Wednesday, June 11, 2008

Domestic Vs International trade

Many trade economists and policy makers have tended to draw conclusions or form hypothesis about international trade by drawing parallels with domestic trade. They tend to see international and domestic trade in the same analytical framework, with the same rules of the game.

Recently Tyler Cowen, in an article defending globalization, had argued that while acceptance of domestic trade is built into the system, trade with foreigners evokes, often passionate, opposition.

Now, what is so different between domestic and international trade, that they evoke such contrasting feelings? Dani Rodrik thinks it has to do with the "embeddedness" of markets. He feels that "domestic trade takes place within thoroughly embedded markets; there are clear rules and they apply to all transactions equally. International trade, on the other hand, is conducted in only weakly embedded markets; the rules either do not exist or apply unevenly."

The concept of emebeddedness arises from his contention that "markets need to be embedded in a larger set of man-made rules and governance structures. Markets need regulation, stabilization, and legitimation because they are not self-regulating, self-stabilizing, or self-legitimizing. The success of modern capitalism is due as much to the institutions that govern markets - political democracy above all - as it is to the power of markets themselves."

This lack or deficiency of institutions that govern markets, or embedded markets, means that international trade is often driven by regulatory arbitrage opportunities - variations in quality, labour, environment, patent, and other standards.

Dani's analysis is from the perspective of the developed economies, whereas let me speculate on the view from the side of the developing economies.

1. The operative condition is not so much the quality of embedded institutions, as the issue of uniformity or homogenity in the "rules of the game". In many developing markets too, opposition to international trade arises from the absence of a "level playing field" - larger and well supported MNCs swamping domestic manufacturers, heavily subsidized farm products driving out local farmers, competition and government procurement policies that weigh in favour of larger firms, unregulated financial markets that spawn dubious practices etc. Yes, these are also perceived as "regulatory arbitrage" - depends on which side of the fence you are in!

2. The logical next step in this analysis would appear to be that we need to harmonize the rules of the game, so as to increase the domestic acceptability of globalization and international trade. While this may increase the acceptability in the developed countries (though I suspect, it will not, given the previous point), it will only increase the suspicion and resistance in the developing economies. We have seen this story enacted before!

It is impossible to bridge these contrasting views easily or soon. Till then, international trade and globalization will have to be driven by more uniform sharing of trade benefits, both between and within countries, and by having adequate enough social safety nets that can cushion those hardest hit by trade and globalization. In the meantime, we can progressively strive towards increasing the "embeddedness".

1 comment:

gaddeswarup said...

"Dani's analysis is from the perspective of the developed economies"'
well said. This seems to be the problem with many of the popular American econ. blogs. Possibly that the American dollar is the reserve currency
http://economistsview.typepad.com/economistsview/2008/06/tim-duy-the-per.html
and the volume of the American economy adds to the problems.