Should trade policy be about "the art of the deal" or about facilitating economic growth?

"We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs.  Protection will lead to great prosperity and strength" - Donald Trump, Inaugural Address, Jan. 20, 2017 

How should the Australian government respond to the potential for the crazy trade policies of President Trump to take the world into a new era of trade protectionism? Since Trump’s inauguration the depth of his commitment to trade protectionism has become clearer. In my view we should be prepared for the unravelling of much of the international trade liberalisation encouraged by the U.S. in the latter half of the 20^th Century.

If the Australian government continues with the current directions of international trade policy – viewing trade policy from an economic diplomacy perspective – there is a real risk that it will take ill-considered retaliatory action to foreign protectionism. Politicians who put their faith in trade diplomacy – the art of the export deal – think that they are pursuing the national interest when they make access to the Australian market contingent upon foreigners allowing our exporters to gain access to their markets. In terms of that mindset, if foreigners restrict access to their markets, it would appear logical for us to retaliate.

By contrast, political leaders who view trade policy as part of economic growth policy are more likely to keep in mind that the substantial trade liberalisation effort that Australia has made over the last 40 years has occurred unilaterally, rather than as part of any international deal. A growth policy perspective recognises the contribution that unilateral trade liberalisation has made to our prosperity.

The substantial trade liberalisation efforts made in Australia since the beginning of The Tariff Review, established in 1971, have all occurred for domestic reasons. Except for the 25 percent tariff cut of 1973, which was motivated primarily by macro-economic objectives, all of the reductions in industry assistance have occurred primarily to promote the micro-economic reform objective of providing incentives for greater productivity throughout the economy. That applies to reductions in non-tariff barriers, including reform of agricultural marketing arrangements, as well as reductions in reductions in tariff barriers.

As with other microeconomic reform policies, trade liberalisation efforts in Australia have not been pursued with equal enthusiasm by all governments. However, a sustained push toward trade liberalisation was initiated by Bob Hawke (then prime minister) and Paul Keating (treasurer) in May 1988 as part of a major package of microeconomic reform measures. In delivering the statement, Keating commented:

“The way forward for Australia is not to be closeted and sheltered, but to be open and dynamic, trading aggressively in the world. Only this kind of economy can provide the employment and rising living standards that Australians aspire to”.

In the light of the toxic political environment currently prevailing in Canberra it is worth remembering that those reforms were facilitated by support from the Liberal–National Party Opposition.

The trade liberalisation that was being undertaken in pursuit of microeconomic objectives was subsequently ­offered, and accepted, in Uruguay negotiations as our market-opening contribution to global trade reform. As the Tasman Transparency Group has noted, this approach enabled us to secure all the gains available from trade negotiations — the major gains in efficiency from reducing the barriers protecting our less competitive industries, as well as those available from access to external markets. That exercise should have provided the model for all subsequent international trade negotiations.

Unfortunately, the opportunity for further gains from the pursuit of microeconomic reforms has been missed in subsequent trade negotiations. Australia’s agenda in recent negotiations establishing a range of preferential trading agreements (PTAs) was simply a market access wish list. Following the conclusion of PTAs, governments have measured their success solely on the basis of whether the outcomes improved access to external markets.

The academic research that the Department of Foreign Affairs and Trade is now sponsoring on “the effectiveness of economic diplomacy in contributing to Australia’s exports and inflow of foreign investment” does not seem to be directed at answering a comprehensible, policy-relevant question. Research being undertaken by the Productivity Commission on implications for Australia’s trade policy of possible international shifts towards a more protectionist stance seems more likely to provide a basis for sensible policy development.

Previous research on the consequences of PTAs suggests that there are no grounds for complacency that the economic benefits even exceed costs. For example, using an analytical framework developed by the Productivity Commission to assess our much-heralded trade agreement with the United States, Australian National University economist Shiro Armstrong found that the agreement was responsible for reducing — or ­diverting — $53.1 billion of trade with the rest of the world. He has suggested that “the data shows that … Australia and the United States … are worse off than they would have been without the agreement”. 

Recent Australian governments have at times acknowledged that trade policy should be part of a wider productivity promoting agenda. Nevertheless, the government seems to have been at a loss to know how to counter the argument that Australian governments should be seeking to provide a level playing field for domestic industries vis a vis subsidized foreign competitors. This argument has figured prominently in lobbying in some quarters for further government assistance by way of anti-dumping action and government procurement preferences. The government has been slow to point out that if we are to use a playing field analogy – and our interest is in promoting the wellbeing of Australians rather than conducting trade wars – the relevant basis for comparison is the relative assistance levels of different Australian industries. As a rule, if industries need assistance to compete internationally, they can’t be making efficient use of resources. 

If the Australian government is serious about its commitment to lift national productivity it should place trade policy in the Treasury department – the department with central responsibility for facilitating economic growth. This would add some much-needed economic discipline to the conduct of trade policy as we face a more difficult world trading environment. The last thing we need in this environment is a bureaucratic structure for trade policy that is biased toward mindless deal-making and retaliation

Is a fixed mindset more realistic than a growth mindset?

Before I got far into Carol Dweck’s book, Mindset, I was confronted by the thought that the author might classify me as having a fixed mindset rather than a growth mindset. Dr Dweck is an eminent psychologist who has conducted a great deal of research on mindsets. She suggests that if you believe that your intelligence “is something very basic about you that you can’t change very much” you have a fixed mindset, but if you believe that you “can always change how intelligent you are” you have a growth mindset.

