This is from Dani Rodrik in the FT:
How will the world trade regime handle a large, increasingly powerful country such as China that apparently plays globalisation by different rules? This is the question that keeps US and European policymakers awake at night. The fever runs highest in the US, where the Trump administration has blamed China for engaging in economic aggression and has declared trade war in response. The US president’s methods may be frowned upon, but the view that something has to be done about China’s trade and industrial practices is widespread among mainstream policy elites.
The tone is softer in Europe, but the concern is shared. EU trade commissioner Cecilia Malmström, writing in the Financial Times, asks how we can reconcile China’s state-owned enterprises model with a global level playing field?
But US and European policymakers are asking the wrong question. The problem is not with China’s policies as much as it is with the world trading regime. The World Trade Organization — as well as every trade agreement since — has been predicated on the idea that economic practices in different nations would eventually converge. This has not happened, as China’s example amply indicates. More importantly, there is no good reason for national economic models to converge in the first place. World trade rules need to change, regardless of what China does, to accommodate economic diversity.
The trade agreements concluded in the early postwar period left plenty of space for countries to pursue their own paths. The various trade rounds under the old General Agreement on Tariffs and Trade system covered only explicit barriers to manufactured goods at the border, mainly import tariffs and quotas. Services and agriculture were excluded. Developing countries could do almost as they pleased. When an import surge in garments threatened economic dislocation in developed countries in the early 1970s, a special regime was established that enabled these countries to re-impose quantitative restrictions.
The WTO changed all that. Negotiated at a time of neoliberal triumphalism, it reached inside the border to constrain domestic policies in subsidies, health and safety and intellectual property. Any domestic regulation with an adverse impact on imports could now be treated as a trade restriction. Subsequent trade agreements went further, prioritising trade and foreign investment over domestic concerns.
[The US and Europe] forget that China’s heterodox policies have generated not only significant domestic economic growth and poverty reduction, they have also created a huge market for western exports and investment — a market that surely would not have been as large if China had been hemmed in by western textbook economic policies.
...
If the WTO has become dysfunctional, it is because our trade rules have over-reached. A fair world trade regime would recognise the value of diversity in economic models. It should seek a modus vivendi among these models, rather than tighter rules.
As I read it, Rodrik is arguing, on the one hand, that China's "heterodox policies" have been successfully implemented during the time that China has been a Member of the WTO and its policies have not "converged" with those of the West; but on the other hand, the WTO intrudes too far into domestic policy-making and does not allow a "diversity" of economic models. Obviously, there is some tension between these two arguments.
I've read a fair amount of Dani Rodrik's work, although not all of it (I reviewed one of his books here). My sense is that what motivates him is a belief in traditional industrial policy, and he would like governments to have as much discretion as possible to pursue that, including the use of protectionism at times. However, he recognizes that protectionism is not well thought of among economists, and so he tries hard not to sound too much like a protectionist.
The result is a critique of the existing system that is hard to follow at times. If he would focus on ISDS and IP (which he wants to characterize as "neoliberal," but I've never understood how they are and the free market folks I know are mostly skeptical of both), his critique would be stronger. Instead, he says things like this: "The various trade rounds under the old General Agreement on Tariffs and Trade system covered only explicit barriers to manufactured goods at the border, mainly import tariffs and quotas." For anyone vaguely familiar with the system, that's pretty obviously a misleading picture of the GATT. Regardless of what the "various trade rounds" covered, GATT Article III prohibits discriminatory taxes and regulations, so GATT was about a lot more than tariffs and quotas and went well beyond just border measures. It's possible Rodrik believes that domestic content requirements were allowed under the GATT (and that they should be allowed now), but they were not. (And it's unclear why he prefers non-transparent domestic content requirements to more transparent protectionist measures such as tariffs.)
At the same time, it is true that the behind the borders rules in trade agreements have expanded since the time of the GATT, and there is a critique to be made of the more intrusive SPS/TBT rules. And yet Rodrik never makes that critique. To take one example, what exactly does he think of trade agreement rules on food safety that require domestic regulations to be based on scientific evidence? Reasonable people can disagree on this issue, but I'm not sure what his view is beyond the vague skepticism he expresses. There are people out there (Cass Sunstein comes to mind) who think that guidelines for regulation of this sort can make regulation better and more widely accepted. How does Rodrik see this issue? There is a lack of clarity in his views here.
Along the same lines, Rodrik seems to approve of China's economic policies, but how far would he take this? Given the wide range of Chinese policies related to the manufacturing sector, it may be worth specifying which ones you approve of and which ones you don't. I'm assuming he doesn't want to copy the whole model. And as much as he likes (some of) China's policies, and wants to make sure WTO rules allow them, what is his view of "trade remedy" responses such as countervailing duties? Does his ideal world involve both industrial policy subsidies AND countervailing duties in response?
A few years ago, I discussed some of these issues briefly with him on his blog, but I didn't get many answers. He has written a number of books and articles on the subject, but I still can't figure out his vision for domestic trade policy and international trade rules.
