Trade Policy and Global Growth

New Directions in the International Economy

Robert A. Blecker

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9781563245312
• eBook ISBN:
  9781315482279
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This collection of essays offers critical perspectives on current issues in the international economy. Divided into four parts, U.S. Trade Policy and Global Growth discusses managed trade and international interdependence, the effect of trade on domestic wages and employment, the costs and benefits of trade protection, and likely effects of NAFTA. The collection also addresses the U.S. trade deficit and presents a Keynesian proposal for international monetary reform. Part IV focuses on issues facing developing countries in the areas of trade, industrial, and financial policy. Rejecting the dogma that pure free-market policies should be accepted as articles of religious faith, in either international trade or domestic policy, the contributors search for trade and macro policies that can achieve balanced growth with high employment and an equitable distribution of income in both the United States and the rest of the world.

PART I
Conceptual Frameworks

---

CHAPTER ONE
Managed Trade and Econmic Sovereignty

ROBERT KUTTNER

International trade remains a political act whether it takes place under a system of free trade or protection, of state trading or private enterprise, of most-favored nation clause, or of discriminating treatments.

— Albert O. Hirschman (1945, p. 78)

Introduction

The contemporary problem of global political economy is that nations are losing sovereignty to private economic actors, yet the very turmoil of an unregulated market intensifies the pressure on nations to secure acceptable outcomes for their citizens. Despite the impetus toward an integrated global private economy, the nation-state remains the instrument of political mediation. The state, not private corporations or banks, remains accountable to its citizens for their economic welfare. The state bears the ultimate fiscal responsibility. The polity remains the arena in which social contracts are negotiated. Yet the growing imbalance between an integrated, unregulated global economy and a weakened set of national and supranational instruments for its governance deprives individual nations of the machinery to deal constructively with those dislocations. The Keynesian nation-state has lost most of its economic rudder—not to supranational public authority but to internationalized private capital.

The confusion about the appropriate role for the state and the market is at its most muddled in the thinking about the desirable norms for the trading system that governs cross-border commerce, where the reach of the state is weakest and that of private capital strongest. The confusion is perhaps most severe in the United States, because the United States, as guarantor of the global system and purveyor of the ideal of liberal trade, is increasingly unsure how to reconcile these twin goals with its own national interest as an economy. For the most part, official opinion seems to think that the remedy for the dislocations of laissez-faire is more laissez-faire.

The United States, as the hegemonic power and as the nation most ideologically committed to economic liberalism, also experiences these dilemmas most acutely because it has the least consciousness of them. By the lights of orthodox economics and the ideology of the Reagan and Bush administrations, the remedy for the range of international economic problems is the perfection of free trade. Other trading nations, lacking the effortless commercial dominance that postwar America once enjoyed, feel far less guilty about using the econpmic instruments of the state. Long accustomed to higher levels of both exports and imports as a share of gross national product (GNP), and lacking the American sense of special responsibility for the system as a whole, these nations developed the survival skills and institutions of economic adjustment and development that the United States lacks (Katzenstein 1985; Gourevitch 1986).

In some countries, such as Japan, Korea, France, and Brazil, these strategies have been overtly mercantilist. These nations have been willing to use the economic power of the state to promote industrial development, to shelter home markets, and to seek trade surpluses. Other successful small trading nations, such as Sweden and Austria, while supporting a generally open trading system, have devised their own mechanisms of adaptation and indirect subsidy that violate the norms of liberal trade in more subtle ways. Still other nations, of the Pacific basin, most of them small, have achieved rapid growth by combining entrepreneurial dynamism with very low wages and state support, turning themselves into export powerhouses by letting their domestic consumption lag their production for world markets. Though this is ostensibly a subsidy, it is better understood as a different form of free riding on the trading system, since it depresses demand nationally and hence globally, and creates lopsided trade surpluses that are the reciprocal of other nations’ trade deficits.

In general, it is the United States that has been the advocate of the purest version of free trade. Most other nations have loyally given lip service to these U.S.-inspired norms, while devising pragmatic measures necessary for their survival in a global economy. At the same time, the United States’ own practice has been far from the paragon of economic liberalism that is often professed. Yet because of the United States’ fierce ideological commitment to laissez-faire, U.S. departures from it have typically been poorly thought out, lacking in long-term industrial goals, and generally not helpful either to the trading system or to America’s own economic self-interest.

