The world needs clarity on beggar-thy-neighbour policies to ease trade tensions

A useful starting point is for everyone to agree, in principle, not to deploy beggar-thy-neighbour 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-neighbour. 

It would indeed be hopeless—and counterproductive—to try to discipline all policies of the former type. Fortunately, beggar-thy-neighbour actions constitute only a small subset of such policies.

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

To grasp the 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 US.

Consider two policies in particular. First, when Beijing subsidizes R&D to enhance China’s competitiveness in high-tech products and lowers prices in global markets, the US and other advanced economies are hurt, because these are areas of their comparative advantage. 

Yet, we would not consider it proper to ask China to remove such subsidies as 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 raising global prices and making its exporters more competitive, thanks to their access to cheaper inputs. 

But this is a clear instance of a beggar-thy-neighbour policy. China’s gains are the result of an exercise of global monopoly power that forces losses upon foreign producers.

A policy is beggar-thy-neighbour when the benefit to the local economy is made possible only by the harm 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 local economy. Such policies are generally negative-sum for the world overall.

Identifying beggar-thy-neighbour policies may be difficult because nobody is likely to own up to them. But clarifying the kinds of actions that are truly objectionable, and narrowing the scope of disputes accordingly, could lead to better outcomes. 

It would also allow better politics because governments would engage in a more productive discussion about what they are doing, why, 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-neighbour. In fact, many can be considered enrich-thy-neighbour.

The clearest example is the range of green industrial policies that China has deployed 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 others 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 aptly target externalities and market failures, as in the case of green subsidies, they are not something to worry about. While we can raise legitimate concerns about cases where these conditions go unmet, the fact remains that the costs of inefficient industrial policies are borne mostly 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-neighbour 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 respond to others’ arguments about what is good for them. 

Trade partners are always free to impose their own safeguards. For example, if a government is worried about national security or adverse consequences for local labour markets, it could 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-neighbour policies.

Distinguishing the small number of beggar-thy-neighbour actions from the vast array of other policies with cross-border spillovers is an important way to ease trade tensions. 

It would let international negotiations focus on real problems, leaving governments free to pursue legitimate policy goals at home. Working towards a world of self-help is largely good economics and good politics. ©2024/project syndicate