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Photo: Bloomberg
Photo: Bloomberg

Jagdish Bhagwati and trade issues today

Trade liberalization in the context of an emerging economy must be premised on the relationship of openness to economic growth

I had the pleasure recently of participating in a conference at Columbia University in New York, organized by my great guru, economist Jagdish Bhagwati. The occasion was the launch of a new book on the global trading system, soon to be released by MIT Press, and co-edited by Bhagwati, economist Pravin Krishna of US’ Johns Hopkins University, and Arvind Panagariya, on leave from US’ Columbia University and at present the vice-chairman of government think tank NITI Aayog.

Krishna (who was my Columbia batchmate), along with Bhagwati and Panagariya, are without doubt today’s top three economists concerned with the political economy of trade policy. In particular, they have focused attention in recent years on the baleful rise of preferential trade agreements (PTAs) which threaten to fragment a world trading system premised on rules-based, multilateral liberalization. The conference also featured other eminent Bhagwati students and colleagues, both present and past, including economist Guillermo Calvo, who has made important contributions to thinking about the current state of disorder in the global monetary (non-)system, and Douglas Irwin, who has been a leading historian of international trade and has carefully studied the disastrous experience of the trade wars of the 1930s. These are both, obviously, pertinent topics today.

In keeping with the catholicity of Bhagwati’s own contributions to international economics over the years, conference panels ranged widely over interconnected and overlapping themes. These included, in particular, a panel on the relationship between alleged currency manipulation and international trade—a topic which has been very much in the news recently as US presidential contender Donald Trump has painted China as both a currency manipulator and an unfair trader.

Equally topical was a panel on the relationship of PTAs—especially “mega-regional" proposed deals such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership—and the global trade regime founded on the principles of consensus and non-discrimination as embedded in the World Trade Organization (WTO). Readers of this column will know that I share the concerns articulated by Bhagwati, Krishna and Panagariya, that these mega-deals pose a clear and present danger to the continued health of the WTO-based multilateral system and threaten further fragmentation of an increasingly imperilled international trade architecture.

The panel most associated with my own work, including early work with Bhagwati, concerned the putative relationship between globalization and inequality, which has animated the anti-globalization backlash in the UK, US, and elsewhere in the advanced economies in recent months and years. Here, it was widely agreed, as I have argued myself in these pages, that the pendulum has swung from one direction to the other in the span of the last 20 years or so. Thus, when Bhagwati and I proposed in the early 1990s that technology, not international trade, was likely the chief culprit in explaining the widening gap between skilled and unskilled wages in the US, most in the economics profession either were inclined to agree with us or were persuaded by our argumentation.

But, today, in the wake of a series of recent research papers by economist David Autor of Massachusetts Institute of Technology, US, and co-authors which seems to suggest that the labour market impacts of trade liberalization in the US were deeper and longer-lasting than conventionally believed, many in the economics profession appear to believe that trade is a more important culprit in explaining inequality in the US, especially wage inequality, than we believed 20 years ago. This belief matches what appears to be in the air politically—based not on Trump but also the lukewarm support, at best, for the principles of free trade, both from President Barack Obama and his party’s presidential candidate, Hillary Clinton.

The danger is that the pendulum may swing back too far. Economists are right to point to the distributional impacts of trade liberalization, as I have done myself in this column, and politicians are right to worry about these impacts. But this is entirely consistent with supporting trade liberalization as being in the national economic interest. The crucial element that makes these two statements logically consistent is that trade liberalization brings aggregate economic gain even in the presence of distributional impacts. It remains to be argued, therefore, that the losers must be compensated, which ensures that everyone gains, or, at any rate, that no one loses—the classic Pareto principle of economics. The wrong conclusion, but one that lazy folk may grasp at, is to call into question the gains from trade liberalization tout court.

Fittingly, the conference ended with a panel, moderated with magisterial sweep by Bhagwati himself, on “trade issues today". An Indian perspective was brought by Panagariya, who argued rightly that the case for trade liberalization in the context of an emerging economy must be premised on the relationship of openness to economic growth, and the impacts of growth on raising incomes and reducing poverty and deprivation. To which: amen.

Every fortnight, In The Margins explores the intersection of economics, politics and public policy to help cast light on current affairs.

Comments are welcome at views@livemint.com. Read Vivek’s Mint columns at www.livemint.com/vivekdehejia

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