Trade Matters, “Free Trade” Less So

I agree with Chris Blattman that Dani Rodrik’s The Globalization Paradox has gotten surprisingly little attention. I just assumed this book was going to be a huge deal when I reviewed it and in retrospect wish I’d been more enthusiastic. Let me quote from Steven Pearlstein’s review to help tease out a really good Rodrik-ian idea:

The irony, Rodrik notes, is that the countries that experienced the greatest growth during the heyday of the “Washington consensus” were Japan, China, South Korea and India, which never embraced it. For years, they had nurtured, protected and subsidized key industries before subjecting them to foreign competition. They had closely controlled the allocation of capital and the flow of capital across their borders. And they flagrantly manipulated their currency and maintained formal and informal barriers to imports. Does anyone, he asks, really think that these countries would be better off today if they had played the game, instead, by the Washington rules?

The point here is that while trade has been hugely important to Asian development success stories, that hasn’t meant “free trade” it’s often meant export-promotion strategies. One important reason trade matters is that in the tradable sector it’s easier to compare quality. Since Hyundai tries to sell cars to Americans and Toyota and Ford also try to sell cars to Americans, you actually tell via price and market share whether Hyundai is succeeding in making cars that people like. In non-tradable sectors, by contrast, it’s difficult to have quality benchmarks and even know whether or not you’re moving up the ladder.

One difficulty here, though, is that if everyone tries to do this simultaneously it’s not clear where it gets you. South Korea can protect its domestic auto market to build up an “infant industry” that turns to exporting. But if everyone’s protecting their domestic auto market, then it’s a wash and you just have a world that’s producing too many cars.