In recent years the world has turned increasingly against free trade as many displaced workers have taken a firm political step to the right. Economists have long argued over the merits of free trade and Dani Rodrik’s blog titled “No Time for Trade Fundamentalism” is a continuation of this debate. Rodrik looks at protectionist measures as a means of “blowing off political steam” in order to continue the expansion of global free trade. Without some of the protectionist measures during the 1980s there was a very real threat to continued expansion of global trade. Political pressure upon the world’s governments to enact protectionist measures to ensure the safety of local jobs was rampant and many pundits in favor of “trade expansion at all costs” decried the proposed measures. The trade barriers erected by the United States and Europe that aimed to tackle stagflation are not that dissimilar to what’s being proposed today by Donald Trump (in a very distilled manner). Why might protectionism be harmful? Who would benefit and who would suffer? Game theory can help to explain some of the trade decisions the world is facing today.
Take this hypothetical case of free trade versus tariffs between the United States and Brazil. Both Brazil and the United States have the choice of free trade or optimal tariffs. If one country chooses optimal tariffs and the other does not, the first country will prosper more and the other will suffer. Both countries will be worse off if they both choose tariffs. The “Nash equilibrium” (both participants choose their best possible response move) here is with optimal tariffs on both sides, Globalization has been let out of the genie bottle and it is all but impossible to turn back now. Donald Trump’s proposition for protectionist measures are assured to spark one of the largest trade wars in modern history. The rhetoric being espoused by the Trump administration regarding trade policy is both dangerous and short-sighted. The American economy is not what it was 50 years ago and will be completely transformed again in the coming 50 years. Progression sometimes requires a country to take one step back and then two steps forward, but what Trump is proposing equates to running back to the starting line when the race is already halfway through. In order to move forward America must recognize this absolutely fundamental shift within itself and move forward with progressive policies aimed at revitalizing a downtrodden middle and lower class people. The next four years can undo decades of progress for the entire world, it is up to the American people now to determine their own fates.even if free trade is “Pareto optimal” (the best possible outcome for both). This classic assurance game structure provides a good way to analyze why Donald Trump’s protectionist policies are problematic to the WTO and IMF. Once the real world political “assurance” of continued free trade is gone the world’s countries will be worse off than if they had engaged in free trade. While there is a prospect for possible protectionist benefits, it will likely lead to only harming the entire global economy. While this game offers a hardline view on global free trade, Rodrik admits that small scale protectionist measures, even if somewhat damaging in the shorter term, can have the effect of letting off political steam and allowing the continuation of globalization.
Lost jobs that are promised to return based on protectionist policies may actually come back (highly unlikely), but at what long-term cost? Reversing globalization is a long painful, painful experience that leaves every country worse off than before. It takes a real economist (think Volker) or politician to stand up and say that those manufacturing jobs are never coming back, the rust belt is permanently rusted, and the American people will need to rethink how they fit in the global economy.