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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