Rocks in the harbour

meta-creation_date: 26 April, 2004
Clyde Prestowitz warns pro-outsourcing economists that their argument doesn’t make sense in cases where the price of foreign labor is distorted by government policies such as exchange rate manipulation. bq. If they wish to avoid the political protectionistreaction, economists would do well to stop repeating the truisms of free trade and start insisting on hardheaded application of free trade rules to the mercantilists whose manipulations they so frequently ignore while telling workers to be happy about losing their jobs (“Financial Times”: [sub]) Prestowitz has a point, of course, when he says that the gains from trade—via international specialization of production—depend somewhat on efficient operations of a competitive market . But it’s not at all clear that his appeal to the ‘hard-headed’ enforcement of rules is a solution. Prestowitz has experience of the short-sightedness of the protectionist response to allegations of ‘manipulation’. The same arguments were heard around Washington in the 1980s, notably from Prestowitz when he was at the Department of Commerce. They were used then to justify ‘voluntary’ restraints imposed on Japanese exporters by the US (under threat of S.301 retaliatory ation) to the apparent cost of US consumers of automobiles and semi-conductors, among other things. Prestowitz today is offering an apparently more subtle argument in favour of ‘hard headed application of rules’. But there are no rules about labour prices or about exchange rate ‘manipulation’in WTO (or anywhere else). The labour pricing issue is fraught with difficulties and more than a whiff of plain old protectionism on the part of those who want the WTO to somehow legislate on wage rates. And evidence for exchange manipulation of advantage one way or the other by government policy is often highly debateable. Your exchange rate manipulation is my smoothing of market overshooting. Sometimes, the best policy is the ‘rocks in harbour’ policy. So what if the other economy is deviously protectionist? Even if it’s true, jawboning doesn’t usually change much where the trade rules are ambiguous: witness four decades of US and now global condemnation of European agricutural protection and subsidies. Better to take the view that the real costs of protection (or exchange rate manipulation) will fall on the econmy maintaining it. Not even an economy the size of Japan can sustain exchange manipulation for long. Above all, if your trading partner throws up barriers by ‘putting rocks in his harbour’, it certainly makes no sense to ‘retaliate’ by putting rocks in your own.

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