There is thus a grave dilemma, both for the global trading system and for the United States as its chief architect and sponsor. Many other nations have demonstrated, by their actions if not their words, that they are not interested in a system of pure free trade. By some calculations, more than half the cross-border trade that takes place today operates by some standard other than the norms of classical free trade (Choate and Linger 1988, p. 91). Yet, curiously enough, the volume of trade continues to increase substantially faster than the growth of total world GNP. The sins against liberal trade vary from economic development initiatives undertaken by poor countries that might be justified as variations on the traditional “infant-industry” loophole, to de facto industrial policies cloaked in national defense, to covert market-closing measures undertaken by the world’s richest and most successful trade-surplus nations.

A different order of problem is the institutional disjuncture between trade negotiations, debt negotiations, and the other policy-making machinery that establishes rules for the global economy. One set of diplomats, at the General Agreement on Trade and Tariffs (GATT) in Geneva, is hectoring Third World nations to open their markets to U.S., European, and Japanese manufactured goods. A different set of bureaucrats, associated with the World Bank, the International Monetary Fund (IMF), and the private creditor banks, is pressing debtor nations to reduce their imports and increase export earnings. Finally, the most pressing, overarching trade questions, such as the problem of chronic Japanese and West German surpluses and the problem of U.S. deficits in manufactured goods, are widely acknowledged, but these issues are not part of the GATT portfolio; they seem to be on the diplomatic agenda everywhere but at the trade talks. Once again, the assumption of liberal economics is that if “barriers” are removed, then the “correct” pattern of trade will naturally ensue. For example, Japan’s chronic surplus, or balance in the trading system, is not an issue per se, except to the extent that illegitimate trading practices can be demonstrated. Desperation remedies such as the Gephardt amendment (which seeks to legislate reductions in U.S. trade deficits with specific countries) are then branded as illegitimate because they flout the stated norms of the trading system that the United States champions.

The GATT system, which will be discussed in more detail below, has only limited criteria for differentiating “good” violations of laissez-faire from bad ones. Aside from giving nations the right to countervail, and being somewhat indulgent of statist policies in developing nations, the GATT does not effectively parse out departures from free trade; it has no mechanism for assuring rough balance in the total calculus of mercantilism. The basic GATT norm is nondiscrimination, and the basic GATT goal is ever freer universal market access. All “trade-distorting” subsidies are presumed to be bad. All departures from the principle of multilateral nondiscrimination are deemed regrettable. Economic development schemes, viewed through the GATT lens, are generally damned as merely protectionist, and it is never conceded that they might have positive-sum benefits in the form of technological gains or redistributions of production.

Advocates of liberal trade tend to see themselves as possessors of special virtue, maintaining the dikes against tides of self-serving protectionism. It is presumed that more laissez-faire is invariably better than less, even though economic theory says this is not necessarily true in an imperfect world. There is no taxonomy for sorting out a world of necessary second bests in practice, and there is little recognition of the necessity of economic management, except through the reluctant toleration of escape clause relief and other “safeguards,” in GATT jargon, which are supposed to be temporary and used sparingly.

If this is a problem for the GATT system, it is a special problem for the United States, which tends to see its own self-interest as identical to the liberalism of the trading system as a whole. The United States seems to view it as its special mission to bring laissez-faire to the world, rather than to hammer out with its trading partners a sustainable mixed system, which tolerates some state involvement in the economy, but with rough overall balance, and in which the United States has an equitable share of benefits and costs.

The prevailing U.S. ideology of economic liberalism eschews industrial goals for the United States. In principle, it is none of the government’s business where steel, or automobiles, or semiconductors, or videocassette recorders (VCRs), or civilian aircraft are produced. If production migrates, this must be the market speaking. If the invisible hand operates through the guiding hands of foreign industrial policies, this is deemed to make no significant difference. Classical trade theory holds that if other nations are stupid enough to subsidize their export industries, American consumers ought to welcome the gift. These presumptions have four consequences, all of them negative for the U.S. national self-interest and confusing to the trading system.

