New and im­proved trade agree­ments?

Financial Mirror (Cyprus) - - FRONT PAGE -

Trade is high on the agenda in the United States, Europe, and much of Asia this year. In the US, where con­cern has been height­ened by weak re­cent trade num­bers, Pres­i­dent Barack Obama is push­ing for Congress to give him Trade Pro­mo­tion Author­ity (TPA), pre­vi­ously known as fast-track author­ity, to con­clude the mega-re­gional Trans-Pa­cific Part­ner­ship (TPP) with 11 Asian and Latin Amer­i­can coun­tries. With­out TPA, trad­ing part­ners re­frain from of­fer­ing their best con­ces­sions, cor­rectly fear­ing that Congress would seek to take “an­other bite of the ap­ple” when asked to rat­ify any deal.

In mar­ket­ing the TPP, Obama tends to em­pha­sise some of the fea­tures that dis­tin­guish it from ear­lier pacts such as the North Amer­i­can Free Trade Agree­ment (NAFTA). Th­ese in­clude com­mit­ments by Pa­cific coun­tries on the en­vi­ron­ment and the ex­pan­sion of en­force­able la­bor rights, as well as the geopo­lit­i­cal ar­gu­ment for Amer­ica’s muchdis­cussed strate­gic “re­bal­anc­ing” to­ward Asia.

As with con­sumer prod­ucts, the slo­gan “New and im­proved!” sells. NAFTA and other pre­vi­ous trade agree­ments are un­pop­u­lar. So the Obama ad­min­is­tra­tion’s ar­gu­ment is ap­par­ently, “We have learned from our mis­takes. This agree­ment will fix them.”

But the premise is wrong: The pre­vi­ous agree­ments did ben­e­fit the US (and its part­ners). The most straight­for­ward ar­gu­ment for TPP is that sim­i­lar eco­nomic benefits are likely to fol­low.

The eco­nomic ar­gu­ments for the gains from trade of course go back to David Ri­cardo’s clas­sic the­ory of com­par­a­tive ad­van­tage. Coun­tries ben­e­fit most from pro­duc­ing and ex­port­ing what they are rel­a­tively best at pro­duc­ing and ex­port­ing, and from im­port­ing what other coun­tries are rel­a­tively bet­ter at pro­duc­ing.

More­over, trade boosts pro­duc­tiv­ity, which is why ex­porters pay higher wages than other com­pa­nies, on av­er­age – an es­ti­mated 18% higher in the case of US man­u­fac­tur­ing. And the pur­chas­ing power of in­come is en­hanced by house­holds’ op­por­tu­nity to con­sume low­er­priced im­ported goods. The cost sav­ings are es­pe­cially large for food and cloth­ing, pur­chases that ac­count for a higher pro­por­tion of lower-in­come and mid­dle-class house­holds’ spend­ing.

Amer­i­can trade de­bates have long been framed by the ques­tion of whether a pol­icy will in­crease or re­duce the num­ber of jobs. This con­cern is a first cousin to the old mer­can­tilist fo­cus on whether a pol­icy will im­prove or worsen the trade bal­ance. A “mer­can­tilist” could be de­fined as some­one who be­lieves that gains go only to the coun­try that en­joys a higher trade sur­plus, mir­rored by losses for the trad­ing part­ner that runs a cor­re­spond­ingly higher deficit.

Even by this sort of rea­son­ing, one could make an “Amer­i­can” case for the on­go­ing trade ne­go­ti­a­tions. The US mar­ket is al­ready rather open; TPP par­tic­i­pants such as Viet­nam, Malaysia, and Ja­pan have higher tar­iff and non-tar­iff bar­ri­ers against some prod­ucts that the US would like to be able to sell them than the US does against their goods. Lib­er­al­i­sa­tion would thus ben­e­fit US ex­ports to Asia more than Asian ex­ports to the US.

The late 1990s of­fer a good il­lus­tra­tion of how trade the­ory works in the real world. The vol­ume of trade in­creased rapidly, ow­ing partly to NAFTA in 1994 and the estab­lish­ment in 1995 of the World Trade Or­gan­i­sa­tion as the suc­ces­sor to the Gen­eral Agree­ment on Tar­iffs and Trade.

For the US dur­ing this pe­riod, im­ports grew more rapidly than ex­ports. But the widen­ing of the trade deficit had no neg­a­tive ef­fect on out­put and em­ploy­ment. Real (in­fla­tion­ad­justed) GDP growth av­er­aged 4.3% dur­ing 1996-2000, pro­duc­tiv­ity in­creased by 2.5% per year, and work­ers re­ceived their share of those gains as real com­pen­sa­tion per hour rose at a 2.2% an­nual pace. The un­em­ploy­ment rate fell be­low 4% – as low as it goes – by the end of 2000.

A stronger trade bal­ance in the late 1990s would not have added to out­put growth or job cre­ation, which were run­ning at full throt­tle. Fur­ther in­creases in net ex­port de­mand would have been met only by at­tract­ing work­ers away from the pro­duc­tion of some­thing else. That is why the gains from trade took the form of bid­ding up real wages, rather than fur­ther in­creas­ing the num­ber of jobs.

Ad­mit­tedly, it is harder to make the case for freer trade – par­tic­u­larly for uni­lat­eral lib­er­al­i­sa­tion – when un­em­ploy­ment is high and out­put is be­low po­ten­tial, as was true in the af­ter­math of the fi­nan­cial cri­sis and re­ces­sion of 2007-2009. Un­der such cir­cum­stances, there is a ker­nel of truth to mer­can­tilist logic: trade sur­pluses con­trib­ute to GDP and em­ploy­ment, com­ing at the ex­pense of deficit coun­tries.

Of course, if one coun­try erects im­port bar­ri­ers, its trad­ing part­ners are likely to re­tal­i­ate with “beg­gar-thy-neigh­bour” poli­cies of their own, leav­ing ev­ery­one worse off. That is why the case for mul­ti­lat­eral re­nun­ci­a­tion of pro­tec­tion­ism is as strong in re­ces­sion­ary con­di­tions as ever. In re­sponse to the 2008-2009 global re­ces­sion, for ex­am­ple, G-20 lead­ers agreed to re­frain from new trade bar­ri­ers. Con­trary to many cyn­i­cal pre­dic­tions, Obama and his coun­ter­parts suc­cess­fully ful­filled this com­mit­ment, avoid­ing a re­peat of the de­ba­cle caused in the 1930s by Amer­ica’s in­tro­duc­tion of im­port tar­iffs.

In any case, mer­can­tilist logic is no longer rel­e­vant. The US un­em­ploy­ment rate has fallen well be­low 6% – not quite full em­ploy­ment, but close. If out­put and em­ploy­ment were ris­ing this year as rapidly as in 2014, the Fed­eral Re­serve would prob­a­bly have felt the need to start rais­ing in­ter­est rates as early as this June. As it is, the Fed will al­most cer­tainly de­lay rais­ing rates for a while longer. If trade deals do boost US ex­ports more than im­ports, the Fed will prob­a­bly have to put a brake on the econ­omy that much sooner.

But the bot­tom line is that if the US can boost auto ex­ports to Malaysia, agri­cul­tural ex­ports to Ja­pan, and ser­vice ex­ports to Viet­nam, real wages will be bid up­ward more than by the cre­ation of more jobs. That is why, if it is al­lowed to pro­ceed, the TPP will, like past trade deals, help put real me­dian US in­comes back on a ris­ing trend.

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