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Chapter 4 Dani Rodrik

Ba(hons)economics (University of Delhi)

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Chapter 4 of Dani Rodrik: The Globalization Paradox: Why Global Markets, States and
Democracy Can’t Coexist

Trade policy in a country is politically contentious because it has serious implications for
functioning of the domestic economy and key development indicators such as inequality and
poverty. There were extensive controls and restrictions in trade policies during the inter war
period. The 2 economists – Keynes and White were in favor of building a policy framework
combining the domestic needs and trade requirements of the economy. Free trade ceased to be
practical in a world where nations were experimenting with the domestic policies followed in
their country.

The Bretton Woods Conference was one of the initial steps taken in this regard in July 1944. The
regime marked the beginning of the possibility of collective deliberation at the global level and
led to the formation of 2 organizations – International Monetary Fund (IMF) and World Bank
(WB) later. The objective was to formulate policies to achieve the twin goals of trade
liberalization and catering to the social and economic needs of the domestic economy (also
known as moderate globalization). These organizations (GATT, IMF and World Bank) set the
rules and regulations for trade enforcement, known as multilateralism1. Though the United States
did enjoy a privileged status in international trade, multilateralism gave the smaller and poorer
nations a voice and protected their interests giving these countries a certain degree of legitimacy
independent of the dominant American power.

50 years after the Bretton Woods Conference GATT (General Agreement on Tariffs and Trade)
was instituted. GATT’s purpose was to achieve the maximum amount of trade compatible with
different nations doing their own thing. GATT was part of what was originally meant to be a
more ambitious organization, the International Trade Organization (ITO) and was managed by a
small secretariat in Geneva. The proposed ITO included agreements on commodity price
stabilization, international antitrust and fair labor standards. This was followed by the
elimination of import tariffs and other restrictions that existed in the 1930s. The Most Favored
Nation (MFN) principle ensured that all signatories to GATT benefited from this relaxation in
restrictions, regardless of how actively they participated in the negotiations. GATT priorities
rested solidly in the domestic policy agenda, which produced both its success and departures
from free trade.

The agreement led to significant increases in the volume of world trade and output between 1948
and 1990, also known as the golden era of globalization. The Bretton Woods system led to
economic growth, equity, security and stability which fostered economic growth. Higher
economic growth facilitated globalization. Though there was increased liberalization in some
sectors such as manufacturing, large parts of world trade were still protected by generous
exceptions to the agreements. Agriculture and services were kept out of GATT negotiations.
1
Multilateralism refers to the rule enforcement and belief systems that work henceforth through international
institutions (IMF, World Bank, GATT) rather than through naked power politics or imperial rule.

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There were enough tariff and non tariff barriers and import quotas in agriculture. In the
manufacturing sector textile and clothing industries in developed countries were sheltered in
1974 as part of the Multi-Fibre Arrangement (MFA)2. This was followed by imposition of
voluntary export restrictions (VERs), which restricted imports of Japanese autos, steel and
industrial products by any country.

There were serious loopholes in these rules. For examples, any business with a good law firm on
its payroll could buy itself protection through the GATT’s Anti-Dumping (AD) or Safeguard
Clauses. Under the AD arrangement, the importing country could impose duties as long as it
determined that an exporter had sold its products at ―less than normal value‖ and caused ―injury‖
to the competing industry at home. The domestic authorities could manipulate the notion of ―less
than normal value‖ to their own advantage. This also led to development of various forms of
capitalism in advanced countries. For example, in Europe there were three different types of
capitalism: the German model of social market economy; and the French system based on
indicative planning and extensive regulations. Japan also developed a highly competitive export
sector along with a highly regulated and protected traditional economy.

Many other rules of GATT were exploited by domestic firms to obtain protection. The GATT
rules left whole segments of world trade uncovered and were weak wherever they existed. The
rules were patently unenforceable with weaker legislative implications. The implementation of
these rules differs for developed vis-a-vis developing countries, where the latter were free to
formulate trade policies on their own. Developing countries were given the liberty to adopt
industrial policies to reduce their dependence on natural resources and commodities.

The WTO Regime

The 1980s were clearly a period of ideological transformation. This was based on the role of
market forces in stimulating economic growth, with limited role of the government. These
policies were promulgated under the Washington Consensus, which was based on the principles
of market fundamentalism (or neoliberalism).

After around eight years of negotiations, the World Trade Organization was created in 1995 as
culmination of the ―Uruguay Round‖. WTO was created with an objective of hyper
globalization. Economic globalization and the international integration of markets for goods and
capital was an end in itself, overshadowing domestic agendas. Globalization became an
imperative, where by all nations were required to pursue a common strategy of low corporate
taxation, tight fiscal policy, deregulation, and reduction of the power of unions. Multinational
companies demanded extensive global rules that would facilitate their international operations.
Developing nations sought to become export platforms and were willing to adopt policies which
attract foreign investment. WTO envisaged a significant ramping up of ambitions with respect to

2
Under the agreement, a set of bilaterally negotiated quotas were imposed on exports from developing countries.

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economic globalization, with a rebalancing of both domestic and international responsibilities of

a nation.

Both agriculture and services were liberalized under the WTO. Among the services sector,
countries were required to specify the areas where they are willing to open up. The extent of
liberalization was allowed to vary across countries and sectors. In agriculture, import quotas
were converted into tariffs and subsidies. There was a push for removal of agricultural quotas,
tariffs and subsidies. Quota regime under the Multi-Fibre Arrangement was to be phased out
subsequently.