In considering those propositions (along with a couple of other similar ones) my mind turned initially to research showing that for most people IQ tends to remain fairly stable throughout life. That must mean that existing IQ is a good predictor of future IQ. If you choose an individual at random it would be safe to bet that their IQ is not likely to change much. 

However, after a few moments I realized that I was adopting what I call a spectator mindset. I was considering the relevant literature like a spectator who is not personally involved. I had overlooked the fact that the author was asking whether I agreed with certain beliefs about the potential for my intelligence to change.

When I began to think from a personal perspective, books by Norman Doidge on brain plasticity came to mind. From a personal viewpoint, I think it makes sense to view your intellectual capacity in much the same light as your physical fitness. Your brain is like a muscle – use it to make it strong. Or, at my age, if you don’t use it you lose it!

As I read further into the book I discovered that, like many other people, I alternate between fixed and growth mindsets.

I was induced to read Mindset, by an article by Nela Canovic on the Quora site where people were discussing the most important thing they have learned in life. The article got me wondering how closely Carol Dweck’s distinction between fixed and growth mindsets corresponds to the distinction between spectator and player mindsets that enabled me to greatly improve one aspect of my life about 14 years ago. It makes sense for a spectator to focus on what she or he expects to happen, but to be successful at anything you need a player mindset – to focus on your intentions. That is one of the most important things I had learned from life. (I have recently written about it on this blog.)

My concern in this post is with the realism of different mindsets because I don’t think it serves us well to maintain delusions about ourselves.  As I see it, human flourishing depends, to a large extent, on realism – seeking understanding about important aspects of your own life and human life in general, and being disposed to act on that understanding when circumstances permit. As previously discussed on this blog, that view has been reinforced by my reading of Wellbeing: Happiness in a Worthwhile Life, by Neera Badhwar, a philosopher.

As I see it, fixed and growth mindsets must both be closely related to the meanings that people give to their experiences, and how those meanings or interpretations shape their intentions and future behaviour. Is a growth mindset more realistic than a fixed mindset?

Carol Dweck suggests that the fixed mindset – the belief that your qualities are carved in stone – “creates an urgency to prove yourself over and over”. She adds:

“If you have only a certain amount of intelligence, a certain personality, and a certain moral character – well, then you’d better prove that you have a healthy dose of them. It simply wouldn’t do to look or feel deficient in these most basic characteristics”.

The book emphasises is that this mindset gives people one consuming goal – proving themselves: “Every situation calls for a confirmation of their intelligence, personality, or character”. In this mindset people tend to avoid coming to terms with reality if reality doesn’t validate their views of their own qualities.

What about the people who have a fixed mindset which involves labelling themselves as stupid, erratic, neurotic, lacking in willpower, or manifesting some other quality associated with poor performance? The author doesn’t give much attention to the potential for people to develop fixed mindsets which involve labelling themselves as poor performers. That could be because she sees fixed mindsets as stemming largely from attempts by parents and teachers to boost the self-esteem of children by telling them how clever they are, and so forth.

In her discussion of willpower, the author’s main emphasis is on the potential for people who believe they have strong willpower to fall into the trap of firmly resolving to do something, then failing to act according to their intentions because they make no special efforts to do so. She doesn’t mention that people who have come to label themselves as lacking in willpower might give up making resolutions to do things that could improve their lives. Perhaps that point is too obvious.

When I went looking in the book for recognition of the potential for people with fixed mindsets to label themselves as poor performers, I did find some. For example, there is recognition of this in the author’s discussion of the higher incidence of depression among students with fixed mindsets, and in her discussion of the learning potential of inner-city children who have been labelled as retarded or emotionally disturbed. The author also writes:

“People tell me they start to catch themselves when they are in the throes of the fixed mindset – passing up the chance for learning, feeling labelled by a failure, or getting discouraged when something requires a lot of effort. And then they switch themselves into the growth mindset …”.

Carol Dweck explains:

“The growth mindset is based on the belief that your basic qualities are things you can cultivate through your efforts. Although people may differ in every which way – in their initial talents and aptitudes, interests, or temperaments – everyone can change and grow through application and experience”.

 

The author refrains from making unrealistic claims about what can be achieved with a growth mindset. She suggests that people with a growth mindset don’t believe that with proper motivation and education anyone can become an Einstein or a Beethoven. They believe that “a person’s true potential is unknown (and unknowable); that it is impossible to foresee what can be accomplished with years of passion, toil, and training”.  As discussed in an earlier post, practice in being alert to opportunities could also be expected to expand growth potential.

In the growth mindset people accept both failure and success as providing learning opportunities. The most important questions: What can I learn from that experience? How can I use it as a basis for growth?

Mindset contains important messages about ways in which parents, teachers and coaches can encourage children to adopt a growth mindset. Carol Dweck considers the message of praising effort rather than outcome to be too simplistic.  She now advises teachers and parents “to praise a child's process and strategies, and tie those to the outcome”. In my view she is encouraging realistic appraisal of personal performance and potential for improvement.

My bottom line: Don’t fool yourself that you are being realistic if you adopt a fixed mindset about your intelligence, personality or moral character. Everyone is a work in progress. We make progress by learning from experience.


Postscript:
My attention has been drawn to a study by Yue Li and Timothy Bates that has failed to replicate Carol Dweck's findings regarding praise of intelligence of children and children's beliefs in the malleability of their basic ability. Please see comments below for further information.