In a recent piece, Dani Rodrik argues that current global trading rules interfere too much with domestic regulation and that "the world economy desperately needs a clear normative framework to determine the rules of the road." In this regard, he distinguishes between two options: (1) "policies with adverse cross-border spillovers"; and (2) "policies that truly are beggar-thy-neighbor." He says that "[i]t would indeed be hopeless – and counterproductive – to try to discipline all policies of the former type," and argues for establishing disciplines that focus on "beggar-thy-neighbor" policies.
I agree with him that "policies with adverse cross-border spillovers" is very broad and wouldn't work well as the basis for the trading system. It's worth noting here that, for the most part, this is not, in fact, the current basis for the system, although I do think there are interest groups who try to push the existing rules in this direction: If a foreign regulation hurts their business, they try to convince their government to challenge it as a "trade barrier," even if the regulation has a similar impact on their foreign competitors.
But I don't think "beggar-thy-neighbor" is the best alternative. "Beggar-thy-neighbor" is a well-known term from economics, but what exactly does he mean by it? He illustrates the concept as follows:
Consider two policies in particular. First, when the Chinese government subsidizes research and development that enhances the country’s competitiveness in high-tech products and lowers their prices on global markets, the US and other advanced economies are hurt, because these are the areas of their comparative advantage. Despite the harm, however, we would not consider it proper to ask China to remove such subsidies, because our intuition tells us that supporting R&D is a legitimate tool to promote economic growth, even if others incur losses.
The second policy is an export ban on rare earths or other critical minerals for which China is the principal global supplier. China benefits by increasing prices on world markets and making its exporters more competitive, owing to their access to cheaper inputs. But this is a clear instance of a beggar-thy-neighbor policy. China’s gains are the result of an exercise of global monopoly power that forces losses onto foreign producers.
A policy is beggar-thy-neighbor when the benefit provided to the domestic economy is made possible only by the harm that it generates for others. Joan Robinson coined the term in the 1930s to describe policies such as competitive devaluation, which, in a situation of generalized unemployment, shifts employment from foreign countries to the domestic economy. Beggar-thy-neighbor policies are generally negative-sum for the world overall.
I see what he is getting at, but speaking as a lawyer, I don't think the concept works very well as a basis for disciplining domestic policies. I'm not sure how you would write a rule that looks at "when the benefit provided to the domestic economy is made possible only by the harm that it generates for others." How would you determine whether there is a "benefit" here? Does this mean an overall benefit, or just a benefit to a particular interest group? And how would you demonstrate the connection between that benefit and the "harm that it generates for others"? What exactly is "made possible by" here?
Fortunately, we do not need to agonize over crafting such a rule, because we have existing concepts that work better. Rather than try to make "beggar-thy-neighbor" happen, we can rely instead on the concept of "protectionism," which I think of as a policy that has the objective of giving an advantage to domestic firms over their foreign competitors. GATT Article III:1 captures this idea pretty well:
The Members recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.
There are some nuances to deal with here, including situations where the advantage being given relates to competition in a foreign market. But the general principles are well understood, and can be applied fairly easily by trade adjudicators. Of course, in practice we have debates about burdens of proof, "aims and effects" tests, and the meaning of "necessary" in the exceptions. And there are carveouts from the principle for ordinary tariffs, trade remedies, and public policy and security exceptions (all of which make it clear that protectionism is not prohibited, but rather the system simply sets out mutually agreed constraints on it). But the debated issues are fairly clear and we just have to pick an approach. With "beggar-thy-neighbor," by contrast, we would be starting from scratch, and I'm not even sure where exactly we would be starting.