One of the major changes was the introduction of new rules on patents and copyrights.
Developing countries were required to bring their laws in conformity with those in rich
countries. Domestic health and safety regulations were subject to WTO scrutiny if they were not
harmonized internationally. They could also be considered illegal if they were not justified
scientifically. Tighter restrictions were placed on the use of government subsidies. There were
prohibitions on government rules requiring firms to limit their imports in relation to exports and
use goods and services produced domestically. Developing nations were also mandated to
comply with rules that circumscribed important areas of industrial policy.

One of the significant achievements of the WTO was the formulation of a new procedure for
settlement of disputes. The appellate body’s decision – whether in favor of the plaintiff or the
defendant – would be final unless it was reversed collectively by every member of the
organization. The judicial process during GATT was lengthy and open to delaying tactics. With
the WTO dispute settlement both compulsory and binding for the member states, it took
multilateralism to new heights. WTO is the only international body to be able to force the United
States to change its policies, as done in cases involving U.S. tax and environmental policies.
With this settlement procedure, WTO became an instrument for attacking the full range of
transaction costs that impeded international commerce, including differences in national
regulations and standards. Tax systems, food safety rules, environmental regulations, and
industrial promotion policies were open to challenge from trade partners. One of the most
contested cases that came before the WTO was the European ban on hormone-treated beef, with
the United States establishing a global standard on the safety of four of the hormones used in
beef production. Another important change was the negotiation of the Agreement on Sanitary
and Phytosanitary (SPS) Measures as part of the WTO. There was finally a set of global rules
and an international forum with adequate reach over domestic regulations. Other examples of the
WTO’s reach abound. In one of the earliest complaints filed under the WTO, U.S. fuel emission
standards were found to discriminate against imported gasoline. Japan’s tax regime was found at
fault because the distilled liquor shochu was taxed at a lower rate than imported vodka, whiskey,
or brandy.

Many of these rulings led to a general perception against globalization. Rulings of the WTO
recognized the need to respect national differences in values and standards. Countries were also
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seen manipulating the WTO rulings to their own advantage. This was evident in the ―teargas
ministerial.‖ There were two main axes of conflict under the ministerial. First, developing
countries felt cheated by results of the Uruguay Round; they sought redress and resisted opening
negotiations in areas such as investment, environment, labor standards, competition policy, and
transparency in government procurement as the rich countries wanted. Second, the United States
locked horns with the European Union (and Japan) over the dismantling of agricultural subsidies
and barriers. This led to the Development Round in Doha, where agriculture was made a
development issue. It became clear that agricultural liberalization was a mixed blessing for
developing countries. It was realized that the removal of European subsidies harmed the food-
importing developing nations such as Egypt or Ethiopia by raising the prices. Cotton was one of
non food crops where the poor benefitted. An increase in world prices for cotton, a nonfood crop,
benefitted growers in West Africa without hurting poor people elsewhere. The crop became a
poster child for NGOs as well. On the other hand, serious agricultural liberalization was painful
for the rich nations and the demonstrable gains to others too meager and narrowly based for
agreement to be reached. There were two versions of globalization thus spelt out – shallow and
deep versions. Under shallow integration, the trade regime requires relatively little of domestic
policy. Under deep integration, by contrast, the distinction between domestic policy and trade
policy disappears. Global rules in effect become the domestic rules.

Trade and Wages in the Real World

There was a rapid increase in economic inequality in the US in 1970s which was believed to be
due to ―skill biased technological change‖. With the introduction of information and
communication technologies the demand for educated and highly skilled workers increased
whereas demand for the less educated workers reduced. Income gaps were believed to be the
result of technological advancements, not increased globalization.

Krugman cited two changes since the mid-1990s which he felt intensified the role of trade as a
force behind widening inequality. First, U.S. imports from developing nations had doubled since
the 1990s in relation to the size of the American economy. Second, the developing nations
against which U.S. producers now compete have much lower wages compared to the developing
country exporters of earlier decades. The second reason particularly meant that increased trade
led to a lowering of U.S. wages, particularly affecting workers at lower end of the income
spectrum. Many economists continue to think that globalization accounts for just a small part—
10 or 15 percent at most—of the rise in U.S. inequality since the 1970s.

According to Krugman, there was a growing recognition among the workers that what is good
for the global economy and its business champions [is] not necessarily good for them. Greater
global integration ―places more competitive pressure on an individual economy [and] workers
are likely disproportionately to bear the brunt of this pressure.‖

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In his words,
―Even as globalization increases inequality and insecurity, it is constantly and often legitimately
invoked as an argument against the viability of progressive taxation, support for labor unions,
strong regulation and substantial production of public goods that mitigate its adverse impacts.‖

It’s expected that coping with foreign competition will become a major concern for many more
workers with increased globalization. Due to technological advancements, jobs that were
previously considered ―safe‖—certain medical and education services, and financial services, for
example—are now increasingly moved offshore to other countries where the services can be
performed more cheaply. The workers are expected to suffer great losses due to dislocation
though.

Broad-based economic growth could help reduce the magnitude of the losses, but that would
require locally tailored strategies and requisite policies in the domestic economy. We cannot
assume beforehand that the potential economic benefits of this of globalization will accrue to the
many rather than the few.

Bhagwati argues that Krugman and other skeptics exaggerate the inequalities and dislocations
that trade with low-income countries generates. But more fundamentally, he thinks that these
authors draw the wrong policy lessons. If trade makes some people worse off and exacerbates
inequality, the correct response is to enhance social safety nets and adjustment assistance. The
problems that trade creates should be solved not by protectionism but through domestic policies
that compensate the losers.

The reality is that we lack the domestic and global strategies needed to manage globalization’s
disruptions. As a result, we run the risk that the social costs of trade will outweigh the narrow
economic gains and spark an even worse globalization backlash.

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