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Elizabeth Warren has a plan for the nation’s approach to trade

Industrial policy may be coming back.

- June 4, 2019

Elizabeth Warren announced an agenda Tuesday that she calls a plan for “economic patriotism.” Warren argues against claims that “globalization” or “automation” or a “skills gap” are causing job losses in the United States. She blames, instead, Washington policies.

To reverse these policies, she proposes a new “Department of Economic Development ” that would: “replace the Commerce Department, subsume other agencies like the Small Business Administration and the Patent and Trademark Office, and include research and development programs, worker training programs, and export and trade authorities like the Office of the U.S. Trade Representative. The new Department will have a single goal: creating and defending good American jobs.”

Warren is stepping into a lively debate over the causes of job losses in the United States. Her initiative also speaks to a debate in political science about a rough bipartisan consensus on trade and industrial policy that has dominated U.S. politics for decades — and whether this consensus is fracturing.

People in Washington used to agree on economics

Up until the very recent past, there appeared to be strong bipartisan agreement in Washington on three basic principles of economic policy. First, the best way to ensure economic growth was through free trade and open markets. Second, industrial policy — looking to develop specific sectors in the economy or provide specific subsidies to firms — was a bad idea. And third, the United States should act to promote free trade globally and open up economies that remained closed. This would benefit U.S. firms but also the countries being opened up, since they would be able to benefit from the economic efficiencies of open trade.

This consensus reflected a broad body of academic research, according to which open trade had general benefits, and the actors who wanted to close trade off were motivated by narrow protectionist interests. As two scholars of international political economy, David Lake and Jeffry Frieden, put it:

“Another effect of the establishment of a more or less consensual academic view of trade policy has been its transmission to policymakers, observers and other participants. Today, popular, policy and journalistic analyses of trade policy issues simply take as given the hard-fought arguments and findings of the scholarly community: protection responds to interest-group pressures, economic characteristics of industries and products affect their ability and willingness to organize and receive favorable trade policies, organized consumers can mitigate pressures for protection, and so on.”

Under this consensus, opening up trade relations might hurt narrow groups in the economy — but consumers would end up better off. The United States would benefit from a world trade system that limited everyone’s power — including the nation’s own power — to protect domestic markets from international trade. Prominent economists such as Greg Mankiw cast scorn on “Muggles” and “Joe Sixpack” for focusing on how globalization threatened their livelihoods. Industrial policy, which sought to shape industries was seen as retrograde and likely useless efforts by the government to “pick winners” when the free market could do a much better job. International trade institutions such as the World Trade Organization (WTO) made it very hard for governments to shape the economy. National rules or regulations that were seen as impeding trade risked being targeted by WTO rulings or by U.S. negotiators looking to make bilateral deals with specific countries.

That consensus has been disrupted

The academic consensus on open trade has become more complicated in recent years. Economists such as David Autor, David Dorn and Gordon Hanson find that opening up trade with China led to much bigger job losses than anyone expected. Other economists, such as Dani Rodrik argued that the global free trade system imposed a straitjacket on national governments limiting their ability to regulate, preventing them from protecting specific local values, and hampering them from experimenting with industrial policy or other tools. Rodrik argued that in real life, free trade agreements were dominated by special interests such as pharmaceutical companies and banks, who were more interested in shaping other countries’ regulations for their own benefit than in working toward the general benefit. He suggests there are other paths toward economic development than simple proposals for open markets.

However, the bigger challenges to the consensus have so far come from politics rather than academic argument. Donald Trump was elected president on a platform of changing the nation’s approach to trade. Trump believed U.S. trade partners were taking advantage of America’s foolish generosity. This is why the Trump administration has weakened the WTO, sought to radically remake trade relations with China, undone trade deals such as North American Free Trade Agreement and used questionable security arguments to justify limits on steel imports and possible tariffs on trade with Mexico. Trump’s preference for trade unilateralism has upset some U.S. firms and Republican members of Congress.

Warren’s plan is another blow to the consensus

Political scientists and economists are trying to figure out whether Trump’s populist challenge to trade is a sign of broader political changes. Some scholars argue that economic insecurity makes people more likely to vote for economic populists. Others, such as Autor and his colleagues, find that increased exposure to trade has led to political polarization in the United States, although there is vigorous debate over whether economic insecurity or racial attitudes, or some combination, best explain Trump’s support among voters.

There is another important question: whether the United States will revert to its bipartisan free trade orientation in the near future. There is significant evidence to suggest it might — a majority of Americans still see free trade as a good thing. Stephen Chaudoin, Helen Milner and Dustin Tingley argue that the commitment to free trade is in the United States’ interest and that even the Trump administration will have to recognize this.

However, Warren’s proposal differs from Trump’s broad but shallowly anchored antagonism toward trade in some important respects. Notably, her proposals would entail a widespread institutional transformation. By merging the U.S. Trade Representative’s office into a broader Department of Economic Development, Warren would subordinate trade negotiations to a broader economic development policy. This would open up the way to full-scale industrial policy. Warren proposes large scale investments in research and development, massively expanded support for exporters and large-scale training programs.

Of course, Warren is just one contender for the Democratic presidential nomination, and it is entirely possible her plan will disappear and be forgotten (as most politicians’ plans are). However, if the plan generates enthusiasm — and perhaps similar competing proposals among other Democratic contenders — it could have important consequences for the once strong bipartisan consensus.

Warren’s proposal is clearly not mere election rhetoric. If the 2020 presidential fight is between an anti-free trade Trump and a Democrat who prefers the ability to implement industrial policy over free trade strictures, then the bipartisan consensus might be seriously challenged, with possible transformative consequences for the United States and for the world, where China is already committed to its own industrial policy, and the European Union is debating a policy based on building up “champion” firms.