Over the last few months, the United States has begun to upend world trade. Writing in the New York Times last week, U.S. Trade Representative Jamieson Greer admitted as much when he claimed the Trump administration was looking to build “a new global trading order.”
Did we need one? Proponents of the White House’s approach to tariffs argue that unfettered globalization harmed American workers, and that the ability to cash in on global arbitrage benefited the rich and hurt the poor. As it happens, that argument has been deployed before, most prominently by a progressive economist nearly three decades ago. In 1997, the Harvard University economist Dani Rodrik published a book titled Has Globalization Gone Too Far? At the time, to argue against globalization was a heterodox position. Now, of course, the idea is mainstream on the political left and right. On the latest episode of FP Live, I invited Rodrik to explain what he thought of the current mood against free trade, and how countries should respond to the Trump administration’s historic tariffs. Subscribers can watch the full discussion on the video box atop this page or follow the FP Live podcast. What follows here is a condensed and edited transcript.
Ravi Agrawal: Dani, what does the Trump administration get right in its diagnosis of what ails American trade policy?
Dani Rodrik: I wouldn’t say it’s getting anything right. It’s feeding off the discontent with elite policies, and with the inability of the Democratic Party elites to realign themselves quickly enough with the disenchantment of workers, the middle class, and regions that were left behind. I have a very different set of views about what the right way to go is, but I view Trumpism and similar authoritarian far-right European movements as (at least partly) a consequence and a symptom of this division within societies. I think the right-wing response is wrong and is exacerbating these problems rather than helping them.
But it is important to recognize that there is a problem that our politics weren’t dealing with. I remember when politicians would just scoff at these discontents, saying, “Globalization is like an act of nature. You cannot stop it. You better adjust.” Or that trying to debate globalization is like debating whether autumn follows the summer. It’s a fact of life. And of course, that seems utterly silly now. But those were the messages that the political center was giving to people who felt that they were being left behind. It seemed their politicians weren’t paying attention, and so the backlash doesn’t terribly surprise me.
RA: And when you hear various Trump officials talk about the problems you have described—that unfettered globalization leads to inequality, that too much urbanization hollows out communities, that the China shock contributed to massive job losses in the United States—and the prescriptions for them, what are they getting wrong?
DR: Several things. One, and probably most important, is that you can’t run history in reverse. And here, the Trump administration’s misdiagnosis parallels also a similar misdiagnosis on the part of the Democrats. Thirty-five years ago, you might have argued that there’s a lot of manufacturing employment to be saved, and that manufacturing remains the essential basis of a middle-class society. Historically, this has been true. But changes in the nature of technology, the manufacturing process, and the establishment of global value chains mean that manufacturing can no longer act as the source of our middle class. So trying to address the broad political discontent by rebuilding manufacturing employment, whether through tariffs or other policies, will miss the mark. From the standpoint of strengthening our middle class, building a more inclusive society, and creating good jobs, manufacturing is not the right starting point.
Second, to the extent that we care about manufacturing for its innovation potential or national security purposes, tariffs are a very blunt instrument. If you protect manufacturing industries, you’re also protecting toys and garments and things that may not be useful to national security. And you are increasing the profitability of certain businesses, but there’s no guarantee that those firms now operating under tariff protection will take their profits and spend it to innovate, to invest, to increase capacity, to train their workers. If you were serious about rebuilding manufacturing, you’d pursue more fine-grained, targeted industrial policies. This is what the Biden administration was doing, going to investors and firms and saying, “I want you to increase your investment capacity in semiconductors. What do you need? You need better-trained workers, so here’s my help doing that. You need subsidies, so here are some subsidies, conditional on building those plans.” A genuine industrial policy based on the needs of the firms and investors, which targets binding constraints rather than simply providing blanket tariff protection, would be the way to go.
And of course, they’re creating havoc with the world economy with the uncertainty and with this policy of extorting the rest of the world. This is a separate and very important layer of additional turmoil.
RA: You wrote last week in Project Syndicate that you were surprised that countries weren’t doing more to stand up to [President Donald] Trump’s tariffs. And you pointed to Brazil as the one country taking a more principled stance. Brazil, of course, has a 50 percent tariff imposed on it, one of the highest in the world. Does this strategy of standing up to Trump make a difference?
DR: How to deal with Trump is a really interesting question. The usual analogy is the schoolyard bully. And the question is, how do you deal with a schoolyard bully? Trump is swinging wildly and hitting himself more often than hitting somebody else. His policies are self-defeating. He believes he is benefiting the U.S. at the expense of the rest of the world, but he’s hitting the U.S. economy as well. We’ll see this in the coming months in inflation, in the stock market, in economic stagnation. Nothing good will come out of this for the U.S. economy.
