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November 16, 2005

Misunderstood.

What’s that line about the prophet being misunderstood in his own land? Fluffy Economist (and DK) think I’m a little extreme in my advocation of free trade yesterday. That there are, in fact, times when tariffs and constraints are a good thing. Hhhmm.

Economies have a history. There are industries which make them tons of cash today, which could be dead ducks tomorrow as technological advances abroad overtake domestic competencies. Trade barriers give countries useful breathing space to sustain their economies during this transition and hopefully allow the domestic market to find something better to do. In the meantime, consumer confidence can be sustained as protected industries can let workers down gently instead of creating mass employment that can paralyse regions and cause widespread misery.

That’s certainly true. Tariffs will indeed slow down the creative destruction. But why the insistence on such technological change coming from abroad? What difference is there between it coming from abroad and it coming from home? Not a lot actually. A new and disruptive technology, whether invented in the room next door or on the other side of the globe, will have the same effect on the older industries it competes with. Unless we’re about to say that domestic competition must be constrained in order to allow time to adjust then tariffs don’t really sound like the answer.

Other things do though. Things like welfare safety nets (yes, wingnut though I am I’m all in favour of them, perhaps just not the one we actually have), retraining, aiding the mobility of labour and capital between firms and industries....but the root of my disagreement with this argument is exactly that competition from overseas is no different from that at home. Thus tariffs, which only apply to that from abroad don’t, to me, seem like a sensible answer.

The other part of the free trade argument is that it ignores all concepts of power. A developing country faced with a multinational with an annual turnover worth twice its GDP will not be able to keepit in check.

Well, while possible, I doubt that there is actually a developing country with a multi-national with turnover twice GDP actually in its territory but I get what is meant about the power argument. And agree with it. There are indeed power imbalances. But I would argue that they are more likely to be within a country than across the borders. How, otherwise, to explain how that 2% of the population that farms gets state aid of more than the value of their output in the UK? The State oil companies of many an exporting nation are where the power lies within those nations.

Of course good governance is a (perhaps THE) major issue in development but one mitigating factor is surely that legal institutions aren't allowed to develop when the economic incentives distort them so much.

I agree absolutely. And I also think that capture of the state institutions by insiders protecting their position in the domestic economy is much more likely in a system of tariff barriers. I’d also add that if we do accept that tariffs can be a good thing we also accept that they need to be finely managed. Bad tariffs would, I think most who support them agree, be worse than no tariffs. Yet if good governance is the thing that we think is missing, where are such optimal tariffs to come from? Where certain domestic industries are political powers in the land (France) then the political pressure will be to protect them (France) at the expense of the rest of the population (France).

One example of such is Ghana post independence. Political power grew from the urban populations, not the rural one. The exchange rate was deliberately rigged high so as to benefit those urban populations by making imports cheap. This screwed the cocoa farmers (amongst others) who were making the exports. Entirely rational from the point of view of those who wished to keep political power but bad for the country as a whole.

So I entirely accept the imbalance of power argument and think it a good example of why there should be less interference in the economy, not more.

November 16, 2005 in Trade | Permalink

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Comments

[I doubt that there is actually a developing country with a multi-national with turnover twice GDP actually in its territory]

I'll take "banana republics" for $100, please, Tim.

Tim adds: Really? Say, Honduras, GDP x, turnover of a mutlinational within Honduras is 2x?

Sure, GDP x and the entire turnover of a multi at 2 x, but the turnover within Honduras of 2x?

Posted by: dsquared | Nov 17, 2005 12:30:16 AM

Actually, yes there
is.

Posted by: Fluffy Economist | Nov 17, 2005 1:00:57 PM