Noah Smith On Free Trade

In an article The Man Who Made Us See That Trade Isn’t Always Free for Bloomberg View, Noah Smith says this about David Autor:

So, I asked, how should trade policy be changed? Autor’s answers again surprised me. He suggested that the process of admitting China to the World Trade Organization back in 2000 should have been slowed down significantly. That would have given American workers and industries time to prepare for, and adjust to, China’s competitive onslaught.

He told me that the U.S. government should focus attention on manufacturing industries, and even use industrial policy to bolster the sector.

Traditionally, economists have looked down their noses at “manufacturing fetishism,” but Autor says he thinks the sector is underrated.

Of course, heterodox economists have known this for long. As Nicholas Kaldor said in his 1980 articleFoundations And Implications Of Free Trade Theory, written in Unemployment In Western Countries (probably my most favourite quote in this blog):

Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal called this’the principle of circular and cumulative causation’.

It is as a result of this that free trade in the field of manfactured goods led to the concentration of manufacturing production in certain areas – to a ‘polarization process’ which inhibits the growth of such activities in some areas and concentrates them on others.

Of course Smith saying all this isn’t exactly heresy as economists are known to make mea culpa all the time and then backtrack. Nonetheless, this article is still revealing. Smith also talks of the importance of empirical work. In heterodox literature, there is of course the work of Anthony Thirlwall, John McCombie and others. See Models Of Balance of Payments Constrained Growth: History, Theory And Empirical EvidenceSoukiazis, E., Cerqueira, P. (Eds.).

There’s also evidence from Ricardo Hausmann and César A. Hidalgo of Harvard University. See this Nature article.

John McCombie in the above quoted book, Models of Balance Of Payments Constrained Growth, in his chapter, Criticisms and Defences Of The Balance Of Payments Constrained Growth Model: Some Old, Some New, recognizes the work of Hausmann, Hidalogo, et al. :

Hausmann et al., (2007) have also stressed the importance of the sophistication of a country’s exports for its rate of output growth. They measure the sophistication of a particular export in terms of an index of the weighted per capita income of the countries that export that good, where the weights correspond to the revealed comparative advantage of the countries producing that good (PRODY). Then the average productivity of a country’s export basket is measured using this productivity index together with the relative shares of exports of the country concerned (EXPY). They found that EXPY was a statistically significant explanatory variable of per capita GDP growth in a regression which also included control variables.

These theoretical and empirical works go so much against the economist case for free trade, the most sacred tenet in economics.

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