'Taking the facts seriously': A conversation on trade with U of T's Michael Trebilcock

Renowned law and economics scholar University Professor Michael Trebilcock will be in Washington on Wednesday to present a paper at the International Monetary Fund’s conference: Meeting Globalization’s Challenges. The University of Toronto is the only Canadian postsecondary institution participating among a global list of panelists.

His paper is entitled "The Fracturing of the Post-War Free Trade Consensus: The Challenges of Constructing a New Consensus." The talk will be recorded and the video link will be posted online post-event. You can also follow the tweets at: #IMFGlobal.

Trebilcock is the author of Dealing with Losers: The Political Economy of Policy Transitions,  which received the 2014 Donner Prize for best public policy book by a Canadian. 

He speaks to alumnus Andrew Stobo Sniderman about his upcoming talk, the rise of “pulling up drawbridges” – and why he advocates Option C, plurilateralism, in international trade:

We are seeing a rise in economic nationalism in developed countries like the United States, with more calls to restrict international trade to protect domestic jobs. You note the irony, because for decades after the Second World War, it was developing countries who were expressing frustration with the unfairness of international trade promoted by developed countries. What has changed?

I think the top of the list is the rise of China, the so-called “China shock” of the past decade or two. That has had a significant impact on manufacturing sectors in the United States and other developed countries on a scale that had not been experienced before. Even then, one has to remember that in the 1980s many libraries of books were generated worrying that Japan was going to take over the world. But of course that didn’t happen. There is a fad to these things, the rise and fall of concerns about emerging economic powerhouses elsewhere.

How else do you explain the recent surge of economic nationalism in developed countries?

Beyond the rise of China, it is true more generally that employment has become more unstable, with the so-called “gig economy,” with more people working part-time and more self-employed, small-scale entrepreneurs. The paradigmatic employer-employee relationship that prevailed for decades after the Second World War of full-time stable employment with generous benefits – that paradigm is clearly under stress, and not just because of trade.

If you look carefully at the evidence, much of this is attributable to technology. But for voters, distinguishing the impacts between trade and technology is not something that is top of mind, so blaming foreign trade and China is easy. Blaming technology is hard because it is amorphous, less identifiable and some politicians are inclined to exploit this kind of ambiguity. Far easier to find readily identifiable villains. It is hard to make a computer or information technology into a villain.

I should add that those of us who have promoted an open, international trading system have not been quick enough or serious enough about addressing the losers from trade.

You warn that it would be a mistake for countries to “pull up the drawbridges” to protect domestic jobs. Why?

It’s really a form of economic autarchy – the idea that instead of importing, let’s make it at home. That view has been rejected by economists since the time of Adam Smith. It makes no sense. Of course, the huge beneficiaries from open international trading system are consumers. They tend to be the silent majority in these kinds of debates, diffuse and unorganized. But benefits to consumers, including you and me, including access to goods and services around the world, are enormous. But you and I are not going to organize lobby groups to ensure access to foreign goods. But people displaced from steel mills in Ohio, where impacts are very localized, have strong incentives to organize.

The persistence of this autarchic streak, this focus on economic self-sufficiency rather than interdependence, remains something of a mystery. When all is said and done, we need to remember that the unemployment rate in the United States, at 4.3 per cent, is at one of the lowest rates in the post-war period. That is pretty much full employment.

Are we mistaking dislocation from trade with the disruption of technology?

With political debates carried on at abstract level, with sound bites and sloganeering, it is hard to distinguish between these things. We have to get down into the weeds and look into the evidence. I give the example of the U.S. steel industry. It is true that output of U.S. steel is down somewhat compared to 30 years ago, and that the import share of steel is up somewhat. But employment in the steel industry has declined much more dramatically. We know that trade accounts for a relatively small percentage of the decline in employment of the U.S. steel industry, and the decline in employment is mostly attributable to changes in technology.

But you have to be prepared to dig into the facts of the U.S. steel industry to reach this conclusion. It is not something that is of much interest to the Trump administration, or economic nationalists more generally, because it means taking facts seriously.

You argue that we must take even more seriously the “losers from economic transitions” caused by liberalizing trade. What more needs to be done?

