The Price of Steel in India

This is a follow up blog post to this one here, summarising some more thoughts I’ve had on Scott Alexander’s ‘The Price of Glee in China’ post and inspired by some of the discussion in the comments there.

I know this is a conversation from a month ago, so is now ancient history in blogging terms.  This is why I’m not a very good blogger.

There’s a comment in the middle of my post that I sort of regret making because it was poorly worded and it’s not really crucial to the point I was trying to make, but lots of people who are presumably sympathetic to protectionist arguments seem to have fixated on it.

The phrase in question is this one: “there is nothing economically or morally relevant about political boundaries”

I have to apologise for the extremely poor wording on my part here.  This phrase is not what I intended to say at all.  That was sloppy.  Sorry.

As pointed out by several other commenters on Scott’s post, politics does have a substantial effect on the economics of a country.  In the most obvious ways, politics and politicians influence tax (and subsidy) rates and hiring practices / regulations (e.g. occupational licensing, minimum wage laws, the EU working time directive, etc. etc.).  They also have a less direct influence through things such as health and education policy.

I don’t debate any of this.  If someone got the wrong end of the stick from my previous post, I can totally understand why and again can only apologise for my sloppy phrasing.

Anyway, this all detracts from the main point I was trying to make in response to Scott’s post.  So let me try to make that point again, hopefully in a clearer and more succinct way:

Scott summed up his argument as:

“If we were to actively try to keep the Indians from industrializing, that would be pretty awful. But that’s not the argument at hand here. The argument at hand is ‘are we morally required to sacrifice our own economy in order to help the Indians industrialize?”

My response to that is:

But that is the argument at hand here.

Put aside for the moment whether protectionist policies are generally a net positive or a net negative for the population (as a whole) of the country that enacts them.  Put aside also whether protectionist policies are, in general, even effective at bringing about their stated aims.  These are debates for another day.

Let’s assume, for the sake of argument, that tariffs imposed by the US Government on imports of Indian steel helps American steelworkers, with no offsetting cost to any other Americans whatsoever.  In other words, the tariffs are a net positive if we consider only the welfare of Americans.

The cost of this policy is paid entirely by Indian steel companies, who now find it more difficult to compete in the American market.

What is this policy if not an active intervention by the US Government which retards industry in India and harms the Indian economy?

Paul Krugman on Trade

Writing in 2016:

"But it’s also true that much of the elite defense of globalization is basically dishonest: false claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict. I hope, by the way, that I haven’t done any of that; I think I’ve always been clear that the gains from globalization aren’t all that (here’s a back-of-the-envelope on the gains from hyperglobalization — only part of which can be attributed to policy — that is less than 5 percent of world GDP over a generation); and I think I’ve never assumed away the income distribution effects.
...
So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking.
...
But it is fair to say that the case for more trade agreements — including TPP, which hasn’t happened yet — is very, very weak. And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things."


Writing in 1995:

"I believe that if the rhetoric that portrays international trade as a struggle continues to dominate the discourse, then policy debate will in the end be dominated by men like [James] Goldsmith, who are willing to take that rhetoric to its logical conclusion.  That is, trade will be treated as war, and the current system of relatively open world markets will disintegrate because nobody but a few professors believes in the ideology of free trade.

And that will be a shame, because for all their faults the professors are right.  The conflict among nations that so many policy intellectuals imagines prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade."

And in 1994:

"Most worrisome of all is the prospect that disguised protectionism will eventually give way to cruder, more open trade barriers.  For example, Robert Kuttner has long argued that all world trade should be run along the lines of the Multi-Fiber Agreement, which fixes market shares for textile and apparel. In effect, he wants the cartelization of all world markets.  Proposals like that are still outside the range of serious policy discussion, but when respectable voices lend credence to the wholly implausible idea that the Third World is responsible for the First World’s problems, they prepare the way for that kind of heavy-handed interference in world trade.

