Left Flank

OK, I'm just disgusted at the level of discourse about the beef protests in Seoul. Americans in their city on the hill have finally started to mouth off, and it's not pretty. Mostly, it's Doug Bandow bowdlerized into a spiteful "Well, let's just take our marbles and go home!", and that's the constructive part of the groaning.

The New Republic has a much more informative debate going. And, a debate it really is. Fortunately, the comments section to Josh Patashnik's forgettable post skips Patashnik and debates the more useful tangle in the links, between Dani Rodrik and Tyler Cowen. Rodrik and Cowen present the antagonism between the two trade perspectives forming across the pond as well as possible.

Tyler Cowen is top of the refuse pile for the "I see crazy Koreans!" crowd (which also includes TMH's Robert Koehler's sarcastic retort, that "If you're bewildered, don't worry — nationalism, anti-Americanism, democracy, frustration with Lee, nighttime entertainment… there are a ton of explanations of how these protests are about anything but US beef."). Dani Rodrik, who actually knows about economics, draws universalizable conclusions to save the free trade vision from both idealists and the Cowens of the world.

What I am referring to is the idea that successful markets need to be embedded in a larger set of man-made rules and governance structures.  Markets need regulation, stabilization, and legitimation because they are not self-regulating, self-stabilizing, or self-legitimizing. The success of modern capitalism is due as much to the institutions that govern markets--political democracy above all--as it is to the power of markets themselves. 

It is important to understand this because it provides an important clue as to why domestic and international trade are different.  Domestic trade takes place within thoroughly embedded markets; there are clear rules and they apply to all transactions equally. International trade, on the other hand, is conducted in only weakly embedded markets: the rules either do not exist or apply unevenly.  I believe this is the fundamental reason why their consequences are often perceived so differently.

(…)

The international trade counterpart of this hypothetical is the worker who loses his job because his company decides to move to a country where, say, labor rights are routinely violated. So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on. 

By overlooking the problems created by trade in instances where regulatory arbitrage does play an important role, we miss the opportunity to celebrate the kind of globalization where such arbitrage doesn't play a role.  The latter type of trade probably constitutes the bulk of world trade. But because economists do not make this important distinction, they have no language or ability with which they can respond appropriately to the uneasiness out there--except for calling it irrational. 

Rodrik also links to the abstract of his and Anna Maria Mayda's research on attitudes toward trade.  In addition to kyungho's comment on the WaPo article, there is this one comment from singlespeed I want to add in full, because it's from the TNR blog post.

Whether or not you think globalization is good or bad, I think what most people can agree upon is trying to provide an equalizing trade framework for international trade. But what complicates that is that trade treaties between countries is based on several factors beyond pure economics.  People on the right tend to argue that pure market globalization raises standards in the poorer countries but that standard of living numbers used are skewed towards the actual individuals/investors/corporations/governments that are making money off of the trade agreements. The flip side is the itinerant farmer who raises a small but diverse selection of crops may not ever see part of that improved quality of life if his rice crop is competing against cheaper American subsidized import rice. One can argue that the farmer is forced to do something more productive but the question remains as to why he/she should be forced to give up his farm solely to the market benefit of a select few?

I think what we're going to start seeing is a further nationalization of product identity (i.e. individuals will align themselves with domestic products as national pride) while at the same time a re-alignment of trade equity will occur as one-sided trade agreements will flatten out as the third and second world nations develop greater economic clout to negotiate fairer trade contracts than the apparent or perceived one-sided trade agreements with first world nations. So Koreans will protest over foreign beef as an affront to the national pride in Korean beef but they won't protest the foreign car market. Much as Americans protested at one point over foreign car market infiltration while at the same time buying Japanese consumer electronics.

The localization of domestic manufacturing for specific markets will grow not just because of the backlash to globalization by multi-nationals but because of a desire to support domestic products out of national pride, economics, quality and for others because its more sustainable. The market might be smaller but more dedicated to supporting the niche of specific domestic manufacturing for local markets. Quality over quantity.

If nothing else, Lee Myung-bak was not the leader to guide South Koreans from protectionism to liberalization.

Peter at The Duck reminds readers of the larger cycle leading to higher food prices worldwide.

