25: What Are Trade Deals For? Dani Rodrik Does Trade Talks, Part 1

Hello, you are listening to an episode of Trade Talks, a podcast about the economics of trade policy. I am Simea Cain's economics and trade correspondent for the Economist. And I'm Chad Bound, a senior fellow with the Peterson Institute for International Economics of Washington. In this episode, we are talking to Professor Danny Rodrick, the Ford Foundation professor at International Political Economy at Harvard University. We'll talk about his views on trade deals as discussed in a paper of his that's coming up in the Journal of Economic Perspectives and in his book, Straight Talk on Trade. Danny, hello. Hello, nice to be with you. Okay, so first question is, what do you think the purpose of a trade deal should be? What's the point? I think the the the purpose of a trade deal should be what the purpose of a there was explicitly stated at the creation of a multilateral trade regime in the late 40s and I think it's still there in the preamble of the gath agreement and subsequently the WTO is to enhance living standards around the world and ensure full employment. What problem are they meant to solve? I mean, what about the world means that that doesn't happen without trade deals? Well, that's a very good question and I actually, you know, economists are still debating what purpose trade agreements serve and whether they should be trade agreements at all. I mean, when we teach trade economics in class, the first thing that we emphasize is that there are gains from trade and the gains from trade are essentially created at home. That is that nation's trade because it benefits them. You know, we take an inordinate amount of pride in the demonstration of David Ricardo back in the early part of the 19th century that comparative advantage ensures that as long as you're just a teeny bit different from your trade partners that you can gain from trade regardless of whether you're more productive, less productive and and all of that. So in that kind of a context, there's a natural question why you should we be signing trade agreements at all when just pursuing open trade policies in our own national interest. So the answer to your question is we have invented a number of reasons and I think they all tell they paint part of the picture but not always the full picture and then the bit that I've emphasized in the paper that you cited at the outset is that trade agreements have increasingly become a vehicle for special interest and special lobbies and business groups and multinational corporations, pharmaceutical companies, international investors, financial institutions to really get what they want internationally and I think frankly economists have been a little bit complicit in the process in terms of not distinguishing between free trade on the one hand which is what as economists were supposed to stand up for and trade agreements or free trade agreements which are often not about free trade at all but simply about creating rules that special interest and corporate interests want. And I would say that when we come to more recent trade agreements which have increasingly been not about import tariffs or quantitative restrictions but much more about rules and especially behind the border rules and I think the gap between what we economists think trade agreements is about and what they have there actually are about I think that gap has become even wider. So at this point Chad asked Danny about whether he thinks trade deals prevent countries from engaging and a kind of race to the bottom. Without them the idea is countries might all put on tariffs in an attempt to improve their terms of trade so they would try to help their own exporters and hurt the foreigners but if everyone does that then everyone does worse off and so trade deals are supposed to tie government's hands and protect everyone from simultaneously trying to improve their terms of trade. Basically that bit of the conversation got a bit techy so we've saved that for a bonus but for the rest of you we thought it would be best to pick up again from here. You know the whole terms of trade view presumes that really we are engaged in you know maximizing some kind of a global or you know national efficiency and I think you know the world trade regime is such a variance with this that you know from the get go I think you need to take into account. I mean just to give you perhaps the most latent example of this is that you know if trade negotiators got around the table to say okay what is it that we can do to increase the global consumption possibilities frontier you know they would stop everything that they're doing right now everything in the you know current negotiating and go after where the barriers are really large because that's really where by the economic logic where the biggest gains are going to be both at the national level and at the global level where the barriers are largest is in labor markets and it's completely outside our multilateral trade negotiation. Why I'm going to simplest explanation is because of course politically it's very hard it's not as if TPP hasn't run into a political obstacle but you know there is something about the politics that's actually shaping why is it a really negotiating let's say you know investment rules and not negotiating temporary work visas you know which would the gains would be in order of magnitude larger than under current negotiations so bottom line it's got it's the politics but that of course is simply opens up the question you know what about the politics who is powerful who gets on the agenda those are the interesting questions. Okay so in an ideal world avoid of any political constraints we wanted to maximize global welfare really we'd be focusing on easing labor mobility around the world but we're not in that world and so what we have is all these trade deals we've got an after the WTO could we could we go through some of your kind of specific problems in the way that those deals are written now. Well I think our existing trade agreements have moved very far away from any kind of economic rationality and I think it's really become a kind of provision of the internationalization of certain special privileges to groups that tend to have access to these negotiations. At the very top of the list certainly are the special protections that pharmaceutical companies and high tech companies get in terms of much tighter patent and copyright rules this really has practically no intellectual rationale and reason for belonging international trade agreement. Danny is about to refer to something called trips or trade related aspects of intellectual property rights to explain it's basically a bit of the world trade organization rules that specify a minimum level of patent protection that countries have to have. Going back to the history of how these so-called trips closes have entered global trade negotiations was a deliberate strategy by the pharmaceutical and high tech companies to shift forums from one forum where they were not very effective because developing countries were very vocal and effective that was the world intellectual property organization WIPO which is the natural forum for discussion of patent and copyright issues shifting from that forum to the what would eventually become the world trade organization under the Uruguay round and suddenly they turned this into a trade issue the question of intellectual property rights and subsequently pretty much in every subsequent bilateral regional trade agreement I think the various monopoly protections that are afforded to these companies have become more advantageous to them so that would be at the very top of the list which I think are you know really doesn't belong in the trade agreement reflects the relative lobbying power of of certain corporations so let's think about the the counter argument so the counter argument is we have the protection of intellectual property rights in rich countries they're designed to you know encourage innovation you know research and development