Who really killed US participation in the TPP? Prime suspects extend beyond President Trump to include other 2016 presidential candidates, politicians across the ideological spectrum, and the public in its collective ignorance. Meaningful, inclusive debate on the substance of the agreement was virtually absent.
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1. For more detail on the agreement, see Council of Economic Advisers, Economic Report of the President (Washington, DC: United States Government Printing Office, 2015), 302–303.
2. Several arguments in favor of US participation in the TPP are nicely summarized in a Council of Economics Advisers brief: Council of Economic Advisers, “Industries and Jobs at Risk if the Trans-Pacific Partnership Does Not Pass,” Report, November 2016.
3. “Trading Places,” Economist, January 27, 2018.
Overall, the case for trade agreements is akin to the case for government. Individuals and companies can’t solve important social problems without the rules and institutions of government: they would have no way to enforce contracts; transportation and communication would be far more costly; and they would lack the vital protections afforded by both the rule of law and the social safety net. Similarly, countries have grave difficulties pursuing areas of mutual interest without international agreements. Good agreements are important for setting the rules of the road, they play a vital role in preventing mutually harmful economic policies, and they promote peaceful, prosperous international relations. (Chapters 7 and 9 will discuss these issues further.)
It’s All about Politics
Given that countries always have the option of liberalizing their trade regimes unilaterally, we might wonder why countries go through all the fuss of negotiating trade agreements. One answer is that, in addition to important rule-setting functions, trade agreements play important political roles.
First, trade agreements constrain future governments and may lead to a more open and free trading system than if countries were constantly revisiting their ideal trade policies based on the spirit of the moment. For example, consider the European Union, which is a customs union.11 Member states in a customs union agree not only to trade freely with members, but to devise and adhere to a common trade policy with respect to other nations.12 Thus, when an EU member state elects a particularly nationalistic government, that government will be nearly powerless to raise trade barriers on either partner EU countries or on other nations. The only way to regain control of the nation’s trade policy would be to exit the European Union—the very move that the United Kingdom is now undertaking, much to the dismay of many observers.
A similar political calculation surrounded China’s accession to the WTO in 2001. Once China joined the WTO, that action committed its government to continued liberal trade policies. It also committed other WTO members, including the United States, not to discriminate against Chinese products.13
There is also a second way in which trade agreements advance political goals: they are often used to improve international relations among countries. Here again, the European Union project offers a good example. After centuries of conflict in Europe, the founders of the European Union explicitly sought to make countries more interdependent economically in order to make future conflicts less likely. One of the project’s first steps was an agreement among the original six members (France, Germany, Italy, Belgium, Netherlands, and Luxembourg) to liberalize trade in coal and steel, essential inputs in military production. Agreeing to rely on each other’s markets for these commodities was basically agreeing not to fight. More recently, the European Union has expanded to include many states that were formerly under the influence of the USSR. Countries such as Latvia, Lithuania, Estonia, Poland, Hungary, and the Czech Republic have embraced European integration as a way to become more closely linked to Europe and to be implicitly protected against potential external threats.
In the case of NAFTA, the United States also had strong political motives to expand the less-controversial Canada-United States Free Trade Agreement to Mexico. It was hoped that NAFTA would help make Mexico, a country that shares a two-thousand-mile border with the United States, more stable, more prosperous, and more democratic. And it was hoped that a more prosperous Mexican economy would also reduce undocumented immigration from Mexico to the United States. Establishing the counterfactual is never easy; we cannot know what would have happened in the absence of the agreement. Yet it is clear that NAFTA has had consequences that stretch far beyond trade.
For example, shortly after NAFTA took effect, Mexico experienced a macroeconomic crisis. The crisis itself had nothing to do with NAFTA; it resulted from macroeconomic problems in Mexico that included over-borrowing and an overvalued peso. When the Mexican peso swiftly depreciated in December 1994, Mexico struggled to finance short-term debts—including many denominated in US dollars that became more burdensome with the sharp decline of the peso. The crisis spread to other countries in a manner that was colorfully described as the “tequila effect.” To help stabilize the Mexican economy, the Clinton administration authorized aid to Mexico via executive action. This action paid off; the Mexican economy recovered quickly from its crisis, and Mexico repaid the $12.5 billion it had borrowed from the federal fund in two years. But the decision was controversial at the time. Without the political connection cemented by NAFTA, it is unlikely that urgently needed support would have arrived.
As argued in the early days of the European Union, countries benefit from strengthening the motives for peaceful cooperation through closer economic relations. This adds an economic deterrent to conflict or war. When countries depend on each other as markets for their output, as suppliers of essential products, as sources of lending, or as destinations where assets earn less-risky or more-rewarding returns, they are less likely to erupt into violence when their interests conflict.