So how do you respond? You try to stay out of his way. And hope that he’ll eventually damage himself or you can work with your partners to try to subdue him. That’s another, and more aggressive, strategy. It’s been quite frustrating to see how even countries with a certain amount of economic power have been ineffective.
I blame the European Union most because my hopes for the European Union were the highest. European Union has the moral authority today, despite the rise of far-right authoritarianism. And their geopolitical concerns are not necessarily threatening to other countries in the same way that the U.S. or China’s might be. So they have the aggregate market and economic power, the moral authority, and the geopolitical standing to have stood up.
RA: They basically struck a 15 percent deal and promised to buy a lot of American energy. But they also have some constraints, especially around the resolution of the war in Ukraine. What would you have recommended they do differently?
DR: I would have recommended they articulate a vision for the world economy that is consistent for our current realities. And that would have entailed a certain degree of accommodation and understanding with China. The world economy is facing significant imbalances that are going to require adjustment by Europe and China. Europe has to increase its own investment rate and undertake reforms to reinvigorate its economy. And China has to rebalance its economy by increasing its consumption and reducing its saving. These things need to be done, not necessarily for the United States, but for these economies’ own good.
Without undertaking these domestic reforms and facing these economic challenges, you can’t articulate a vision and stand up for the next stage of the world economy. We’re missing the domestic element of this new global economy. Then you can stand up to Trump because you have the ability to draw in other countries on your side. But you can’t do it simply on the basis of just saying, “We want the world to continue as it is, and we’re not going to really make any number of changes.” In the end, you can say that what Europe got was maybe the best that they were going to get, because who knows what those investment and import commitments really mean. There’s really no way to enforce them. And these agreements are also vague and even the tariffs that are here today may be gone tomorrow. So maybe that could be the best way to manage Trump until he goes away. But what I’m really faulting these countries for is the lack of recognition that they had the power to do something about it, to reshape the world economy, and that they have been unable to articulate a sense of purpose and vision of what it is that they want the world economy to look like. It can simply be waving the flag of multilateralism and saying, “Oh, we want global cooperation.” You just need to say what the world is going to look like.
Inevitably, all parts of the world are going to be economically more nationalist. Inevitably, we’re facing a climate challenge that’s going to require a huge amount of green industrial policies. And all parts of the world have to follow more inclusive policies that are going to build, create good jobs, and rebuild their middle classes. What does the architecture need to look like that’s going to enable all these countries to pursue those policies internally?
RA: What happens to globalization as it existed before? You have all these countries that are export-dependent—like in Southeast Asia or East Asia, for example—and you have countries whose domestic consumption doesn’t match up to what it should, like China or even India. These are all countries with different needs, and there’s no one-case-fits-all model for how to manage Trump’s tariffs. What does globalization look like in a post-Trump world?
DR: Economic nationalism is not a fundamental threat to the world economy or economic globalization. Now, that might sound like a weird thing to say, but let’s deconstruct the term economic nationalism. What does economic nationalism mean? It means pursuing economic policy in the service of the national interests. Isn’t that what we elect politicians to do? When we teach the gains from trade and comparative advantage, isn’t this what we teach our students? That trade is about expanding the national economic pie? We say trade is good because it’s going to allocate our resources more efficiently or expand the size of our pie.
RA: But if you’re in a country in which it costs $800 to construct a suit, and there’s another country that can make the same suit for $50, it’s hard to tell people not to purchase this product from another place that does it cheaper.
DR: I think that’s right, but people tend to have very different views depending on the reason for that cost advantage, like people have innovated or labor costs are low because their productivity is low. That’s opposed to that cost advantage because you’re actually repressing their rights, making them work 14 days in factories where you’ve locked the doors and the windows, where they can’t get out if there’s a fire. The notion of trade fairness is very important. We overlooked that during the era of hyper-globalization when we said, “Trade is good no matter what kind it is, and comparative advantage makes sense, regardless of how it’s created.”
I am very much in favor of having rules that say, if imports coming in exploit labor and fundamentally violate our sense of moral justice, then it’s entirely OK to keep those goods out. But it’s a relatively small part of trade. And by not making those distinctions early on in this debate, we opened the field up to demagogues who then said that all trade is trade of that kind. And then we get Jamieson Greer saying that the rest of the world has taken advantage of the United States because essentially all of our deindustrialization has been due to unfair trade. That’s a wild mischaracterization of the bulk of trade in the last 40-50 years. We can care about fair trade without necessarily saying that people will instinctively oppose trade. I’ve researched this. People react very differently when they lose their jobs because of a competitor that has worked harder or invested in new technology rather than when the competitor simply has outsourced to a country where they have child workers working under unacceptable conditions. Those are distinctions that we need to make.