that that what otherwise not be undertaken without this profit motive some would argue in the United States too much of that in the case of pharmaceutical prices too much of the cost of R&D being born by American consumers of pharmaceutical products and so trips or these trade agreements are a way to therefore spread the costs perhaps they shouldn't be spread to developing countries but they should be spread perhaps to other rich countries that are also benefiting from access to these pharmaceuticals so if we were to take this system away we would have to replace it with something else where we want to still have a sufficient amount of of R&D so can you kind of walk us through what do you have in mind for replacing it with and still having some of what we need on the intellectual property rights protection from well I mean from the from the international standpoint there's practically no evidence that the provision of more stringent patent and copyrights on the part of developing countries increases the supply of innovations I think that would be the issue there's a lot of evidence that increases the transfer of rents from consumers in the developing countries these producers. So the first order effect of these things is really is a transfer of rents and actually don't know of any empirical work that has shown that such intellectual property rights protections in the developing countries have a substantive effect on the supply of innovations either globally or from the perspective of you know more appropriate technologies or or pharmaceuticals targeted to the needs of developing countries. So in that kind of a setting you know this is you know then the argument for having such clauses in international trade agreements is mainly a way of transferring income from you know one group of countries to another and as we were talking about before the point in principle of trade agreements is to have a mutual benefit not simply to benefit one partner at the expense of the other. But there's a broader question I mentioned earlier that these often these trade agreements are a way of internationalizing particular corporate privileges. In the United States there is now a fair amount of empirical evidence that suggests that the existing intellectual property rights system is too restrictive that it is gone way beyond what is required to provide the supply of innovation. So in other words the balance between encouraging innovation and creating monopoly rents has moved way too much in the direction of the latter. I think so in general there is I think there's an argument for scaling these back even within nations in the United States and I think the argument for enshrining them into international trade agreements I think is extremely weak. So let's try and connect this all into the trade negotiations that are going on as we speak really negotiations of NAFTA. So there I think it's looking very possible that the final agreement might not include a chapter on investor state dispute settlement this chapter where investors consume other governments. How do you feel about that? Well I think in general that would be a good thing. I'm not a fan of Trump's trade strategy so I don't think that you know what he's trying to do in NAFTA and with the NAFTA renegotiations overall is something that's going to significantly you know improve the lives of his voters but I think just you know with respect to ISDS specifically I'm generally my presumption is against them and I think I would be happy if it was gone. Now originally there was a there was an intellectual argument for ISDS but I think again it's become sort of has become universalized into these trade agreements and I think once again has been has turned into largely a rant extraction mechanism. The original rationale for ISDS was that you know developing countries wanted to or generally speaking countries with weak legal regimes wanted to attract foreign investment and the ISDS was a you know shortcut which said you know we can't reform our legal regime overnight but in the meantime let's just offer some extra bit of legal protection to foreign investors by creating this parallel track of international arbitration and to the extent that that provides foreign investors with a little bit more assurance that they're not going to be expropriated then you know they're benefiting and then developing countries benefit because they get a high volume of foreign investment and that sort of was the original reason why many developing countries start to incorporate such clauses not in trade agreements but in the bilateral investment treaties but I think you know that was you know several decades ago I think you know the issue of foreign investment and the you know ease with which foreign investors cross border as the protection foreign investors get I think doesn't have the same kind of urgency for developing countries as it is not because foreign investment is unimportant but because in fact developing countries have already built up reputations for you know different policy regimes and attracting foreign investment subsidizing them and I think this this largely becomes a way as turning to a mechanism where a particular environmental or social or other policies are become targets for investors and I think on the whole they're playing a rather negative role at present. So ISDS intellectual property I guess and by now people who are familiar with your work wouldn't be surprised that you're upset about those things but so in the North and negotiations one of the most economically significant potentially one of the toughest arguments going on right now is over how the rules of origin for cars should be rewritten in the deal. Another quick definition which is that the rules of origin specify how much I would say a car has to come from within the trade deals partner countries for it to qualify for lower tariffs. So the Trump administration is pushing for tighter rules in NAFTA which would mean that more parts would have to be sourced from NAFTA members for a car to go through with zero tariffs. What's your take on what should happen? I don't have a very strong view on on the rules of origin interestingly when NAFTA was first negotiated rules of origin were the only bit of NAFTA essentially the only bit of NAFTA that economists many economists were very worried about because they viewed it as largely as a protectionist item in what was largely a trade liberalizing kind of agreement. And it was protectionist because they essentially prevented you from importing parts from no NAFTA countries. Exactly. So it was trade diverting that it was meant to create great employment in the car industry in the NAFTA member countries at the expense of exporters like Japan or other Asian exporters because as non NAFTA member countries they would not benefit. It goes back to the question of what is it that we're negotiating trade agreements for. If you look at trade negotiations from the perspective of you know how can we you know increase employment in sectors that are going to be benefiting then you're going to have all these kinds of pressure to negotiate you know rules of origins that are going to be protectionist. And I don't think that this is you know as an economist I don't think this is the right way to approach trade agreements. So in general I do think that rules of origin are are unnecessarily protectionist and you know I wouldn't take any particular comfort in their tightening. That is the end of part one of our four part conversation with Danny Rodrick on trade talks. Thanks to Danny Rodrick for coming on and also thanks to the Julius Rebinoid Center for Public Policy and Finance at Princeton University's Woodrow Wilson School. Thanks to them for hosting the conference that brought the three of us together and thanks to our listeners please do keep in touch. On Twitter I'm @chadbound and we're on at trade underscore underscore talks. That's not one but two underscores at trade underscore underscore talks. Because of one part episode with Danny Rodrick just wasn't enough.