Striking a Balance: Straight Talk on the Global Economy

Harvard economist Dani Rodrik details the downside of hyperglobalization, and calls for a better balance between global rules and national autonomy.

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For more than two decades, economist Dani Rodrik has warned about the dangers of what he has called “hyperglobalization.” He has long argued that national economies and domestic policies should have priority amidst a rising tide of unfettered globalization and open markets. Today we have some evidence that he was right. Our race toward “one world economy” has produced consequences in the form of global social inequality and populist or extremist political movements, for example. Rodrik envisions a way to keep bringing down trade barriers while maintaining the integrity of the nation-state. His latest book, Straight Talk on Trade, is a synthesis of his monthly columns for Project Syndicate, and functions as a roadmap of Rodrik’s prolific analyses. The Weatherhead Center spoke to him about his long view on world economies.

Q: One way to address the inequalities of globalization is to “compensate” the losers, and this can take many forms. For one, we know that labor has been losing to technological advances since the 1960s. How can these losses be addressed effectively?
 

A: This is the conventional approach to dealing with the globalization backlash: compensate the losers. Historically, it is countries with extensive safety nets in the form of a welfare state that has done the best in this regard. Those are mostly European countries. In fact, I like to call the welfare state the flip side of the open economy: in the long run they go together.

The United States has traditionally tried to deal with this problem using ad hoc trade adjustment assistance mechanisms. But the lesson of this experience is that compensating the losers does not work—economically or politically—unless it is part of a broader political settlement that establishes the welfare state as a constitutive part of the existing political economy of a society.

That is why I am very skeptical of today’s calls for compensation. The US has failed the test and it is simply not credible to say that we will do better with similar attempts in the future. As for Europe, it is in much better shape in that regard—which explains why trade with low-income countries is politically not nearly as problematic there. In other words, while Americans feel exploited by trade with low-wage countries, Europeans do not share this sense of being cheated because they have more social protections. But the controversy in Europe over trade is about regulations, harmonization, and special investment rules—none of which can be handled through compensation.

The bottom line is it is too late to talk about compensation. We need to talk about the rules of trade and how to make them work for society at large, rather than redistributing the gains after the fact. 

Q: If you could design a summit on international finance and trade, the next Bretton Woods, if you will, what would it look like and what should its outcome be?
 

A: I think we need a better balance between global rules and national autonomy. The prevailing regime did pretty well until the 1990s, by reducing trade and investment barriers at the border. But then we overreached and tried to adapt domestic regulations—product standards, investment rules, industrial policies, patents, and copyrights—to the demands of international corporations instead of doing the reverse and making global rules work for the national economy. 

So we need a rebalancing here. I see it as moving from an “exchange of market access” mindset to an “exchange of policy space” mindset. Advanced countries need to repair their social contracts and that may require occasional barriers to trade, in cases of “social dumping” for example. And developing nations need greater policy space to restructure their economies, which means loosening the global restraints on industrial policies or financial regulations in the existing rules. Appropriately designed, looser rules may be in the benefit of all. 

Image of first Bretton Woods conference in 1944

Q: You describe global governance as a “chimera,” or pipe dream, and many others would agree. Instead of economic and political integration, you believe that nations should develop their own domestic policies, but they also need “traffic rules,” for managing interaction among various national institutions. What would the “traffic rules” of international trade look like?  
 

A: Some key distinctions are helpful here. First, we should accept that countries have the right to “protect” their national economies when global trade or finance threaten to undermine prevailing social bargains as codified in their domestic regulations. We require imported toys to conform to our product safety standards (e.g., in lead content). We should apply this principle more broadly, which means it is okay to keep out financial flows that threaten domestic financial stability or restrict imported goods made in labor-repressive conditions that threaten our own labor standards. 

Second, while we have the right to protect our own social arrangements, we do not have the right to impose those arrangements on others. There is no presumption that our intellectual property rules are appropriate to other countries. (It is questionable if they are even appropriate for us, but that is another matter.) Diversity of national regulations and standards is on balance a good thing, not a bad thing that we should try to reduce so as to maximize the flow of goods and services across national borders. 

The main idea to keep in mind is that the gains from trade are, in principle, national. We trade not to confer benefits to other nations, but because it is good for our own society. We need to make that happen in reality, and not just in principle. We should not be surprised if the legitimacy of trade comes into question when the domestic benefits are so skewed. 

Image of Dani Rodrik

Q: “Social dumping that undermines democratically legitimated domestic practices is not acceptable,” you write in your book. Can you explain what “social dumping” is and suggest how a trading partner nation might respond?
 

