The chickens come home to roost
By Scott Sumner
I don’t know anything about roosting chickens, but I do know a bit about trade theory. Over the past 200 years, debates about trade have occurred on two levels. Academics insist that unilateral free trade is the best options. However the “very serious people” (VSP) who conduct real world trade negotiations act as if open markets are a “concession”. They act as if we were doing other countries a favor by letting them export goods to our market. They view the academic perspective as hopelessly idealistic, even as the VSPs have worked hard to gradually move the world toward the same goal of freer trade, one agreement at a time.
Today it looks like the VSPs who believe in globalization made a big mistake, and that the idealistic approach of unilaterally moving toward freer trade was the better strategy. The VSP approach opened the door to protectionist populists, and Donald Trump walked through. Protectionists are using the “concessions” myth as an excuse to impose higher tariffs. Other countries then face a difficult choice. If they give in to pressure from Trump, it would just encourage him to make even more demands.
It’s normally the case that one is better off standing up to a bully. When one does so, bullies tend to back off. But it’s not easy to do this without making the problem even worse, without triggering an international trade war.
If countries had done like Singapore and Hong Kong, and adopted a unilateral policy of free trade, then they would not face this quandary. In that case, if the US wants to shoot itself in the foot with trade barriers, it’s free to do so. No point in compounding the problem by also shooting yourself in the foot. Unfortunately, the international trade negotiation establishment is deeply invested in the “concessions” view of trade, and this creates some difficult game theory problems. If they do the “right thing” (cut tariffs) they look weak and make the populists even more popular.
Sometimes the most idealistic approach is also the most pragmatic.
PS. As an analogy, I have argued that we should rely 100% on monetary policy to stabilize demand, and not at all on fiscal policy. This view is widely seen as impractical. But now the Trump administration and Congress have raised spending and cut taxes to the point where a viable countercyclical fiscal policy is almost impossible. And yet we never built the sort of robust monetary regime that could provide a stable path for expected NGDP. So what happens if there is another 2008?