Some of the biggest names in the economics world have weighed in recently on President Obama’s proposed Pacific Rim trade deal and the negotiating authority that would help secure its approval by Congress, and their analyses once again underscore how thoroughly misunderstood American trade diplomacy, its impact, and its possibilities remain. Their main points – that agreements like the Trans-Pacific Partnership (TPP) have little economic impact, and that carefully crafted provisions can produce equitable terms of competition for America – could not be more at odds with the record, and with simple common sense.
The main rationales for slighting the economic effects of the TPP – and indeed trade agreements in general – have been made by New York Times columnist and Nobel economics winner Paul Krugman, and former Treasury Secretary and top economic adviser to President Obama Lawrence Summers. The former emphasizes that “once trade is already fairly open, the gains from opening it further are small.” The latter writes that “increases in the extent of U.S. trade are driven largely by technology and by the increased sophistication of developing economies, not by trade agreements.” (Krugman also expresses agreement with this point.)
But although trade liberalization unquestionably has made major strides in the post-World War II period, the barriers that remain shouldn’t be underestimated. For the vast bulk of the obstacles to trade that have been dismantled have been visible barriers like tariffs and quotas. By contrast, non-tariff barriers (NTBs) like subsidies – which are often excruciatingly difficult even to identify, much less document and combat through trade law actions – have become especially important to America’s trading fortunes for two main reasons.
First, most of them are found overseas, which means that their persistence and growth damages U.S. producers who face foreign competition disproportionately. Second, they are particularly popular among the developing countries whose massive surge into the global trading system starting roughly when the Cold War ended has transformed international commerce. Because trade with countries like China increasingly dominates America’s trade flows, their pervasive use of NTBs – greatly aided by the secrecy with which their governments tend to operate – imposes outsized costs on their U.S. rivals, too.
What Summers overlooks is just as important. The main reason that these developing countries’ sophistication has fueled so much trade growth is that trade agreements have enabled capital from the United States and other high income countries to access not only their markets but their productive capacities and potential. In fact, by providing important guarantees to prospective investors about their treatment in host countries, these trade agreements have boosted and indeed created most of that developing country sophistication to begin with – through the transfer of management and technological knowhow that these economies never would have developed so quickly on their own.
Ironically, Summers concedes the point when he writes that trade agreements “reduce pressure for outsourcing because when barriers fall the incentive to invest abroad in order to avoid paying tariffs is attenuated.” Unfortunately, he misses the continuing importance of NTBs in sending American production and jobs to trade deal partners, especially requirements that foreign investors transfer technology, and produce and source locally.
Krugman and Summers also ignore the crucial role played by recent U.S. trade agreements, and the global imbalances they inevitably generated, in triggering the last financial crisis and ensuing Great Recession. Chiefly, the third world focus of America’s trade diplomacy starting with NAFTA intensified U.S. economic ties with countries whose willingness and potential to produce vastly exceeded their willingness and potential to consume. So not only did soaring U.S. trade deficits become inevitable. So did a deterioration of income-earning opportunities in the United States that Washington decided to offset with recklessly easy money policies. These in were turn enabled largely by the trade profits of its partners that were recycled back into the U.S. economy to create oceans of cheap credit. If you don’t believe this, your quarrel isn’t only with me. It’s with guys named Obstfeld and Rogoff, among others.
Completely unjustified faith in the ability of trade agreements to deal effectively with trade barriers – especially NTBs – is the second fundamental misunderstanding surrounding U.S. trade policies. It’s expressed prominently on both sides of the TPP debate both by Members of Congress and leading scholars, notably Summers as well as David Autor, David Dorn, and Gordon H. Hanson in the Washington Post; and Simon Johnson (along with Rep. Sander Levin, Democrat from Michigan) in Politico.
TPP supporters (based on what is known of the agreement) claim that the deal will significantly strengthen the American economy and even improve the lot of hard-pressed U.S. workers facing foreign competition by creating significant protections for intellectual property; and by protecting “U.S. firms against predatory regulatory interventions by member governments” (as Autor, Dorn, and Hanson insist). Critics, like Johnson, Levin, and Summers believe that the deal could be made acceptable to the United States if it banned currency manipulation and included strong safeguards for the environment and worker rights.
Based on America’s experience, though, confidence in trade rule-writing is a total mystery. One big and in practical terms insuperable problem is enforcement. As I’ve noted, many of the countries currently negotiating the TPP have enormous manufacturing complexes (even relatively small economies like Vietnam). As Johnson and Levin recognize, the labor provisions of NAFTA have been a major flop in Mexico. But even if a much stronger regime had been in place, how many American officials would have been needed to be constantly inspecting how many Mexican factories to ensure consistent, widespread compliance? And now they propose to add Vietnam to Washington’s enforcement burden? And, down the road, possibly China?
The second equally big and insuperable problem stems from the structure of the dispute-resolution systems in U.S. trade agreements. Typically, they give each signatory country an equal say, even though the American economy is invariably the biggest by far in the group – and therefore the greatest prize. As a result, even if so-called strong and enforceable disciplines on currency manipulation, for example, were included in the core texts of TPP and other trade deals, what reason is there to suppose that the majority of partner countries would ever see eye-to-eye with Washington on actually using any existing standard to punish the practice?
After all, Japan has already been accused by the U.S. Treasury Department of devaluing the yen for trade advantage. Why would Tokyo agree to deprive itself of the option in the future? The same goes for follow-on countries like Korea and China. In fact, since all of current and likely TPP members have a strong interest in growing by amassing trade surpluses with the United States, why would any of them ever agree to remove this weapon from their policy arsenals in any and all future circumstances?
The real lesson taught by America’s experience with trade deals is that it’s not remotely possible to level the proverbial global playing field with provisions proscribing or limiting various ostensibly objectionable foreign practices and policies. Washington’s enforcement capacity is sorely inadequate to the task, and the necessary consensus among our trade partners on acceptable and unacceptable behavior simply doesn’t exist, and shows no likelihood of emerging no matter how many pieces of paper these countries sign and how many rules they endorse.
The United States can, however, reasonably hope to secure equitable terms of trade for its domestic producers by relying on what it can hope to control – access to its own supremely important market. In other words, to serve the interests of the U.S. domestic economy, America’s trade agreements must stipulate that other countries will receive the privilege and immense advantages of doing business in the United States only on terms acceptable to the U.S. government and subject to the Congress’ unfettered ability to amend any deal it considers. Moreover, Washington will unilaterally administer all agreements and serve as judge, jury, and court of appeals for all disputes.
Even better, since the U.S. economy remains the world economy’s biggest golden goose, such tough trade policy love will bring major worldwide benefits as well – by preventing the reemergence of unsustainable international economic imbalances and the destructive financial instability and global crises to which they can lead.