My thinking on trade protectionism is no longer absolute. Here’s why:
One dirty secret is that state-managed growth isn’t such a bad policy for poor countries. Neoliberals might be angry to read that, but it’s true. But here’s the common sense that policymakers don’t seem to fathom: Policies that work for poor countries have no lessons for the United States.
The United States – a country at the cutting edge of productivity – needs entrepreneurs, not bureaucrats, to maximize economic growth. In contrast, sometimes poor countries need some institutional heavy-handedness to manage their economy. They’re developing, not inventing. Although pure free trade remains the first best development strategy, I no longer believe it is the only one.
Yet the fact that vastly poorer countries have shown that state-managed development and trade protectionism might help close the productivity gap is not instructive to richer countries. It might be helpful to make the contrast plain when U.S. politicians complain about foreign mercantilism. Yes, the Germans manage their trade. So it seems do the Japanese. And look, they have much lower GDP/capita as a consequence! (USA = $62,000 compared to Germany at $48,000).