Good morning.

Interesting debate, indeed. First, I would say it is important to separate theories from empirics and perceptions.

National politics in developed countries has followed opinions and turned against trade after the 2008-2009 global crisis because of unemployment. Blaming trade was the easiest way and made it easy for politicians to blame unfair competition from developing countries. This may probably not resist a closer analysis, but it is another debate.

I take a theoretical perspective here and will focus on the following part: "Is it true that the trouble attributed to trade is an illusion and the international trade theory is fundamentally right"

First,  we cannot know for sure that a theory (be it on trade or on elementary particles) is fundamentally right. Theories evolve with time, revised and falsified by new data and new evidences (here, I am definitely Popperian . 

Second, even from the neo-classic perspective close to Krugman, the fact that trade is welfare enhancing should not lead to the conclusion that it is without troubles, at least if we take a dynamic perspective and look at transitions between "steady-states".  

Transitions can be long and painful. Besides the traditional gains from trade, trade in long term growth model is expected to boost technological progress (total factor productivity). And economists should know (thanks to Schumpeter, not a neo-classic, but certainly not a protectionist) that progress is also painful: creation is destructive.

My opinion (not backed with data, so it is of very limited value) is that because a series of structural and institutional changes in the world economy, space and time have started collapsing after the late 1980s. The emergence of global supply chains, the convergence of consumption models or the spread of international travel are just one of the indices of this smaller and faster world.

This had positive impacts (faster convergence between developing and developed economies during the 15 glorious 1990-2005 years and sharp reduction in poverty indicators) and negative ones (societies and workers had little time to adjust to the fast transitions, income distribution within countries worsen and structural unemployment --open like in some European countries or hidden through a larger informal economy, like in Latin America).

As physicists know, the damage caused by frictions increases with speed. But theory should not be blamed for the adjustment frictions.

Best regards,

Hubert

What we observe in international political economy is that the theory on trade is one thing the the manner in which trade is conducted is totally different. Trade negotiations at multilateral, plurilateral and regional forums shows that practice is far from the theory. Arm twisting and manipulations are so integral to trade negotiations that the actual trade is not based on comparative advantage. If theory was to hold true, trade could have been in those goods where countries have comparative advantage and all countries would have benefited from trade. That is not happening at the ground level and is causing the 'real' conflict. 

Dear Reji K. Joseph,

thank your for your interest to my question. 

Do you think it a good state of a discipline that the theory and the practice or empirical knowledge are completely separated?

Thomas Oatley's book

The Global Economy: Contemporary Debate 2005

would be a good basis for our discussion.

You can read the sample chapter:

https://www.researchgate.net/publication/238790411_The_GLOBAL_ECONOMY_Contemporary_Debates

I have added a comment on this sample chapter (March 6, 2016). I here reproduce it. It may help to consider on the question I posed above.

This is a book compiled by a prominent textbook writer in International Political Economist (IPE) and intended to give chances to reflect on the crucial questions in IPE. Topics in IPE are always polemic, because it focuses on issues in which opinions are divided widely and deeply. The book presents two opposing stands and ask students to reflect on this divergence. The sample chapter is illustrating. It opposes Scott and Irwin. The former argues that trade deficits indicate job loss and the latter defends that there is no job loss caused by free trade agreement.

This reveals the strength and weakness of IPE. In the mainstream economics textbook does not treat this problem in this symmetric way. There are occasional mentions on the popular opinions but passes by emphasizing that they are misconceived.

Irwin estimates that

• the overall impact of trade on the number of jobs in an economy is best approximated as zero. Total employment is not a function of international trade, but the number of people in the labor force. (p.27)

Here Irwin simply repeats the claim he made in his former book (2002) Free Trade under Fire (p.71).

All his arguments are constructed on the framework of general equilibrium (GE). In this framework, there is no unemployment. One of fundamental assumptions in GE model is the efficient use of all resources, which includes labor force as one of them. This is what Irwin supposes and what he deduces as a conclusion. This is but a petitio principii.

Scott's arguments and analysis follow the IPE tradition and are based on real or supposed conflicts of interests. It is less dogmatic and reflects the existing psychology of the society. This is the strength of the IPE. It is more close to the actually existing conflicts. This reveals also the weakness of the IPE, because, although it raises the question rightly, it cannot go deep in the economics arguments and criticize it. It is necessary that IPE presents a theory that is alternative to the existing economic explanations. However, there are no (or extremely few) researchers who dare to pursuit this objective.

