Not a Duck

I was prepared to detest Mihir Sharma’s column at Bloomberg criticizing a proposal from Dani Rodrik, Jeffrey Lehman and Yang Yao for ending the trade war between the U. S. and China. It begins as a lament for the fall in prominence of neoliberal policies but improves:

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-U.S. 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 U.S. 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.

or, in other words, damage control. So far so good. He continues:

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.

This is the direction about which I was initially concerned:

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.

but, fortunately, he did not veer from there into some sort of massive international redistribution system from which only the administrators of the system would benefit which is what I was concerned about. Instead he makes this very good point:

The central problem with the Sino-U.S. trade war is that it is a Sino-U.S. 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 U.S., 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 U.S. 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.

The emphasis is mine. I wish he had been more explicit about what he actually means. What actions would those be? For example, I think that U. S. and European subsidies for their agricultural sectors are unconscionable but so are India’s massive import barriers. Substituting a mercantilist India for a mercantilist China would not be much of an improvement in global trade.

You might be wondering about the relevance of the title of this post. You’re probably familiar with the millennium-old proverb, “You can lead a horse to water but you can’t make it drink”. My wife has her own version of that saying: “You can lead a horse to water but that won’t make it into a duck”.

China has seen the benefits of trade but it has violated the “unwritten agreement” under which they were admitted to the international trading system at every turn and all of its written agreements as well. What we have learned is that a country as large as China and as mercantilist as China is disastrously harmful not just to the already developed countries of North America and Europe but even more to the developing world whose path to development has been cut off by a China with tremendous over-capacity. Just as a single example China not only has enough automobile productive capacity to produce all of the automobiles it needs, it has enough productive capacity to produce all of the automobiles the entire world needs several times over. That is repeated in many industries, many sectors.

We cannot make China into a duck, a well-behaved trading partner, we should accept that, but we should also recognize that the risks of trading with China far exceed the rewards.