We are not talking about narrow economic issues.  If the West throws up barriers to imports out of a misguided belief that they will protect Western living standards, the effect could be to destroy the most promising aspect of today’s world economy: the beginning of widespread economic development, of hopes for a decent living standard for hundreds of millions, even billions, of human beings.  Economic growth in the Third World is an opportunity, not a threat; it is our fear of Third World success, not that success itself, that is the real danger to the world economy."

And these two from 1993:

"What is true in the Washington view, at least in broad terms, is the belief in the virtues of free markets and the evils of protectionism.  There are qualifications to that view, but they are minor compared with the essential correctness of this position."

"One of the most popular, enduring misconceptions of practical men is that countries are in competition with each other in the same way that companies in the same business are in competition.  Ricardo already knew better in 1817.  An introductory economics course should drive home to students the point that international trade is not about competition, it is about mutually beneficial exchange."


Emphasis added.

Hat tips to Don Boudreaux and Scott Alexander/Noah Smith for the quotes/links.

The Confused and Backwards Thinking of Protectionists

Scott Alexander’s latest post, about the link (or apparent lack thereof - the Easterlin Paradox) between wealth and happiness, on his Slate Star Codex blog is interesting and thought-provoking as always.  I recommend reading the whole thing.

Scott makes some good points and I find myself in complete agreement with his conclusion that:

“...I am forced to acknowledge that happiness research remains a very strange field whose conclusions make no sense to me and which tempt me to crazy beliefs and actions if I take them seriously.”

I do have one objection to his argument.  Specifically, it’s with the way he discusses free trade and protectionism in part II of his post.

Here’s Scott:

“Suppose that some free trade pact will increase US unemployment by 1%, but also accelerate the development of some undeveloped foreign country like India into hyper-speed. In twenty years, India’s GDP per capita will go from $1,500/year to $10,000/year. The only cost will be a million or so extra unemployed Americans, plus all that coal that the newly vibrant India is burning probably won’t be very good for the fight against global warming.

Part of me wants to argue that obviously we should sign the trade pact; as utilitarians we should agree with [Scott] Sumner that lifting 1.4 billion Chinese out of poverty was ‘the best thing that ever happened’ and so lifting 1.2 billion Indians out of poverty would be the second-best thing that ever happened, far more important than any possible risks. But if Easterlin is right, those Indians won’t be any happier, the utility gain will be nil, and all we will have done is worsened global warming and kicked a million Americans out of work for no reason (and they will definitely be unhappy).”

I think Scott’s thinking here is confused.  I don't mean to pick on Scott here, he’s not alone, I think this is an issue where many people's thinking is very confused.  For now, let’s put aside the question of whether or not raising people’s income can make them any happier or not; as this is not relevant to the point I wish to make here.

The way he words this is as if:

1. The US government has the option to take some action X (in this case signing a free trade pact).
2. Positive consequences of X are: a >6 fold increase in the material well being of over a billion people, who are mostly extremely poor by US standards, in just 20 years.  (Additional positive consequences not identified by Scott include some combination of reduced prices, improved quality, better selection and/or improved availability of certain goods and services to American consumers - and to other American producers not in the protected industries.)
3. Negative consequences of X are: 1 million people, who are mostly well off by global standards, lose their jobs and additional fossil fuels are burned, contributing to global warming.  (Note that most of these 1 million people will eventually find other work; some will take early retirement; some may set up businesses of their own.)

Should the government take action X?

I think this gets things backwards.  Here’s what I think is a more accurate way to look at this:

1. The US government has the option to take some action Y (in this case imposing tariffs, quotas and/or outright bans on US imports from India).
2. Positive consequences of Y are: 1 million people, who are mostly well off by global standards, can remain in their current jobs and don’t have to be forced to retrain, find other work, or be forced into early retirement.  Also, less fossil fuels will be burned, leading to less global warming.
3. Negative consequences of Y are: severely retarding the improvement in the material well being of over a billion people, who are mostly extremely poor by US standards.  Higher prices, worse quality, more limited selection and poorer availability of various goods and services to American consumers - and to other American producers not in the protected industries.

Should the government take action Y?

Some people will look at the above and ask what’s the difference?

