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Richard Mellor

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Free trade or protectionism? ? the Keynesian dilemma
« on: July 12, 2018, 07:30:20 AM »
Free trade or protectionism? ? the Keynesian dilemma

 Free trade or protectionism? ? the Keynesian dilemma

by Michael Roberts

The trade war that has broken out has confused mainstream  macroeconomics.  The majority still see tariff increases as  ?protectionism? and ?free trade? as the only way to operate. Trump?s  measures are generally condemned.  But among the Keynesians, there is  confusion and split.

Martin Wolf, the Keynesian economic journalist, who writes for the  FT, reckoned that the trade war would be costly for global capital: ?Global co-operation would surely be shattered?  Nevertheless, he argued for UK retaliation against Trump?s measures ?more  because the alternative looks weak than in the belief that it would  work. Another thing the rest of the world should do is to strengthen  their co-operation.?  On the other hand, he thought Trump?s wild proposal to create tariff-free area (for rich countries only) could be taken up. ?Who knows? It might even work.?   He did not explain how cutting tariffs on goods from the 3-4% (that  they average now for most advanced countries) to zero would make any  difference.

While Wolf looks for ways to ?save globalisation and free trade? through retaliation, another Keynesian Dani Rodrik actually advocates protectionism as a good idea for economies with weak domestic growth: ?US protectionism surely will generate some beneficiaries as well in other countries.? 

In a contrary view to Wolf, who calls for retaliation to stand up to Trump. Rodrik says Europe and China should ?should  refuse to be drawn into a trade war, and say to Trump: you are free to  damage your own economy; we will stick by policies that work best for  us.?  Indeed, he says, domestic industries may benefit from tariffs  on their exports to the US ? they could sell at home instead. He cites  how Boeing could sell more planes in the US and Airbus could do the same  in Europe. ?Some European airlines favor Boeing over Airbus, while  some US airlines prefer Airbus over Boeing. Trade restrictions may  result in a total collapse in this large volume of two-way trade in  aircraft between the US and Europe. But the overall loss in economic  welfare would be small, so long as airlines view the two companies?  products as close substitutes.?  According to Rodrik, ?US protectionism surely will generate some beneficiaries as well in other countries.?

The protectionist line has also been peddled by leftist economist Dean Baker.   He points out that not everyone gains from ?free trade?. He claims that  it was free trade that lost manufacturing jobs in the US, echoing the  Trumpist argument.  However, there is much evidence that this was not the case.  As I said in a past post on Trump, trade and technology, ?the loss of US manufacturing jobs, as it has been in other advanced  capitalist economies, is not due to nasty foreigners fixing trade  deals.  It is due to the inexorable attempt of American capital to  reduce its labour costs through mechanisation or through finding new  cheap labour areas overseas to produce.  The rising inequality in  incomes is a product of ?capital-bias? in capitalist accumulation and  ?globalisation? aimed at counteracting falling profitability in the  advanced capitalist economies. But it is also the result of  ?neo-liberal?policies designed to hold down wages and boost profit  share.?

Baker claims that trade deficits lose jobs because it reduces  ?demand? and so reducing the US trade deficit would save jobs.  He makes  this argument when the official unemployment rate in the US, the UK and  Japan is at an all-time low (yes, I know many are crap jobs)!   Apparently, if everybody ran a trade surplus (impossible by the way) all  would be better off.  What he really means is Trump is right to turn  the US trade deficit into a surplus and get manufacturing jobs back from  the developing world and Europe. It is certainly a weird and confused  argument for nationalism.

The Keynesians are confused about whether they favour ?free trade? or  protectionist/nationalist measures.  That echoes that confusion that  Keynes had during the last Great Depression of the 1930s.  He changed  his mind from a strong free trader in the late 1920s to a protectionist  and advocate of tariffs by the mid-1930s.  This changing view was really  an expression of the changing view of British capitalism.  Free trade  is fine for those winning in markets; protectionism is better when a  national capital loses share.  And that was Britain?s position.

In 1923, Keynes endorsed free trade in no uncertain terms: ?We  must hold to Free Trade, in its widest interpretation, as an inflexible  dogma, to which no exception is admitted, wherever the decision rests  with us. We must hold to this even where we receive no reciprocity of  treatment and even in those rare cases where by infringing it we could  in fact obtain a direct economic advantage. We should hold to Free Trade as a principle of international morals, and not merely as a doctrine of economic advantage.?