Article The GLOBAL ECONOMY: Contemporary Debates

Yoshinori S and Hubert E advocated the reality related to the study of international trade. I think, in reality, the comparative advantage/disadvantage  in form of private/social cost and benefit does matter in international trade.

Dear Arjun,

I suppose that it was what Yoshinori suggested when referring to IPE tradition. I understand that the research angle private vs social cost-benefit has been covered by the branch of trade analysts favouring the political economy approach. Actually, it is difficult to understand the practice of trade negotiations without referring to the political economy approach. Yet, most trade economists have focused on explaining trade flows and measuring welfare gains. In contrast, political scientists have rarely focused on explaining the pattern of actual trade flows. So, there is a cognitive/communication gap between the two approaches.

Up to relatively recently,it did not matter that much as the debate on social gains and private costs remained partly virtual: Even if/when tariffs declined under the pressure of the free traders community, the other trading costs (transportation, administrative hurdles, etc.) remained very high so private vested interests remained largely untouched.

Today, this perception gap between social gains vs private costs matters much more: the reduction in the costs of trade makes imported goods more competitive important relative to domestic ones, increasing the demand for protection.

My two cents,

Best.

Hubert

Dear Yoshinori Shiozawa,

There is a difference between natural science and social science in terms of correspondence between theory and practice. There is a one to one correspondence in the case of natural science but that is no so in social science. In social science it depends on so many unpredictable factors such as behaviour of  individual, society and state. The economics discipline attempts to overcome these uncertainties  by making so many assumptions many of which do not hold true in reality. I agree with you that it is the strength of IPE that it reflects the existing conflicts. IPE is already providing  alternate economic explanations using its approaches - realism, liberalism and Marxism. Some  explanations for the 'conflicts' could also be given using approaches of game theory.

Reji K. Joseph,

maybe you are misunderstanding me. I am not reproaching IPE as much as International trade theory in Economics.  As I have written at the last sentence of my question,

• My opinion is that the standard international trade theory has some serious defects and Krugman is not aware of this grave fact.

As you are hinting, knowledge in social sciences is not as firm as physics and others. There are always oppositions and differences of contentions. However, if we want to remain scientists, it is necessary that we learn from facts (not the practice). If there are grave discrepancy between theory (or conclusions  derived from the theory) and facts, we must think of reconstruction of the theory.

This is the reason that I am asking if 

• the standard international trade theory has some serious defects.

Import tariff reduction is a critical piece of the trade liberalization policies that are strongly advocated and many times mandated by international financial institutions like the International Monetary Fund (IMF) and the World Bank in the loan packages they negotiate with developing countries. In 1994 the Haitian government entered into a new agreement with the IMF that contained a "medium-term structural adjustment strategy" which "included sweeping trade liberalization measures."[6] In 1995 when this agreement went into affect, Haiti's tariffs on rice imports were cut dramatically from 35% to the current level of 3% (the bound tariff on rice imports is 50%)[7]. By comparison, the Common External Tariff on rice in the CARICOM (Caribbean Community) zone for rice in 1999 was 25%[8].

Haiti's extremely low import tariff on rice is part of the trade liberalization policies which earned it a score of 1 on the IMF's 1999 Index of Trade Restrictive ness, making Haiti the least trade restrictive country in the Caribbean [9]. Yet, in the almost 10 years that have passed, Haiti has also remained the least developed country in the Caribbean despite its openness to trade,

Haitian rice which is most likely of West African origin has been cultivated in Haiti for over 200 years. Rice is the staple food of Haiti and up until the 1980s Haiti was self-sufficient in its production. In the mid-1980s Haiti's domestic rice production decreased rapidly. By the1990s rice imports outpaced domestic rice production. This displaced many Haitian farmers, traders, and millers whose employment opportunities are extremely limited.

http://www1.american.edu/TED/haitirice.htm

Right now the US has a huge surplus in peanut butter production.  It is a production subsidized by the US government.  Haiti has a local non subsidized peanut butter production.  The US is now considering dumping its surplus in Haiti which would destroy that Haitian farming industry.  

I agree that the standard international has some defects. The conflict in international trade is not an illusion. Many disputes that many countries have taken to WTO dispute settlement mechanism. It indicates it is not an illusion.  

Some years back Richard G. Harris wrote a thoughtful piece on new theories of international trade. I can't find the original. But in abbreviated form his contribution ended up as chapter two in the book below.

http://www.ilo.org/public/libdoc/ilo/1992/92B09_351_engl.pdf

Dear Gijsbert Van liemt, 

thank you for the information. I have read through Harris's paper: New Theories of International Trade and the Pattern of Global Specialization.

