What Do Undergrads Need to Know About Trade?

I have a complicated relationship with this piece. On one hand, I would love to live in a world where I could 100% agree with it and adopt its worldviews wholeheartedly. That's because my identity as an economist is married to it, and it would crush my heart for someone to label me a 'pop internationalist'. And everything that Krugman is arguing here is 100% true (to sneer at ANY suggestion that countries compete in the world marketplace, that exports are an objective in of themselves, etc)! But caveat - in a US or other developed country context! How should developing nations approach trade, though? I first start with the candid empirical observation that many successful nations lifted themselves out of poverty through export-led growth, e.g. the Asian tigers, and more recently, China. Perhaps there are many failed cases of export-led growth that we don't observe due to survivorship bias, though. But I will consider that nuance on a future date. Krugman's thinking is not new - it stretches back for centuries all the way back to the classical economists, e.g. Hume and Smith. These 2 economists conclusively won the debate against mercantilism (which I whole-heartedly celebrate). And hence we econ students now learn about trade through this prism: that mercantilism was a series of errors that Hume and Smith rectified. Today, mercantilism is viewed as a grave misunderstanding of economics that simple minds would fall for, and the nightmare of someone whose identity is tied to being educated in econ is to entertain mercantilist thought. Only simple minds get befuddled by simple misconceptions that wealth is money or gold, that we must outcompete other nations in selling our products, that we should be jealous of other nations whose trade surpluses outweigh ours, that we should protect our domestic industries, because, are you stupid? Why would you help foreigners over your own kin? Conceptually, wealth could of course emerge in a closed, developing nation. Of course it could - it's why global wealth increased astronomically over history even though we never trade with Mars! So, the doctrine that countries shouldn't care about export revenues should extend to all nations, rich or poor, big or small, right? Nay, just get rid of the trade account - Alex Tabarrok. But how can a small, poor nation lift itself out of poverty if its domestic market is just too small to support its industry? Mearsheimer said that population is the central factor for a state's international power. I'm starting to think that it's a key factor for economics as well. What if a developing nation has a lot of human capital - that it is endowed with a hard-working population that is willing to start from low-value industrial sectors. This nation would produce more than it can consume or even afford. It has to export the surplus, then! Export revenues become an existential concern for this nation. If policies were not put in place for this nation to export the surplus production, it may lead to premature industrialisation - where the number of employment of the manufacturing sector peaks too early. I also suspect there are further advantages in emphasizing industralisation - there are countless skills that the nation's workers can pick up on to help it climb the value chain. Unconditional convergence in manufacturing productivity, anyone? What if this developing nation insists on opening its borders, so premature industrialisation kicks in, and the rest of the population just works in the service sector? Can this still accelerate its growth? I have complex thoughts. On one hand, perhaps. Remember that wealth can still emerge in a closed economy. But on the other hand, services suffer from Baumol's disease. Furthermore, is there even a value chain in services - where workers pick up more skills over time and transition into higher value-add services? My thoughts thus far are not new in the slightest. Lee Kuan Yew understood this more than 60 years ago. I do not know what the consensus was in development economics at the time. But it was clear that he was not bound by any theory or ideology. He just had one motto: do what works. It helped that he was not an economist so he didn't suffer from ideological pride. I also need to hear Krugman's reflections on his earlier work. The essays in 'Pop internationalism' resound with the elite naivety of the econ establishment that characterised the late 90s. To quote Krugman in this piece: 'we need to teach them (undergrads) that trade deficits are self-correcting'. But, but ... the US trade deficit did NOT self-correct! Global imbalances persisted for decades - there is definitely something structural happening at this point. What does Krugman think of the hollowing out of the Rust Belt? It is blindingly obvious to me that the self-correcting nature of the trade deficit only worked under the price-specie-flow mechanism of the GOLD STANDARD. When the US transitioned to the gold-exchange standard in the early 20th century, central banks could already 'sterilize' bullion flows and hence by extension, the self-correction of trade deficits. Let alone the fully floating mechanism that we now operate by! Under the current system, we have to rely on demand for exports pushing up the CURRENCY, which makes exports uncompetitive - a much weaker mechanism that countries like China can and have exploited. Price inelasticity of demand, J-curve effect, anyone? When I read this article, I found myself agreeing with all of Krugman's mainstream points. But the news that I saw after reading it - that Indonesia unveiled a new state export body, PT Danantara, to basically nationalize their key exports, i.e. palm oil, coal, and ferroalloys - really struck me that trade for developing nations isn't a leisurely exchange for consumption. It is survival. I am aware, however, that the development playbook seems to have changed. The nature of automation in global supply chains has changed profoundly since the 2012/2013 'Unconditional convergence in manufacturing' paper and I also doubt whether manufacturing is still the unconditional escalator for growth that it used to be. Ethiopia's development is a case in point. That even Dani Rodrik changed his mind on manufacturing may signal a win for classical liberals/ economists: that hard free trade for development nations is making a comeback. Developing nations that try to hard-emulate the East Asian tiger model may be setting themselves up for disappointment. My reading list has a clear direction now, though. I will balance 'Pop internationalism' with Dani Rodrik. My next development/ trade read will be 'What the mercantilists got right'. And I must study the trade policy of the US when it was a young nation.