But his ?moral? position soon dissipated as British capitalism fell  into a long depression in the mid-1920s and then in the 1930s.  In his  seminal work, The General Theory, published in 1936, he concluded that ?the  one big (and smart) idea of absolute monarchy was to push exports over  imports?..?A favorable balance, provided it is not too large, will prove  extremely stimulating; whilst an unfavorable balance may soon produce a  state of persistent depression.?

He advocated tariffs on imports into the UK as an alternative way of  cutting real wages (by increased import prices) and to boost domestic  production.  For Keynes, it was a way for British capital to gain a cost  advantage over its rivals by reducing wage costs in real terms.  ?I am frightfully afraid of protection as a long-term policy,? he testified to a UK parliamentary commission, ?but  we cannot afford always to take long views . . . the question, in my  opinion, is how far I am prepared to risk long-period disadvantages in  order to get some help to the immediate position.? Of course, once capitalism globally had recovered and, with it British capital, then ?free trade? could be renewed.

The current confusion in macroeconomics and particularly among modern  Keynesians mirrors the changing views of Keynes as the current Long  Depression lingers and ?globalisation? fails for all.  So now we have  Keynesians like Rodrik and Baker supporting tariffs on US imports and  pushing for trade surpluses, while calling on Europe and China not to  retaliate!  And Wolf calls for retaliation by Europe and Asia.

What is the Marxist view?  Should we support tariffs and other  protectionist measures introduced by weaker capitalist nations to ?stand  up? to Trump?s measures (Wolf)?  Alternatively should we support  Trump?s measures as a way of saving US manufacturing jobs (Baker) and  perhaps helping other countries to boost their domestic industries  (Rodrik)?

Free trade or protection?  I outlined my answer in a previous post.   Free trade has been no great capitalist success.  Capitalism does not  tend to equilibrium in the process of accumulation.  As Adam Smith put  it, in contrast to Ricardo, ?When a rich man and a poor man deal  with one another, both of them will increase their riches, if they deal  prudently, but the rich man?s stock will increase in a greater  proportion than the poor man?s. In like manner, when a rich and a poor  nation engage in trade the rich nation will have the greatest advantage,  and therefore the prohibition of this commerce is most hurtful to it of  the two?. Capitalism does not grow globally in a smooth and  balanced way, but in what Marxists have called ?uneven and combined  development?.  Those firms and countries with better technological  advances will gain at the expense of those who are behind the curve and  there will be no equalisation.

Free trade works for national capitalist states when the  profitability of capital is rising (as it was from the 1980s to 2000)  and everybody can gain from a larger cake (if in differing  proportions).  Then globalisation appears very attractive.  The  strongest capitalist economy (technologically and thus competitively in  price per unit terms) will be the strongest advocate of ?free trade?, as  Britain was from 1850-1870; and the US was from 1945-2000.  Then  globalisation was the mantra of the US and its international agencies,  the World Bank, the OECD and the IMF. But if profitability starts to  fall consistently, then ?free trade? loses its glamour, especially for  the weaker capitalist economies as the profit cake stops getting large.

Marx and Engels recognised that ?free trade? could drive capital  accumulation globally and so expand economies, as has happened in the  last 170 years.  But they also saw (as is the dual nature of capitalist  accumulation) the other side: rising inequality, a permanently floating  ?reserve army? of unemployed and increased exploitation of labour in the  weaker economies.  And so they recognised that rising industrial  capitalist nations could probably only succeed through protecting their  industries with tariffs and controls and even state support (China is an  extreme example of that).

Engels re-considered the case for free trade in 1888 when writing a new preface on a pamphlet on free trade that Marx had wrote in 1847.  Engels concluded that ?the  question of Free Trade or Protection moves entirely within the bounds  of the present system of capitalist production, and has, therefore, no  direct interest for us socialists who want to do away with that system.  Whether you try the Protectionist or the Free Trade will make no  difference in the end.?

But it is informative to see the Keynesians split over favouring free trade for global capital (Krugman) or protection for national capitals (Rodrik and Baker for the US and Wolf for the UK and Europe).  Sign of the times.
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