Saturday, January 2, 2010

Reply to Commenter on Protection

Commenter Ted takes issue with my pro-protectionist argument.

So, let me say that if I were advising a developing country, I would have them be protectionist in a heartbeat. Only, protectionism w/ tariffs is suicide, b/c these countries really, really need market access -- that might be the most important variable in all of economics. A much smarter way is with capital controls, an undervalued peg, and an umbrella of Treasuries one can deploy on a rainy day. Nobody has ever won a WTO case stemming from an undervalued peg. (Who's to say it's undervalued? Who's to say China shouldn't hold $2 trillion in Treasuries?)

Anyway -- here's a trivia question for blog readers/Ted: Name three countries that got rich on free trade.

Keep in mind Hong Kong doesn't count here -- when Hong Kong got rich, it had an effective monopoly on the opium/tea trade between southern China and the rest of the world.

Here's a random thought: Meiji Japan has got to be the most under-studied (at least by economists) Development Policy case-study there is... Which is odd, b/c that's also the most successful development example there's ever been. I'm going to go sit in on a Macro Development course on monday, and I'd be willing to bet my lunch money there will be nothing about Meiji Japan. Hell, I'd be willing to be my lunch money there won't even be anything historical on the syllabus, which i can't see, b/c this prof is still stuck with the cultural norms of a decade in which it was not expected, as a professional courtesy, to put your effing syllabus on-line before the semester starts! But I digress. The original "Men of Meiji" had the Midas touch -- everything they touched turned to gold (Korea, Manchuria, Formosa...)


  1. You completely missed the point of my comment ...

    I never claimed that free trade was necessarily a good policy historically. In fact, I specifically said that many historical examples contradict that premise. So asking me for historical examples to prove my point is bit absurd. I don't and haven't disputed that China's policy has been very good for their growth.

    What my comment was concerning were the fragile emerging markets (and the future emerging markets) who the West can steam roll with retaliation measures if they decide they don't like their currency policies, something we can't exactly do with China.

    I think it's reasonably accepted that the developed world makes quite a bit of money from importing our fancy economies of scale goods into underdeveloped / developing countries. If they decide to take a policy of currency devaluation I'm not convinced that their won't be a lot of political pressure to retaliate in some way which might be counterproductive. There was already talk earlier this year of defining the definition of China's currency policy as a "subsidy" to permit measures to counteract them. If we would seriously consider something like that against China, and given that it would be easier to do to a less stable country, I think it should be a serious concern for emerging markets.

    In terms of the WTO, there are no doubt issues there. The original draft would have actually likely included China's currency policy as a "subsidy," but a different definition was settled on. However, given that many WTO countries still have subsidies (and sometimes quite large ones) that are technically illegal I'm not convinced the WTO courts have much teeth, particularly when dealing with big players. The WTO always seems to lecture the little countries, but let's the big guys off.

    Regardless, my comment was a theoretical argument that may not pan out in practice but you didn't really address it at all and went on to say things I already agreed with you on.

    On a note of Meiji, I've read a few papers but they are mostly either bad or just stuff I already knew. In terms of classes, I can actually sort-of see why it wouldn't be included (though I disagree with it not being). What drove Japan's rise was a long list of factors, the reforms were quite sweeping. To properly study it, I believe, would take up a substantial amount of time. Perhaps that would actually be worthwhile. I know I think it would be more insightful to learn about the Meiji period rather than Lucas' development mechanics or that so-called brilliant "colonial origins."

  2. Just to add, my argument would be irrelevant prior so historical examples aren't valid. My argument stems from the believe that free trade is god which is a relatively recent orthodoxy and with a global recession and pressure on currency policies I suspect things will heat up over the next decade.

  3. Ted-- My post wasn't trying to counter your argument necessarily, I'm actually curious what countries have gotten rich w/out using protectionism/industrial policy!
    I agree w/ what you've been writing. Large, persistent undervaluing in the face of trade surplus's is likely to create some bad blood between you and your trading partners. If you are a poor/small country, you can probably get away w/ moderate undervaluing until you're well into being middle-income...


  4. If the only thing you want your country to do or be known for is trading, then a "free-trade" strategy is the strategy you want.

    If, on the other hand, you want your country to be able to MAKE things--especially difficult or high quality things--then you MUST have a protectionist / industrial policy strategy.

    And if you already have an industrial state and some dimbulb economist sells a "free-trade" strategy to your politicians, you WILL lose your ability to make complex, high-quality goods.

    There are NO exceptions