Yes, it was a good and comprehensive overview on the state of the arts. Of course, as it is published in 1992, there are no comments about later developments. So, he does not mention the new-new trade theory (Melitz and others).  He does not take up topics like fragmentation, outsourcing, or increase of input trade. We have to say that research interests of international trade theory  changed much by the appearance of "new" phenomena which became conspicuous after 1990.

As for the concept of "comparative advantage," Harris talks about the simple 2- country, 1-or 2-factor cases  (comparative advantage between 2 goods and the chain of comparative advantage). The notion of chain of comparative advantage is famous one. Harberler (1936) wrote a chapter on it. Dorbusch-Fischer-Samuelson  (1977) still uses this concept. However, this concept is defined only for 2-country case.  In many-country case (i.e three countries or more), there is no clear  definition of this concept. It is better to say there is no such concept. The same thing is true for the case when the inputs counts more than 3 kinds (3 factor case for HOS theory and material input case for Ricardian theory.)

The concept of comparative advantage itself looses its meaning in these wider class of situations. On this point Ohlin was right. In a general case (many-coutry, many commodity and input-trade case), it is necessary to appeal to monetary (or evaluative) criteria and "real cost approach" does not  work at all.

I have given some accounts on these points in my comments below:

Conference Paper The New Interpretation of Ricardo's Four Magic Numbers and t...

I have forgotten to add an important point. Ricardian trade theory does no more depend on the assumption that labor is the unique input for the production. It can be formulated in such a way that products are produced by labor and products. Among the products we may count raw materials, fuels, parts and machines. The theory admits Input trade as well. In this sense, Ricardian trade theory can treat now much more wide situation than HOS theory.

In the HOS theory, or factor proportion theory in general (including HOV theory), the capital is assumed to be endowed, while in Ricardian theory it is produced and traded.   

I have also posted several comments on HO model in Dr. Tahsen Alqatawni's  question: What are the pragmatic problems with Heckscher-Ohlin model? 

https://www.researchgate.net/post/What_are_the_pragmatic_problems_with_Heckscher-Ohlin_model 

The conflict of interest in international trade is not an illusion. It is indeed a fact of life. I totally agree with Yoshinori Shizawa and his well based argument. The current conflict between the US and China is the best example. It may shift from commodities to currencies. 

I have written a paper (still in a draft stage). Here I tried to prove that it is possible to construct a trade theory that admits  unemployment and trade conflicts. Comments are welcome.

Working Paper The New Theory of International Values: An Overview

Display system has been changed. My post 25 days ago showed the paper and the link in a small box. Now it was wiped out. Let me post the tile of the paper and the link again below:

New Theory of International Values: A General Introduction

https://www.researchgate.net/publication/304717720_New_Theory_of_International_Values_A_General_Introduction

Working Paper The New Theory of International Values: An Overview

I have posted this new question:

Trump and Sanders are opposed to the TPP. How the International Trade theory and International Political Economy explain this?

https://www.researchgate.net/post/Trump_and_Sanders_are_opposed_to_the_TPP_How_the_International_Trade_theory_and_International_Political_Economy_explain_this?_tpcectx=profile_questions

I believe that this is really what International Political Economy must explain. How do you think? Please argue freely in the new question page.

International trade has been with us since the Neolithic and flourished as an essential part of Bronze Age civilizations. The Egyptians, Babylonians, Hittites, Mycenaens, Minoans, Assyrians, Cypriots, Canaanites and Phoenicians  had no need for computer-modeled theories of trade. They obtained what they wanted in exchange for what they could produce. Trade kept the peace. In the long run, nothing much has changed since the Early Bronze Age, since at least around 7000 years ago. except the rhetoric of a few crazy 21st-century sociopaths, which would make about as much sense to anyone in the highly civilized Bronze Age as hieroglyphics do to most of us today. International trade requires and produces international understanding and cooperation. Caravan raiders, pirates and terrorists have always been part of the equation. Today's pirates and caravan raiders are populist stone-age demagogues preaching a nutty panoply of anti-trade economic superstition.

 Dear Charles,

welcome to our question page. Trade, be it regional or international,  is indeed an old method and media of communication. I agree with you. As there are today a few people who deny the indispensable function that trade plays in our civilization. However, this does not mean that everything of free trade is good and has no defects.  Indeed, free trade has many negative aspects and we are questioning if we can avoid such side effects.