To recap, this implicates:

• Global Warming causing a drought
• High oil prices, raising costs for farmers, shippers, and sellers
• Ethanol and bio-fuels (meant to reduce the first two) sucking corn off the market
• Farm subsidies distorting food prices
• Lack of open markets
• Development in large countries (China, India) leading to increased meat consumption
• Integrated global commodities markets, allowing for speculation

Add in Australia's water pricing policies.

So, I assume the solution will be just as complicated. That hasn't stopped Tyler Cowen form trying to advocate one: «...governments are making matters worse by constraining what farmers can store and export.»

Yet, Dani Rodrik comes along and complicates the picture again.

I am puzzled more generally by how the commentary on the world food crisis misses this basic point. It's all about how the price rise is an unmitigated disaster for the world's poor, with nary a comment on the fact that some of the beneficiaries are also among the world's poorest. (Some of you will say that all the price increase is absorbed by margins, with little of it showing at the farm gate--but I doubt that is true.) The panic on the part of governments is understandable. They are much more sensitive to the urban poor, who can create greater havoc than the rural poor. But what about the rest of us?

Paul Krugman starts what passes, to a non-economist, for fun when reading about economics. Admittedly, I fall asleep when people talk about math - unless it concerns my money - but I will put in the effort for comparative advantage (and, so should you). If for no other reason, it's fun when intelligent people get stuck in cat fights like this.

So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It's often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That's still true of things like the import quota on sugar. But when it comes to manufactured goods, it's at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I'm not a protectionist. For the sake of the world as a whole, I hope that we Americans respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

Don Boudreaux responds with Krugman's own 1996 essay attacking Krugman's 2007 argument. Greg Mankiw gives Krugman an "out" (since Krugman claims he's not a protectionist, but Dani Rodrik praises Krugman.

Perhaps we can make more progress here if we stopped using blanket terms to characterize where people stand, and used real words to describe what their views are.

I think Rodrik is on to something here, even if I think Krugman's essay encourages arguments in favor of protectionism. Firstly, let me emphasize what Suranovic argues (assuming you read the passage about comparative advantage before this):

Many people who learn about the theory of comparative advantage quickly convince themselves that its ability to describe the real world is extremely limited, if not non-existent. Although the results follow logically from the assumptions, the assumptions are easily assailed as unrealistic. For example, the model assumes only two countries producing two goods using just one factor of production. There is no capital or land or other resources needed for production. The real world, on the other hand, consists of many countries producing many goods using many factors of production. In the model, each market is assumed to be perfectly competitive, when in reality there are many industries in which firms have market power. Labor productivity is assumed fixed, when in actuality it changes over time, perhaps based on past production levels. Full employment is assumed, when clearly workers cannot immediately and costlessly move to other industries. Also, all workers are assumed identical. This means that when a worker is moved from one industry to another, he or she is immediately as productive as every other worker who was previously employed there. Finally, the model assumes that technology differences are the only differences that exist between the countries.

With so many unrealistic assumptions it is difficult for some people to accept the conclusions of the model with any confidence, especially when so many of the results are counterintuitive. Indeed one of the most difficult aspects of economic analysis is how to interpret the conclusions of models. Models are, by their nature, simplifications of the real world and thus all economic models contain unrealistic assumptions. Therefore, to dismiss the results of economic analysis on the basis of unrealistic assumptions means that one must dismiss all insights contained within the entire economics discipline. Surely, this is not practical or realistic. Economic models in general and the Ricardian model in particular do contain insights that most likely carry over to the more complex real world. The following story is meant to explain some of the insights within the theory of comparative advantage by placing the model into a more familiar setting.

I would argue that most laypersons, like me, would doze during a economics lecture (but I fight the urge). And, since most people do understand their interests, based on their particular experience at whatever company or agency, better than what they learned in college, haranguing them about learning comparative advantage is probably an impossible task. But, lest I become completely cynic, many people do think in political terms for elections, if only right before entering the booth. So, the task is to translate economic theory into political language people can scrawl on their hand, as it were.

Starting with models and lectures about wine in Portugal, X's and Y's, and two countries is like labelling oneself a "free trader", unless one then proceeds to lampoon that argument. "Free trader" becomes a caricature which translates to a political epithet, "Republican" or "Clintonian". Resisting this impulse requires a political platform cut from whole cloth that emphasizes the "free trade" program and an emphasis on national interest fit enough to tangle with the mercantilist impulse.

How that would work is another question...