Consider the United States and China; the two are economically reliant on each other. The United States provides a large, rich market for Chinese products. We also provide a large and sophisticated market selling diversified financial assets, where Chinese savings can earn safe returns. China provides US consumers with large quantities of low-cost goods, and provides US companies with intermediate input goods that enable them to be more successful in world markets. China also provides a reliable source of funds, allowing the US government and private investors to borrow in larger quantities and at lower interest rates than they could otherwise. These economic interests are mutual, they are large, and they are likely to improve relations between the United States and China, reducing the chance that frictions will escalate into larger conflicts or war.
Can We Help American Workers by Restricting Trade?
The suffering of American workers is real. As Chapter 2 showed, wage stagnation, rising income inequality, and the declining share of labor income are enormous problems for the US economy. Beyond our borders, similar problems affect many other countries. Workers in China, Europe, India, and elsewhere are affected by these trends.
Make Trade, Not War
The last great era of globalization ended with World War I. Rising nationalism and conflict abruptly ended a period of expanding international trade and migration. Only after the Great Depression and World War II had passed did countries work to build up international economic relations again, establishing the General Agreement on Tariffs and Trade (GATT) which eventually became the World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank (originally to provide funds for war reconstruction).
Numerous studies have found that international trade is associated with reduced likelihood of political conflict. Several theories suggest mechanisms by which trade may promote peace. Trade is cheaper than war as a mechanism for increasing resources, trade increases the losses from conflict, and freer trade undermines domestic groups that favor protectionism and aggressive foreign policy.
One study finds that moving a country from the ninetieth percentile on a scale of protectionism to th
e tenth percentile is associated with a 70 percent lower probability of conflict.1 Another finds that the least economically free states are fourteen times more conflict-prone than the freest states.2
While causality is nearly impossible to establish, there is a robust negative relationship between proxies for nationalism, such as military spending and military personnel, and the importance of trade in economies. Countries that militarize, or whose trading partners militarize, trade less.3 And nationalist sentiment is strongly correlated with more negative opinions about trade openness.4 Closed borders, and closed minds, can hurt both prosperity and peace.
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1. Patrick J. McDonald, “Peace through Trade or Free Trade?” The Journal of Conflict Resolution 48:4 (2004), 547–572.
2. Erik Gartzke, “Economic Freedom and Peace,” Annual Report, Economic Freedom of the World, Fraser Institute, Canada, 2005.
3. See Daron Acemoglu, and Pierre Yared, “Political Limits to Globalization,” American Economic Review 100:2 (2010), 83–88.
4. See Anna Maria Mayda, and Dani Rodrik, “Why Are Some People (and Countries) More Protectionist than Others?” European Economic Review 49:6 (2005), 1393–1430; Kevin H. O’Rourke and Richard Sinnott, “The Determinants of Individual Attitudes towards Immigration,” European Journal of Political Economy 22:4 (2006), 838–861; and Edward D. Mansfield and Diana C. Mutz, “Support for Free Trade: Self-Interest, Sociotropic Politics, and Out-Group Anxiety,” International Organization 63:3 (2009), 425–457.
While international trade is not the only, or even the dominant, causal factor, it has played a role in the suffering of the American middle class. There are good reasons to suspect that trade with low-wage countries puts pressure on workers by making the environment in which people work more competitive. This lowers wages and reduces labor’s bargaining power. At the same time, the United States is particularly well suited to making goods that require abundant capital, highly-skilled labor, research and development funds, and technology. As our export sectors expand due to trade, capital owners and highly-skilled workers benefit disproportionately.
Yet, not only US workers but workers throughout the world, including in less-developed countries, are experiencing lower labor shares of national income and increased income inequality. This leads one to suspect that international trade is not the only culprit in this story. The computer revolution, and the pervasive effects of technological change, are an essential part of the narrative. Computers displace some workers, yet they make others more productive, and this has important effects on the distribution of income, hurting the poorer members of society and benefiting those that are better off. Further, technology works together with globalization to swell the supersized returns of the most successful earners in the world economy, as they reap enormous benefits from selling their ideas to the entire world, squeezing the returns to others. Corporate profits and monopoly power are also on the rise, adding to these pressures.
The losers from these global trends are not happy, and they have responded by voting for those that promise populist interventions, such as erecting trade barriers, imposing penalties on firms that send jobs offshore, and renegotiating, or exiting, prior trade agreements. Yet the populists proposing to turn back the clock on globalization do not suggest turning back the clock on technological innovation. Surely, if we all threw away our computers, or even banned computing, that would be a quick way to increase demand for low-skilled workers and return to the economy of yore. Suddenly, there would be an enormous demand for labor to do the myriad tasks that computers used to do for us.