An economics theory is never completely neutral. The actual mainstream trade theory does not admit an possibility of unemployment as a side effect of rapid liberalization. I am questioning if this kind of theory is sane? What is your opinion?

As an outsider to trade theories, it seems to me that we can distinguish restrictions from distortions. Examples of distortion: boycotts and embargoes for political purposes and supplying arms and dollars to monarchs and other dictators to suppress their populations and keep oil flowing west rather than east have had repercussions far beyond employment. Restrictions are often useful - necessary - for security purposes. Critical industries must be protected or sealed, while resources scarce or unavailable within a country's borders must be secured. Protecting and furthering critical workers and expertise is a large part of these considerations. How a state protects its workers beyond or in conflict with these primary considerations would not seem to lend itself to broad theories, but to practical specific strategies temporally tailored to specific industries and fluid complex internal and international circumstances.

Perhaps I misunderstand everything, but that's my theory. 

The world is more complex today than ever before, but securing copper from Cyprus, tin from Anatolia, cedar from Lebanon (Canaan), was more often, more efficiently and more securely accomplished in ancient times through cooperation than conflict. While war and conquest have always been globally endemic, protectionism is relatively new and we have little to learn here from history, and even less from which to fashion universal theory. Some suggest that trade-induced dependence was partially responsible for the collapse of great civilizations around the middle of the 2nd millennium bce, but the circumstances were complex and even climate change was likely a large factor over 3000 years ago. Trade would appear today to be more responsible for civilization's continuation.

Western countries are more endangered today by unemployment in the countries they have embargoed, boycotted and invaded than unemployment at home, which can be addressed in a variety of ways if only the political will and intelligence were available. More boycotts, embargoes and invasions are not the solution.

Please excuse me for being somewhat off topic.

My meager recent readings for much of this: (1) 1177 B.C. The Year Civilization Collapsed, Eric Cline, (2) Canaanites, Jonathan Tubb, (3) Ages in Chaos, Immanuel Velikovsky, and (4) Wer den Wind sät, Was westliche Politik im Oreint anrichtet, Michael Lüders.

Dear Charles,

I liked reading Jared Diamons's Guns, Germs and Steel. I am not a simple economaniac. I also like to read global economic history, not only Robert Allen's concise book, but many others which treat long range economic history. However, I have sometimes to object theories employed in their explanations. Many of them are simple reproduction of mainstream economics.

For example, Allen tells us that England promoted capital intensive technology, whereas rest of the world stayed labor intensive technology, because wage rate was higher in England and lower elsewhere. This is a simple repetition of some part of economics textbooks. However, we can easily think of reverse causality. England developed efficient machines in various fields and this helped to realize high wage rates.

Allen told us that real wage rate stayed constant from the 14th century to the middle of the 19th century. If then, why did industrial revolution take place in the turn to the 19th century and not in the 15th or 17th centuries? Economics is not yet a perfect science as you may believe it to be.

Dear Yoshinori,

Diamond's Guns, Germs and Steel and his Collapse sit on my shelf waiting for me to finish everything else. Almost there.

Like "political science", the use of the term "science" in the same sentence as "economics" is not easily justified. If we in the U.S. could employ scientists at the Treasury Department and Federal Reserve the way we employ them at NASA, we would inhabit a different planet.

Complexity nature or characteristics is extremely different between rocket science and economics. You must know that many rocket scientists entered into economic and financial fields after the collapse of Soviet Union. Even with their abilities and analytical tools, they could not prevent Lehman collapse, thus triggering worldwide depression. Some others estimates that they have aggravated the situation.

Although mainstream economics is stuck at maximization-cum-equilibrium framework, new trends in economics is emerging. One of them is  complexity economics. Evolutionary economics is closely related to complexity economics. Please see my recent working paper  on the evolutionary economics:

Microfoundations of Evolutionary Economics

https://www.researchgate.net/publication/301766363_Microfoundations_of_Evolutionary_Economics

I am asking if the international trade theory based completely on neoclassical foundations i.e. a theory constructed in the maximization-cum-equilibrium framework is sane.

Working Paper Microfoundations of Evolutionary Economics

It is very interesting question. I think that sometimes it depends on the conflict. There are very important and very good ideas.

Hello Nino Paresashvili

the agents that  I am thinking as representative in my paper above Microfoundations of Evolutionary Economics is, I believe, much  closer to managers who have to make decision in firms. Traditional economics assumed economic men or women who are omniscient and omnipotent (rational economic man or woman). My paper contends that we should start from the opposite extremes. The main question is  how a man or woman who works in a big C-D gap (i.e. Competence and Difficulty) can behave effectively. 