A: Social dumping refers to taking advantage of repressive or exploitative labor, environmental, or other social conditions in order to obtain a competitive advantage in trade. 

In our current trade rules we already have anti-dumping rules, which are based on the idea of fair trade. Every market economy has rules about exchanges that are fair, and restrictions on exchanges that are considered unfair. Currently, domestic producers are allowed protection when they face dumping by foreigners or compete with goods that are subsidized by other governments. But there are no rules that protect workers when they face unfair competition in the form of repressive labor practices.

Consider the case where an employer threatens to outsource to a country where core labor rights are not observed. Workers at home are effectively told that they must sacrifice some of their labor standards, or else face losing their jobs. This kind of threat would be illegal in a purely domestic context; it is not clear why it should be part of ordinary commerce in the global economy.

So my proposal in the book is to provide domestic workers with a potential remedy in the form of trade tariffs, if they can show that (a) their labor standards are threatened by the kind of outsourcing I just described; (b) the standards in question are in fact broadly supported by society (for example, embodied in existing regulations); and (c) the consequences of tariffs on others in the domestic economy are not excessively negative. I propose a deliberative process, open to all stakeholders, to discuss and shed light on these issues before a government body makes its decision.

Image of workers in a Chinese Toy Factory

Q: Should countries (including the US) be trading with China, given its dismal track record on human rights and environmental protections? In your book, you argue that countries can have differences and should not be economically penalized for having a different value system. But where do you draw the line?
 

A: When trade rules are sparse and excessively permissive, we do not have to be concerned too much about the nature of political regimes in the trading regimes. But the more elaborate the trading regime becomes, the more political it necessarily gets. In the latter case, we cannot remain unconcerned about the spillovers from repressive regimes to our own domestic economic and social arrangements.  

I do think that it is appropriate to treat countries that are not democratic—like China—differently in a country’s trade rules. This is not an entirely new principle. Some trade preferences for low-income countries, for example, are predicated on the existence of democratic rule in those countries. 

Image of quote from blog post

However, authoritarianism is not a reason for blanket protection against a country. The case that trade is harming us (our values and standards) has to be made for specific transactions, and not in a wholesale manner. Violations of labor rights or egregious environmental practices have to be demonstrated on a case-by-case basis. Their impact on us has to be traced out. And a full discussion of the counterfactual—what would happen if we restricted the particular trade in question?—has to take place. 

Applying these rules to China’s exports, we may find that the bulk of its trade is not problematic after all. Conversely, we may find that some democratic countries (e.g., India) have employment practices that are indeed problematic. 

Q: “The future of the global economy lies more and more in the hands of poor nations,” you write. Why are you so convinced that the US and Europe will no longer lead the pack in the future, when they have the qualities you associate with stability and long term growth—liberal democracies, sound governance, (some) social supports, human rights protections?
 

A: Well it is just a mathematical fact that the center of gravity of the world economy is moving away from the advanced nations and to the poorer nations. The latter have been growing more rapidly than the former since the 1990s. I just do not see this pattern being reversed.

In addition, in recent years the US and Europe have lost their claim to leadership, with their foreign policy blunders, economic mismanagement, treatment of immigrants, and the rise in illiberal political practices. Unfortunately, the US is no longer the liberal democratic norm, and Europe is no longer a successful example of a social market economy. Developing nations will have to experiment and find their own ways. 

—Michelle Nicholasen, Communications Specialist, Weatherhead Center for International Affairs

Weatherhead Center Faculty Associate Dani Rodrik is the Ford Foundation Professor of International Political Economy at the Harvard Kennedy School. He is also a member of the Center’s steering committee and co-chair of the Weatherhead Research Cluster on Global Populism. His new book, Straight Talk on Trade: Ideas for a Sane World Economy, delves into the realities of today’s global economy, navigating the tensions among globalization, national sovereignty, and democracy.

Photo Captions

  1. United Nations Monetary and Financial Conference. Prior to the formation of the United Nations in June 1945, a number of meetings and events helped set the stage for the creation of the new international organization. Forty-four United Nations and associated nations met in Bretton Woods, New Hampshire, to discuss monetary stabilization as an aid to post-war trade. Bretton Woods, New Hampshire, United States, 01 July 1944. UN Media Photo #97323.
  2. Sunlight Toy Factory in Tangxia China. By Flickr user Chris, taken on July 15, 2010, (CC BY-NC 2.0).