Can global rules prevent national self-harm?

CAMBRIDGE — US President Donald Trump has used national security as a justification for his tariffs on steel imports, his threatened tariff hikes on autos and the tariffs he recently vowed to impose on Mexican imports. “If you don’t have steel, you don’t have a country,” he declared (to cite just one example). While Trump’s national-security claim seems absurd on the face of it, it raises difficult questions for the word trade regime and global economic governance more broadly.

The critical challenge of global governance is determining the dividing line between policy domains in which nation-states are free to do as they please and those that are regulated by international agreement. In a world economy that has become increasingly interdependent, pretty much everything that one country does spills over to others.

But such spillovers are not by themselves a sufficient reason to constrain national autonomy. Consider public education, gasoline taxes or highway speed limits. Each of these policies has consequences for trade partners. Improved skills alter a country’s comparative advantage and, hence, others’ trading opportunities. Gasoline taxes and speed limits affect demand for oil and hence prices on world markets. Such policies are not regulated internationally, and doing so would be widely, and rightly, considered absurd.

The canonical case for global governance is based on two classes of problems. The first concerns global public goods (or bads): policies that benefit the world at large, but produce little or no benefit at home. Controls on greenhouse-gas emissions are a key example. The second class of problems is so-called beggar-thy-neighbour policies: actions that produce economic benefits at home only to the extent they harm others, and generate global inefficiency in the process. A classic example is the cartelisation of some scarce commodity to extract monopoly prices from trading partners.

These cases present impeccable arguments for global economic governance. But few of the issues that preoccupy policymakers these days fall neatly into one or the other category. For example, subsidies, industrial policies, employment-protecting tariffs, or non-tariff measures that target health or social concerns, poor financial regulations and inappropriate (excessively austere) fiscal policies are neither global public goods/bads, nor beggar-thy-neighbour policies.

Some of these policies are, in fact, beggar-thyself policies. Others do produce domestic benefits, but because they address real market distortions or legitimate social objectives, not because they impose costs on other countries. If global governance is in a muddle today, it is because many policies have become internationalised through happenstance or the operation of political lobbies, rather than with any genuine economic justification.

Consider the national security argument for tariffs. If Trump’s argument is baseless, as many believe, it is the US economy first and foremost that bears the costs of his misguided approach. In other words, Trump’s tariffs are a beggar-thyself policy. If, on the other hand, we give Trump the benefit of doubt and are willing to accept that there is a genuine national security case, then it is proper for the decision to be made domestically.

It is impossible to know before countries apply such policies which situation applies. Either way, delegating ultimate authority to an international body seems unwise. Even when a policy, such as a national-security tariff, is misguided, democracies should be allowed, as a general rule, to make their own mistakes. Empowering international bureaucracies to prevent countries from harming themselves when there is considerable ambiguity beforehand would seem inappropriate. It would also set a dangerous precedent for other areas.

In the case of national security, World Trade Organisation (WTO) principles are vague and remain largely untested in practice. The relevant text seems to open the door very wide by saying “Nothing in this agreement shall be construed... to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests.” And yet, in a recent ruling in a case not involving the US, the WTO has adopted the position that it can review national decisions in this area and judge their appropriateness. Predictably, the US has criticised this decision.

Global governance enthusiasts must reckon with the fact that most policy mishaps in the world economy today, as in the case of Trump’s tariffs, occur as a result of failures at the national level, not because of a lack of international cooperation. Trump’s tariffs are bad policy not because they harm certain other countries, but rather because they impose substantial costs directly on the US economy.

Global arrangements cannot be relied on to prevent such domestic failures, and they are as likely to be captured by special interests as domestic political processes, with far less democratic legitimacy. External constraints may in fact aggravate domestic governance failures, insofar as they empower particular distributional coalitions at the expense of the broad public.

The best we can hope for is what one might call “democracy-enhancing global governance”. Unlike “globalisation-enhancing global governance”, democracy-enhancing global governance would leave most policy domains, those that cannot be classified as global public goods or beggar-thy-neighbour policies, to national regulation. Global oversight would be restricted to procedural requirements, such as transparency, accountability, participation by relevant stakeholders and use of scientific/economic evidence, intended to strengthen domestic democratic deliberation, without prejudging the ultimate outcome.

It is doubtful that such a light mode of global governance would make a difference when it comes to Trump’s trade follies. But at least it would deny Trump, and other nativist politicians, any basis for the chronic complaint that the WTO and other international bodies are trampling on national sovereignty.

Dani Rodrik, professor of international political economy at Harvard University’s John F. Kennedy School of Government, is the author of “Straight Talk on Trade: Ideas for a Sane World Economy”. Copyright: Project Syndicate, 2019.
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