I have posted a following question:

How do you explain the Trump’s victory as a question of economics?

https://www.researchgate.net/post/How_do_you_explain_the_Trumps_victory_as_a_question_of_economics#582dce974048548ea67ac3f6

Although I think this is a new sincere good question concerning economics, the RG people in charge of topics link cut all links to topics to

• Economics
• International political economy
• International trade
• International economics 

Is it a fair measure?

I have a complex emotion when I remind that this question was posed two years ago before Mr. Trump came to be the President of the United States. I am now a bit perplexed to know that the this important question lately arrived to 40 reads after two years.

Dear Ye Laird,

thank you for revitalizing my question. My constant position is that trade conflict seems illusion because we lack a suitable trade theory. Three years have passed since this question was posed and the trade conflict becomes more and more serious problems. I believe our question deserves to be argued again and again.

I am not sure the initial question was framed in such a way that it would generate a wide discussion.

Conflict and theories are two different things, in my opinion. We could have discussed trade theories, or --alternatively-- trade conflicts. But mixing both leads to a dead-end. I will try to explain my point:

I suspect what Yoshinori Shiozawa wanted to state is that in a Ricardian or Neo-Classic world, trade is supposingly welfare enhancing and, if it is the case in practice, there is no theoretical justification for trade conflict. But because we observe trade conflicts, then the theory must be wrong. Popper would say: when facts contradict (falsify) theory, theory must be changed. As long as the facts relate to the theory, which is not the case here.

First, there is no need for free multilateral trade for trade to be welfare enhancing, as long as you do not put barriers to imports (imports are what is important, exports are just a mean to pay for them). Bastiat (one of the few French liberals) even said that free trade does not even need to be reciprocal: if we can import cheap goods, even subsidised ones, rather than having to produce them at higher cost, we are better off regardless of what does the exporting country. From a China-USA trade perspective, Bastiat would say that when China subsidises its industrial production and exports it, it is the US consumer who benefits from the taxes paid by the Chinese citizens.

The weakness of this point is that it is purely static: Spain used its colonial gold to buy manufacture from England and France and missed the industrial revolution: it was rich and it became poor; England was poor and it became rich. Working is not only a cost (as Bastiat thought), it is also a learning process.

So, Structuralists defended protectionism in manufacture as a way to gain dynamic comparative advantages through investment in technology and know-how. It didn't work except in East Asia, where industrial policy was export-oriented instead of inward looking, as stated by the Structuralists.

But this does not mean that the Neo-Classic theory is "the" truth. Just that, for the time being, it is better than the alternative. But the post-crisis period shows that it relies heavily on the assumption of full employment. In absence of full employment, trade is perhaps not welfare enhancing for all partners. Here, we need to find some new theory, like the one proposed by Shiozawa.

The issue of conflicts is independent of theory. Everybody would agree than Peace is better than War from a Pareto optimality point of view. The proof is relatively easy as long as once remains on arbitraging for welfare enhancement , but history is full of devastating wars.

So the issue of conflict is not to be analysed through some kind of general equilibrium optimization, but through its political economy: Since the work of Johnson on optimal tariffs in the late 1950s, we know that you can win or lose a trade war (even if everybody loses something, in the end there is a winner and there is a loser: in game theory, you win if you lose less than the others...).

In practice, the present bilateral trade conflict between China and the USA has nothing to do with theory: the USA wants some aspects of the Chinese investment and intellectual property policies modified, and they think that by engaging in a bilateral trade conflict they can put pressure on the Chinese administration to implement these changes. Even if the US consumers has to pay more for their imported electronics or washing machines.

Will it be successful? Read Johnson (and his followers) for some clue (it has to do with economic size and demand elasticity). But Johnson never claimed to be working on "the" trade theory, just on some special case of optimal taxation.

Thank you, Hubert Escaith , for the clarification of the question. The question poser does not necessarily know the real meaning and extent of the problem.

Hubert seems to have made a good re-organization of the question.

Although his clarification of the problem is excellent, I cannot totally agree with some of his arguments. He mentioned the conflict between China and the USA, which takes a form of tariff war. Unfortunately, I have never studied optimal tariff problem and the retaliation possibility, I must read at least Harry Johnson's paper "Optimal tariffs and retaliation" Review of Economic Studies, 1953. It may take one or two weeks, because I have now many "home works" to do. But, I will return to this question page.