The difference is free trade is what would happen anyway unless the government actively goes out of it’s way to prevent it from happening, if it didn’t erect barriers to trade between people who happen to live in different countries.  Free trade does not require a free trade pact to happen, it just requires that government doesn’t get in the way.

Here’s Scott again, later in the post:

“If we were to actively try to keep the Indians from industrializing, that would be pretty awful. But that’s not the argument at hand here. The argument at hand is ‘are we morally required to sacrifice our own economy in order to help the Indians industrialize?’”

I think many (most?) people would answer 'no' to the above question.  However I think this question is a red herring.  Even more than that, I think the quotation above perfectly highlights what is so confused about many people’s thinking on international trade, globalisation and protectionism.

What does the phrase "our own economy" mean?  It seems from the context and from common parlance that it means "the US economy".  However, it needs to be emphasized there is nothing economically or morally relevant about political boundaries.  Trade between someone in New York and someone in New Delhi is no different, in any economically or morally relevant way, than trade between someone in New York and someone in New Jersey.

Or, as one commentator, j r, put it:

“We don’t use these sorts of rationales to restrict trade between California and Utah or to stop a white American from going to a Chinese American dry cleaner.

What’s the basis for using the nation state as an intrinsically valid moral or ethical unit?”

It seems to me that the argument at hand really does revolve around actively trying to keep less developed countries from industrializing.  Consider the question: what is protectionism?  Protectionism is the active effort of government to prevent, limit or restrict trade across political boundaries.  No active efforts are required on the part of government to allow mutually beneficial free trade.  All this requires is that government doesn’t stop it from happening by erecting artificial barriers to trade.

Contrary to the implication of the question: “are we morally required to sacrifice our own economy in order to help the Indians industrialize?”, free trade does not involve any sacrifice.  It is what would naturally happen if governments and others were to refrain from butting into other people’s business.  Protectionism is an active attempt to retard the economies of the countries which it is directed against (not to mention the adverse unintended consequences on the economy of the country imposing the protectionist measures).

I would rephrase the argument at hand as: “can we morally justify sacrificing the Indian economy in order to help a minority of domestic producers?”

I think many (most?) people would answer 'no' to the above question.  However, our political system often produces outcomes that would appear to suggest an affirmative answer to this question.  I think this is largely a result of the confused thinking about these issues.  Many people’s intuition causes them to get this issue precisely backwards.

Quotation of the Day...

From Don Boudreaux:

"… is from the abstract of Solomon Polachek’s and Carlos Seiglie’s important 2006 paper, “Trade, Peace and Democracy: An Analysis of Dyadic Dispute“:

At least since 1750 when Baron de Montesquieu declared peace is the natural effect of trade, a number of economists and political scientists espoused the notion that trade among nations leads to peace….  The greater two nations’ gain from trade the more costly is bilateral (dyadic) conflict.  This notion forms the basis of Baron de Montesquieu’s assertion regarding dyadic dispute.  This paper develops an analytical framework showing that higher gains from trade between two trading partners (dyads) lowers the level of conflict between them….  Crosssectional evidence using various data on political interactions confirms that trading nations cooperate more and fight less.  A doubling of trade leads to a 20% diminution of belligerence."

A slice from the rest of Prof. Boudreaux's post, which is well worth reading in it's entirety [emphasis added]:

"When people trade they must engage with others, mostly strangers; when people trade across political borders they must engage with greater numbers of strangers still.  This trade, though, makes the strangers less strange to each other, because each learns better what the other is like and what the other likes and dislikes.  Trade is peaceful, and so it reveals to each trader the other’s humanity; war reveals the other’s brutality.  Each party to every trade gains; with war, one party certainly losses, and even the ‘winner’ might well, in the end, have lost so much to have made the entire activity a losing proposition."

and to file under sentences I wish I'd written:

"The retaliation incited by war is negative-sum and stupid: “You killed someone whose passport is issued by the same agency as that issues my passport, so I’ll kill someone whose passport is issued by the same agency that issues your passport.  That’ll teach you!”"