That argument is silly, of course. First, delaying technological progress, let alone reversing it, is very difficult to do. (Though not impossible. Periods of war produce technological setbacks by destroying capital and reducing nonmilitary investment.) Second, given that computers are recognized to provide so many benefits and efficiencies throughout the economy, and affect our daily lives in so many tangible ways, the idea of giving them up is inconceivable.
It is important to recognize that international trade and technological change generate twin tradeoffs. Both entail numerous efficiencies, large gains to consumers, and large sectors of the economy that “win.” But both also create vocal groups of losers. Still, in contrast with technological change, globalization is more reversible, since we can easily take political actions that would curtail or reverse it. Indeed, there are historical examples of this occurring. After the previous “golden age” of globalization (1870–1913), there was a period of war, economic depression, and backlash that substantially reduced trade, international investment, and migration. It would not be difficult for policy-makers to take actions that would reverse the present “wave” of globalization.
Supporters of international trade face a vexing political problem. Gains from trade are easy to ignore since consumers don’t notice them, and they are diffusely spread throughout the economy. Gains in export sectors create firms that favor international trade, but their workers may not easily associate their opportunities with the fact that their firms can sell products worldwide. Yet losses due to import competition are easy to notice, as workers face lower wages or job loss. And, unlike computers, foreigners provide an easy target for blame. This creates big political problems for an open trading system.
Do Americans Like Trade?
Do Americans like trade? In short: it depends. Polling has, at some times, found relatively high favorable opinions of international trade. From 2015 to 2017, however, favorable trade ratings plummeted, despite these years’ above-average wage growth and low unemployment. Likely, political rhetoric has shaped voter opinions. The erosion in favorable views about trade has been particularly strong among registered Republicans. In a 2017 survey about NAFTA, only 22 percent of Republicans thought that NAFTA had been good for the United States, whereas 67 percent of Democrats thought so. In 2000, the gap was much less wide, with 46 percent of Republicans and 49 percent of Democrats holding favorable opinions of NAFTA.1
Figure 5.1: Are Trade Agreements a Good or Bad Thing?
Data source: Pew Research Center.
It also appears that public opinion is driven less by self-interest than by personal views of what is good for society. For example, recent research suggests that the industry of the worker is not a predictor of their likely view of trade. But other political views are. Those expressing agreement with isolationist, nationalist, or ethnocentric views are more likely to have unfavorable views of trade.2 Educational attainment also matters; voters reporting more years of formal education view trade more favorably.
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1. Gallup Politics, “Americans Split on Whether NAFTA Is Good or Bad for US” February 24, 2017, http://www.gallup.com/poll/204269/americans-split-whether-nafta-good-bad.aspx.
2. N. Gregory Mankiw, “Why Voters Don’t Buy It When Economists Say Global Trade Is Good,” The Upshot, July 29, 2016; Edward D. Mansfield and Diana C. Mutz, “Support for Free Trade.”
This political problem is daunting, but the case against protectionism remains strong. Giving up trade, or even reducing trade by instituting a 30 percent tariff or shutting down the trade-liberalizing components of international agreements, would create large costs for the US economy and US workers. In particular:
Tariffs would harm consumers, with particularly harmful effects for low- or middle-income workers.
Export industries would be hurt by the higher costs of intermediate products and the likely retaliatory actions of our trading partners, hurting workers in those sectors.
To replace the goods that would have been imported from low-income countries, labor would need to switch from other sectors, contracting other industries. This process would create its own shocks and disruptions.
Since many other factors, including technology, monopoly power, and social norms, are also driving the woes of workers, it is unlikely that trade restrictions would be effective.
This might lead to increased political pressures for even greater trade restrictions.
Importantly, the negative repercussions would also play out on the global stage. International relations would be harmed, and there would be fewer mutual dependencies tying countries together. Weaker international alliances and friendships would make it more difficult to solve international problems, and increase the chances of conflict.
Making Trade Work for Everyone
Between trade and technological change, it is difficult to tease out how much each should be blamed for the plight of workers—but in one important respect, it does not matter. Regardless of which is the bigger culprit, “solving” the problem by erecting trade barriers (or throwing away our computers) would generate a lot of collateral damage. There are much better, and more direct, ways to help workers.
Chapters 9 through 11 will lay out a policy agenda in far greater detail, but for now, the unifying theme is (perhaps unsurprisingly) to focus directly on workers themselves. Most directly, we can work to ensure that everyone benefits from changes in the economy that increase GDP. The tax system provides a powerful tool for achieving this end. By lowering tax burdens for those lower in the income distribution, and providing refundable tax credits for the least well-off, the tax system can help most Americans benefit from periods of economic growth. These tax policies are easily available to those with the political will to implement them.
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