We needn’t focus just on trade, because this is a general problem. As policy analysts, we can identify a variety of weaknesses in the status quo and can identify future superior policies, but the issue is how we get from here to there. No matter how beneficial the changes are on balance, every policy change is going to generate some losers. In the real world, situations where everyone wins and nobody loses hardly ever exist.

First, we should not dismiss the impacts and say that, in the long run, it will all come out in the wash because people will find alternative employment, or their children will. That is unconscionable and politically suicidal. So I put a lot of weight on active labour market policies to help people adjust. Whatever the reason, trade or technology, we should help these workers. The United States in particular is way behind the pack in this area. And it is possible to do a lot better and we should do a lot better.

There will be some cases where labour market policies alone will not be the appropriate response. In Canada, we have the case of dairy supply management that we have maintained with massive tariffs and quotas. I think that the Trump administration will take a run at this, with some justification. But this is a political hot potato for governments in Canada. These dairy farmers, often third- or fourth-generation farmers, have invested large amounts of money purchasing milk quotas, and to simply announce the termination of the scheme overnight would, in their view and in the view of others, be a form of expropriation. So here’s a case where a hard-line free trader will say, “Well this will all work in the long run.” But we will in fact have to contemplate some kind of buyout as well as reducing tariffs gradually over time, because this is a case where we absolutely have to take the losers seriously or this is the kind of issue a government can fall on. We would have dairy farmers surrounding Parliament and other legislatures for weeks on end. There would be chaos; I can confidently predict that.

That’s what I mean by taking losers seriously. But not moving at all on dairy is not really defensible either.

What happens when we ignore the economic losers?

When losses are highly concentrated, in certain geographic areas and industries, there are strong incentives to lobby against any changes, like trade policy changes. So that’s what we see. We end up with the status quo, the default option, doing nothing. It means keeping Uber out. It means keeping the pensionable age at 65, even though life expectancy is increasing. It means maintaining massive dairy tariffs. All these policies have this in common: very concentrated losers that prevent us from moving in a positive policy direction.

You write that the World Trade Organization is paralyzed, and note increasing fragmentation in international trade rules. You argue that we need to move away from the one-size-fits-all, take-it-or-leave-it regime of the WTO, where every rule applies to everyone. Why?

Coming out of the Second World War, the architects of the postwar international regime – including the International Monetary Fund, the World Bank, and what would become the WTO – their thinking was that economic nationalism and factionalism in the interwar years was a significant contributor to the outbreak of the Second World War. So the ideal in the postwar period was to establish a regime where every country, whatever their ideology, traded with every other country on a level playing field. It was a noble vision.

But that vision could not be maintained without qualification. Many developing countries that became independent from the 1950s onwards plausibly argued that they had inherited highly truncated economies, and to expect them to overnight to trade with longstanding developed countries was unfair and unrealistic. So various dispensations were made, and with some justification. Then the next breach was a proliferation of preferential trade agreements between smaller groups of countries.

There are two extremes, neither of which I find appealing. One is the one-size-fits-all, every country agrees to a common set of rules. There are now 164 member states in the WTO, in all states of development. The idea that their distinctive needs can be addressed with a one-size-fits-all approach is a delusion and clearly unsustainable. The other extreme is abandoning the multilateral system and going bilateral, allowing the multilateral system to wither away and die. This will lead to extreme fragmentation of international trading system, with every relationship governed by their own rules that are discriminatory against others countries. And small countries are at a huge bargaining disadvantage in bilateral negotiations, which is one reason why the Trump administration likes them.

So what alternative do you suggest?

The question is: Is there some intermediate option between extreme multilateralism and extreme bilateralism? I argue that there is, and that is a multi-speed, multi-tiered World Trade Organization, which would be much more accommodating of plurilateral agreements. We should encourage and accommodate many more such agreements, all governed by the World Trade Organization dispute resolution system, and these agreements should be open to subsequent succession by other members.

The World Trade Organization is now largely paralyzed. The consensus principle is strongly entrenched, and there can be no new agreement without consensus. You have to ask yourself whether 164 countries reaching consensus on new agreements is plausible. There is no easy solution or alternative to the consensus principle, but what I like about plurilateralism is that it allows for a coalition of the willing, and for more countries to join later on if they choose to. This may be the best we can aspire to.