First, the lack of a set of U.S. industrial goals means that it is impossible to have any trade goals for U.S. policy, other than to exhort other nations to practice laissez-faire in the American image. In practice, this makes America’s industrial fate partly the captive of other nations’ industrial policies. Second, because the United States continues to view itself as the political leader of the western world, it is reluctant to play tactical hardball on trade issues, lest it alienate key geopolitical allies. Third, when exhortation fails to achieve equitable results, or to open markets, the United States is reluctant to resort to explicit market-sharing remedies, because this of course would be a version of the managed trade it claims to disdain and would violate the very ideology it is promoting. Finally, and perhaps most seriously, U.S. devotion to the ideal of laissez-faire means that the U.S. departures from liberal trade that do intermittently occur are undertaken guiltily and without strategic purpose, and are seen by U.S. officials as unfortunate concessions to domestic politics rather than as economic development initiatives.

The cases are legion. For example, the United States disingenuously imposed a quota regime on autos, disguised as voluntary export restraints (VERs). This allowed the Japanese to determine just what was exported to the United States and to capture the quota rents; it also exposed the United States as a perfect hypocrite. The United States backed into an “industrial policy”—for motorcycles (!)—via a trade relief case, but disdained an industrial policy for the far more consequential machine tool industry. It has long had a highly protectionist regime for agriculture, which it does not know how to dismantle except by having everyone else forswear all price regulation for farm products, which other nations regard as unrealistic and probably cynical. It has had an extensive and unacknowledged industrial policy for aircraft, via the Pentagon. Because national defense is the one available loophole in the otherwise seamless ideology of laissez-faire, we recently witnessed the Pentagon sponsoring an industrial (and trade) policy for semiconductors, and another for high-definition television (HDTV). We have even seen an advisory body to the Secretary of Defense drawing the seemingly logical conclusion that the Pentagon should widen that sole loophole and simply take over the task of modernizing all American industry (Defense Science Board Report 1988).

In the prevailing ideology, perfect laissez-faire is presumed to be not only the first best but the only defensible goal. As even most orthodox economists will admit when pressed hard enough, it is neither. Because the United States has no criteria or taxonomy for sorting out second bests in a necessarily mixed world economy that can never attain pure free trade, this self-defeating pattern keeps recurring. It is the purpose of this chapter to help us understand and evaluate the available second bests. Contrary to the standard assumptions of free traders, the case for managed trade is not simply a set of special pleadings on behalf of retrograde industries; it also reflects a dissenting analysis of political economy, of the dynamics of trade, and of the interconnections between trade and geopolitics.

History

To understand the deep confusion in American thinking about trade, it is helpful to recall the remarkable period of the late 1940s when the present global trading regime was conceived. In the revisionist memory of the 1940s, the western nations under U.S. leadership set the postwar economy on its present course of economic liberalism, gradually dismantling wartime controls and looking toward ever freer movements of capital and goods. “The Bretton Woods conference, held in 1944,” wrote influential economist Jagdish Bhagwati, “had designed an institutional infrastructure that embodied the principles of a liberal international order” (1988, p. 1).

But postwar reconstruction did nothing of the sort. The statesmen of the 1940s who devised the Bretton Woods regime, the IMF, the World Bank, the stillborn International Trade Organization (ITO), the GATT, and the first European common market in coal and steel were mindful of avoiding two extremes that had been burned into their consciousness by recent experience—the extreme instability of laissez-faire capitalism in the 1920s, and the destructive failure of global economic cooperation and retreat into currency blocs and autarky that followed in the 1930s—which together led to mass unemployment, popular revolt against liberal democratic rule, extreme nationalism, and world war.

Postwar reconstruction aimed at a compromise between the anarchy of laissez-faire capitalism and the autarky of state planning. This blend of opposite impulses often seemed contradictory. President Franklin Delano Roosevelt, early in his first term, called American representatives home from the world economic conference of 1933 (which aimed to restore a stable international monetary regime) because he had no intention of hold...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Tables and Figures
• Preface
• Acknowledgments
• Part I: Conceptual Frameworks
• Part II: Issues in U.S. Trade Policy
• Part III: Macroeconomic Perspectives
• Part IV: Trade Policies in the Developing Countries
• Index
• Contributing Authors
• About the Economic Policy Institute