processes which coincide with the general welfare. I view trade restrictions as almost always motivated by the classic, crude "diffusion of costs, concentration of benefits" logic.
But then again:
If we redefine the problem more broadly, it could be said that trade policy as a whole gets an 8 or a 9. Most of the wealthier countries, agriculture aside, have fairly free trade, as they ought to. But what if we focus on evaluating only the quality of the trade restrictions? How good are the restrictions we get in tracking the ideal welfare-improving restrictions?
The question, if I understand it correctly, is whether I think trade policy—and in particular trade policy which departs from free trade—can ever do some good in a world where purely political motives and rent-seeking are rampant. My answer is yes, but let me build my case point by point.
First, let’s notice that Tyler is making a point about the politics of trade policy, not about its economics. In fact he grants (perhaps for the sake of the argument) that there may be social welfare-improving trade restrictions. So he understands that we live in a second-best world. (In a first-best world, trade policy would have absolutely no positive role.) Good.
He also grants that trade policy has worked pretty well in recent years if you tend to like free trade. In fact, the world economy has never had freer trade in goods (and in most services except for labor services). So whatever political problems may exist, they have not prevented the winners from freer trade from imposing their will on the losers.
But what about the pattern of existing trade policies, Tyler asks. Can we really say that they are the result of any process of social-welfare maximization? No, of course not. That is why I do not want to keep them as is. To be clear, I do not believe the economic cost of existing restrictions is all that high (the reasons will have to wait for another post). But I want to change existing policies and make them more consistent with social welfare too.
But is there any chance that we could actually move in the direction that I would like to see (which is not necessarily and always the unconditional free trade direction) without doing more damage than good?
Now, remember the point above regarding the openness of existing policies. The fact that we do not live in autarky is prima facie evidence that we are not at a corner solution where the political-economy equilibrium is concerned. That means that even relatively small changes in institutional design—with corresponding changes in incentives for political agents—can have important implications for the outputs of the political game. We actually have some control over how the political game is to be played, and therefore over the amount of rent-seeking that will be generated in equilibrium.
Here is one example where this generally works to our advantage. To prevent congressional log-rolling in tariff setting, we allow Congress to delegate the details of trade policy negotiations to the President (in the form of trade negotiating authority), with Congress limited to an up-or-down vote on the entire package. It is generally agreed that this delivers better trade policy than in the absence of delegation.
And here is another example where it works to our disadvantage (and does so again by design). Anti-dumping proceedings are explicitly designed to favor import-competing firms and to provide protection where none is really needed on sound economic grounds. That is because the government is instructed to determine whether firms are “injured,” but not whether the imposition of duties would engender greater hurt elsewhere. Their outcomes would be significantly different if we allowed beneficiaries of trade (consumers and downstream firms) to have standing in these proceedings.
The point is that we do not have to throw up our hands and say “politics will screw everything up at the end.” The nature of the political equilibrium depends on the rules we select and the institutions we design. In my 1997 book and also in a more recent article, I have discussed some of the institutional safeguards that we could consider putting in place to render trade policy both more responsive to social and economic goals and less prone to narrow rent-seeking. But to everyone, their own level of cynicism.
Let me make a couple of other general points that are relevant to this discussion.
Tyler makes it sound like the debate is about whether we should increase trade restrictions or lower them. That is really the old debate (the “last war,” to use the term from my previous post). Today’s questions are different. Should the U.S. negotiate more bilateral free trade agreements, or fewer? Should we consider a “strategic pause” in trade negotiations to improve the functioning of the WTO or push hard on the existing Doha agenda? Should core labor standards and environmental safeguards be negotiated jointly with trade agreements? How much “policy space” should the WTO allow for? Should labor mobility be part of international trade agreements? How much quid pro quo should the developing countries offer “in return” for agricultural liberalization in the North? Does competition policy and investment belong in the WTO? Should intellectual property rights protection rules be different for developing nations? None of these questions maps neatly into the more-versus-less restriction dichotomy.
Finally, let me note the irony in how a discussion on free trade among economists quickly ends up being a debate on its politics—that is, a debate on whether this or that trade policy which on economic grounds is actually desirable can also be politically feasible. We are way beyond our area of expertise. Your hand-waving is as good as mine.
Scratch any strongly-held view about free trade, and you will find (typically) unexamined political assumptions underneath. Even if we do not end up agreeing, the value of the present exchange is that it is getting us to reveal what those assumptions are. And for that I thank Tyler Cowen.