Originally Published 2019-11-04 10:20:44 Published on Nov 04, 2019
A proposal by Nobel economists to resolve the trade war ignores the whole point of having a global trading system.
US-China truce shouldn’t sacrifice the rest of us

The economics of international trade is in something of a crisis. After long years of being unchallenged orthodoxy, free-trade economics faces challenges on multiple fronts: The World Trade Organization is increasingly under threat; politics in the developing world is pivoting to skepticism about the benefits of globalization; and old-style “industrial policy” is winning fresh converts on the back of China’s unprecedented development successes.

Now, an international group of economists led by Harvard University’s Dani Rodrik, New York University law professor Jeffrey Lehman and Yang Yao, dean of the National School of Development at Peking University -- as well as five past winners of the Nobel Prize -- have tried to address one of the symptoms of this crisis, the Sino-US trade war. Last week, they released a plan for the future of trade that seeks a middle path between what they fear are two excessively limiting options: forced reform of the Chinese economic model, which they call “deep integration,” or alternatively a “decoupling” of the world’s two biggest economies that could lead to severe welfare losses for both sides.

Their solution: In essence, to expand the group of “permissible” trade policies to include what China is already doing. If the US wished to prevent some trade-distorting internal policy from taking hold in China, it would have to directly and bilaterally compensate Beijing; or else it would be permitted some proportionate response.

This is, I have no doubt, a well-meaning effort. But it is theoretically and practically misguided. It does little more than legitimize past trade-distorting behavior while limiting possible responses going forward.

Worse, it is founded on a basically mistaken assumption: that both “deep integration” (by infringing on the ability of nations to determine their own economic policies) and “decoupling” are equally bad outcomes. In fact, the former is not just vastly preferable to any intermediate path -- it was the unwritten agreement underlying China’s acceptance into the global trading system in the first place.

The economists’ joint statement insists that everything they suggest is WTO-compliant. This might well be the case. Still, the essence of their proposal is bilateral, not multilateral. This undermines the basic principle of the WTO, namely that all economies -- even and especially the largest ones -- should be subject to the same norms.

Even if side deals of the sort that the authors recommend are permissible under WTO rules, they are designed to privilege the biggest trading nations -- those with the most to lose, the most resources to use for “compensation” and the biggest capacity for trade blackmail. It is a recipe for undermining multilateralism, normalizing America’s disruptive recent politics and entrenching the advantages built up by China over the past decades.

Economists are often accused of designing recommendations that ignore political realities. We now see how much worse things can be if they simply recommend what already exists. Certainly, this deference to the status quo is not quite what one expects of heterodox economists.

The central problem with the Sino-US trade war is that it is a Sino-US trade war, rather than a broader effort to rebalance a broken multilateral trading system. The economists’ suggestions emerge from the assumption that China’s outsize presence in manufacturing trade -- driven, many believe, by hidden subsidies and the deployment of state power in unfair ways -- damages countries, particularly the US, in clear and quantifiable ways. Their remedy, therefore, is not to force China to correct any unfair practices, but to consider what actions might be available to the US and to make sure they are proportionate to the harm that has been seen to be done.

Only bilaterally, and for countries that already have a manufacturing base, can such a mechanism work even in theory. But what of countries such as, for example, India? The possibly quantifiable damage that has been done to manufacturing in the developed world is an order of magnitude less severe than the quite unquantifiable damage done to countries that have not been able to develop goods exports under the shadow of Chinese dominance.

The point of a multilateral trading system is not to protect existing industry. It is to allow everyone a good chance of building industries that export to the world, so small and underdeveloped countries, too, can start climbing the ladder to prosperity.

Bilateral deals between the old and new rich leave the poor out in the cold. The latter do not need the dubious freedom to implement industrial policy; many already had that freedom to some degree. What they need is for protections and subsidies to be dismantled elsewhere.

This is what a moral trade economics, or even one that simply seeks efficiency and growth, should argue. By warping the trading system to satisfy the ambitions of China and the US, we would be short-changing the rest of the world.

This commentary originally appeared in Bloomberg.

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Mihir Swarup Sharma

Mihir Swarup Sharma

Mihir Swarup Sharma is the Director Centre for Economy and Growth Programme at the Observer Research Foundation. He was trained as an economist and political scientist ...

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