CAMBRIDGE – With all major trading countries increasingly resorting to unilateral action to advance their own social, economic, environmental, and security goals, the world economy desperately needs a clear normative framework to determine the rules of the road. A useful starting point is for everyone to agree, in principle, not to deploy beggar-thy-neighbor policies.

This may sound reasonable, but is it feasible? Aren’t countries relying on such policies too often to be dissuaded from changing their ways?

Actually, no, they are not. The perception that they are is rooted in a conceptual confusion between policies with adverse cross-border spillovers and policies that truly are beggar-thy-neighbor. It would indeed be hopeless – and counterproductive – to try to discipline all policies of the former type. Fortunately, beggar-thy-neighbor actions constitute only a small subset of such policies.

Hyper-globalization floundered largely because of its ambition to overregulate policies with international spillovers. By focusing on genuinely beggar-thy-neighbor policies, we can target the real source of the problem and make more headway in international negotiations.

To understand the significance of this distinction, consider the classic case in which one country’s policy produces harms abroad, specifically by weakening another country’s terms of trade (prices of exports relative to imports). Initially formalized by Jagdish Bhagwati, this “immiserizing-trade” scenario was later used by Paul Samuelson to argue that China’s economic growth could hurt the United States.

Consider two policies in particular. First, when the Chinese government subsidizes research and development that enhances the country’s competitiveness in high-tech products and lowers their prices on global markets, the US and other advanced economies are hurt, because these are the areas of their comparative advantage. Despite the harm, however, we would not consider it proper to ask China to remove such subsidies, because our intuition tells us that supporting R&D is a legitimate tool to promote economic growth, even if others incur losses.

The second policy is an export ban on rare earths or other critical minerals for which China is the principal global supplier. China benefits by increasing prices on world markets and making its exporters more competitive, owing to their access to cheaper inputs. But this is a clear instance of a beggar-thy-neighbor policy. China’s gains are the result of an exercise of global monopoly power that forces losses onto foreign producers.

A policy is beggar-thy-neighbor when the benefit provided to the domestic economy is made possible only by the harm that it generates for others. Joan Robinson coined the term in the 1930s to describe policies such as competitive devaluation, which, in a situation of generalized unemployment, shifts employment from foreign countries to the domestic economy. Beggar-thy-neighbor policies are generally negative-sum for the world overall.

Distinguishing beggar-thy-neighbor policies may be difficult in practice, because no country is likely to own up to them. But clarifying the kinds of actions that are truly objectionable, and narrowing the scope of disputes accordingly, would likely lead to better economic outcomes. It also would make for better politics, because governments would be encouraged to engage in a more productive discussion about what they are doing, why they are doing it, and the likely consequences.

Applying this perspective to the real world, one finds that the bulk of industrial policies in China and the US today are not beggar-thy-neighbor. In fact, many should be considered enrich-thy-neighbor.

The clearest example is the broad range of green industrial policies that China has deployed over the last couple of decades to bring down the price of solar and wind power, batteries, and electric vehicles. These policies have been doubly beneficial to the world economy. They generate innovation spillovers, reducing costs for the world’s producers and lowering prices for consumers. And they accelerate the transition from fossil fuels to renewables, partly compensating for the absence of carbon pricing. 

When industrial policies appropriately target externalities and market failures – as in the case of green subsidies – they are not something to worry about. Moreover, while we can raise legitimate concerns about cases where these conditions are not met, the fact remains that the costs of inefficient industrial policies are borne primarily at home. It is domestic taxpayers and consumers who pay in the form of higher taxes and prices. Bad industrial policies are less beggar-thy-neighbor than beggar thyself.

Of course, other countries may face costs as well. But that doesn’t mean it is desirable for trade partners to have a say. It is neither realistic nor reasonable to expect governments to be more responsive to other countries’ arguments about what is good for them than to their own convictions. Trade partners are always free to impose their own safeguards, even when the policies they are responding to are not beggar-thy-neighbor.

For example, if a government is worried about national security or adverse consequences for local labor markets, it should have the freedom to introduce export restrictions or tariffs to address these concerns. Ideally, such responses will be well-calibrated and targeted narrowly at the stated domestic goal, rather than being designed to punish countries that are not engaged in beggar-thy-neighbor policies.

Distinguishing the small number of beggar-thy-neighbor actions from the vast array of other policies with cross-border spillovers is an important first step to easing trade tensions. Doing so would allow international negotiations to focus on the real problems, leaving governments free to pursue legitimate policy goals at home. Working toward a world of self-help is largely good economics and good politics.

Dani Rodrik, Professor of International Political Economy at Harvard Kennedy School, is President of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017).

Copyright: Project Syndicate, 2024.
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