We are all mercantilists now

Last Thursday, President Donald Trump announced the imposition of global tariffs on steel and aluminium, apparently without consulting the head of his council of economic advisers or the US treasury secretary. The president was seeking to reassert himself, according to the New Yorker, after White House chief of staff John Kelly’s decision to revoke son-in-law Jared Kushner’s high-level security clearances. The admittedly much more damaging Smoot-Hawley Tariff Act was at least debated before it was passed in 1930. Circa 2018, we may be at the cusp of a trade war arguably brought on by a fit of presidential pique.

Leaders of the world’s largest economies would do well to read Dani Rodrik’s Straight Talk on Trade: Ideas for a Sane World Economy. The trouble is that the US and China are governed by people with aggressively mercantilist worldviews. President Trump’s broad-based tariffs on steel and aluminium, ostensibly directed at China, are likely to hurt Canada, Brazil and Japan. China accounts for less than 2.5 per cent of the imports to the US of these two products. President Xi Jinping, meanwhile, may not be tweeting about how easy it is to win trade wars, but this is only a difference in style. Under him, China has heightened its skills at gaming the trading system.

Interestingly, Mr Rodrik’s argument is not with such populists as President Trump or the British Conservative Party leaders who championed the cause of leaving the European Union. He takes aim instead at economists who he says have been too eager to trumpet the virtues of free trade while downplaying the jobs lost and industries hollowed out even if consumers benefit. “The reluctance to be honest about trade has cost economists their credibility with the public,” he writes.

This thrust of an otherwise admirable book seems naïve to the point of being silly. In the midst of the assorted nastiness of the most recent US or French presidential elections, it is hard to see how economists’ freetrade bias played a role. While it’s true that Mr Trump and French right-wing candidate Marine Le Pen professed a disregard for the European Union and the global trading system, it was their verbal attacks on immigrants and minorities that helped them get votes. In France, Emmanuel Macron won by forcefully taking apart Ms Le Pen’s economic smoke and mirrors claims and hate-mongering. A less compromised and less status quo candidate than Hillary Clinton might have been able to do the same in the US.

Mr Rodrik is on firmer ground when he argues that absolutist worldviews on issues such as capital account convertibility and intellectual property rights have sowed the seeds for a backlash against “hyperglobalisation,” but it is hard to see this as pivotal to the dystopian political worldview many of us have today. That he roughly dates this period to China’s accession to the World Trade Organisation in 2001 is telling. There are many industries — usually those in the hands of Chinese private entrepreneurs or firms from Hong Kong or Taiwan such as Foxconn — in which China enjoys global comparative advantage. There are others, notably steel and industrial goods, where Beijing and provincial governments have invested far too much because they find it politically unfeasible to close such factories. This creates problems for the rest of the world because it hurts job creation everywhere else.

In the first case, China’s dense supply chains, Taiwanese and Hong Kong knowhow and superb ports and highways mean that it is not vacating labour-intensive industries such as shoes or furniture to the degree that it should even as its labour costs rise because China’s other efficiencies more than make up. The coddling of Chinese heavy industry, meanwhile, leads to dumping and is easier to retaliate against. The cumulative effect of China’s export subsidies extracts “losses” of 3 per cent of Chinese income while transferring a gain to other countries of 1 per cent to global income. But try explaining that the socalled “distributional effects” of trade are uneven at an election rally anywhere in the world.

To make matters worse, several countries, including India, are caught in a spiral of diminished prospects because of what Mr Rodrik in earlier research catchily labelled “premature deindustrialisation”, i.e. manufacturing jobs peaking in countries at lower levels of employment than was the case during the industrialisation of the West. In

India’s case, manufacturing jobs peaked at 13 per cent of the total. This is partly due to technology; it takes fewer workers to make a car today than it did three decades ago.

Most of India’s services industry is based on self-employment, yielding such meagre returns as, say, a vegetable seller, that it amounts to self-exploitation. “It is not implausible the East Asian Tiger economies will be the last countries to ever experience industrialisation in the manner to which economic history has accustomed us,” Mr Rodrik argues. Those who conceived the “Make in India” initiative seem unaware of this trend. Instead, the budget has slapped hefty duties on products ranging from mobile phones to automotive parts. Impatient for our share of economic good news, we are all mercantilists now.

STRAIGHT TALK ON TRADE: IDEAS FOR A SANE WORLD ECONOMY

By Dani Rodrik Princeton University Press; Pages 336,

$29.95