RA: When you described economic nationalism that protected sectors based on their policy interests, my mind immediately went to India, which for the longest time has protected agriculture and dairy. They don’t want to flood those particular sectors, which are an outsized part of the economy, with foreign goods. You’re saying countries should look to that model, yet they are being penalized for it now with a 50 percent tariff from the United States. How do you see the future of trade working out, if countries may be penalized for essentially doing what is in their interests?
DR: I don’t think that the Trump approach to trade will last. We’re definitely moving into a world where there’ll be more economic nationalism, with countries prioritizing their own domestic economic and social interests first. And I don’t think that’s necessarily a bad thing. The best thing that a country can do for the world economy is to take care of its own economy and society. If you take care of your own economy, you create a stable economy that’s growing and developing and you become a better market for the rest of the world. If you take care of your own society, you create a society that’s much less xenophobic and worries much less about imports and investment from the rest of the world and is much more open to the world economy. If in doing so, you occasionally protect or subsidize this or that sector or move in ways that don’t necessarily follow the rules of the WTO [World Trade Organization] or principles of hyper-globalization, those are really minor blemishes in the big picture of things. That’s a fundamental point that we need to realize going on.
But here again we have no control. Political systems will make their own choices. Having a WTO or IMF [International Monetary Fund] make those choices would not be better for those countries. We have to hope that ultimately countries, and particularly democracies like the United States and India, will make choices that are better for their own countries.
Unfortunately, that is not true of the United States. Trump is not making the right choices. My own view is that this is temporary. Ultimately, we’re going to go back to something that’s more reasonable. The Biden administration was also a much more economically nationalist administration, but they pursued policies that were appropriately targeted to domestic economic and social needs than Trump’s are. So, I would hope that we’ll return to that. And in the meantime, I think Trump’s trade policies will do more damage to the United States than they do to the rest of the world.
And here I want to connect to a point that I made before. You mentioned India or Brazil, countries that are very rightly worried about U.S. trade policies. But these are also countries where manufacturing and exports are a tiny part of their total economy. The livelihoods of the vast majority of workers are tied to small informal services. If I were the leader of these countries, I would put less emphasis on exports and significantly more emphasis on the working conditions and the productivity of the vast majority of workers who are in urban informal service activity.
RA: When exactly do all of these tariffs hurt the United States enough for the White House to pivot?
DR: There are three areas. One is the stock market; financial markets are the quickest to respond to the economy. And financial markets have been extremely lenient with Donald Trump. But they are a very poor guide to the real economy and can swing very quickly in either direction.
Second is labor markets, unemployment, and new job creation. We’ve already seen Trump becoming very nervous there and trying to replace the Bureau of Labor Statistics director.
Third is inflation prices. There we have some concerns about threats to the Fed’s independence. Trump is likely to move if the economy begins to stagnate, as it likely will. Trump will want the Fed to take action quickly to cut interest rates. He may not get that.
RA: There’s also simultaneously been a spate of free trade agreements, or at least moves toward them, which don’t include America. Europe has been pursuing one with Mercosur. There’s the India-U.K. free trade agreement, which was struck a few weeks ago. There’s of course the RCEP in Asia. Are countries looking to trade around America, without America? How does that fit into your future vision of what trade and globalization should look like?
DR: These are all symptoms of countries trying to figure out a way toward a world where the United States is no longer the leader. It’s really a bad actor rather than a public goods provider. I’m surprised there isn’t more happening. We need a kind of a realignment of priorities and perspectives all over the world. And that’s true from Europe and China’s large economies to the smaller countries. Eighty percent of what happens to your economy is determined by what you do at home. If you, as a world leader or politician, lose sight of that and start spending all your time thinking about trade agreements and the world economy, you’re misallocating your time and resources. The way to create cohesive societies and inclusive economies is by focusing on creating good jobs and a solid middle class. That requires strategies that are largely domestic or based on non-traded services that have little to do with the world economy. Regardless of how the world economy does, some countries always do well and sometimes can do worse. And I think the world’s economy can help, but unless you’re a tiny country, you really cannot drive what’s happening in your economy.
RA: How does AI fit into this as countries modernize and build out their own economic resilience?
DR: New technologies in AI obviously will play a critical role. AI can be used to complement and augment the skills of less-educated workers. There’s already some evidence from more advanced economies like the United States where if you deploy AI, the ones who benefit the most are the ones with less experience and less education. But this isn’t a foregone conclusion. Countries will need to make an explicit investment and effort to deploy new technologies in a way that benefits the less educated and the less experienced of their workers and not repeat the mistake of earlier decades when new technologies and automation displaced less than college-educated workers and increased inequality in the labor markets. It’s an opportunity, but I think technology needs to be given a direction by public authorities, and we’re at the very, very beginning stages of that. It remains to be seen how it’s going to work out.
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