Monthly Archives: July 2016

Trans-Pacific Partnership –complex and messy

Back in the early nineties, one of the first courses I took in college was Macroeconomics.   During the course, I remember the professor giving the familiar econ 101 spiel about how international trade was based on the principles of comparative advantage.  What really stuck out in my mind, and still does, was her contention that there would be a net economic advantage to simply asking low-tech textile workers to stay home and have the government mail them a check for $120,000 a year.  I can’t verify that number (although I remember it well), but I was largely sold on the importance of international trade agreements by the end of the semester and remember feeling relief when Congress narrowly passed NAFTA the next year.

The real world, however, does not always operate along the nice, simple models presented in an undergraduate introductory economics course – a lesson politicians opposed to current health care reform in favor of allowing “the market to work” should remember.  It’s also something that I need to remind myself when considering the impact of the Trans Pacific Partnership that will greatly reduce remaining tariffs among the US and 11 other countries.  My personal bias is for free trade in its simple, theoretical form, but there are numerous valid concerns about the TPP.

The first concern, and why labor unions are so opposed, is because, in this country at least, labor likely does take the brunt of the negative effects of trade agreements.  A manifestation of the Stolper-Samuelson theory (another economic “theory” that has mixed empirical evidence at best), suggests that countries that are labor versus capital rich (lesser developed countries) will see benefits for workers at the expense of financial, tech, and service-type industries, while capital-rich (including “human capital”) countries will witness disproportionate benefits to the educated and wealthy – thus the argument that trade replaces poorly paid jobs with better paid jobs.  In classic economic theory, however, the disadvantage “factors” lose less than the advantaged factors gains, representing a net economic gain for each country.  In principle, with the political will, money can be re-distributed such that the impact of differential gains is mitigated.  We all also get to buy cheaper stuff at Walmart, which frees up money for other economic activities.

Whatever the empirical findings supporting or contrary to particular economic theories, however, most economists agree that trade is a good thing overall for a country — but with very visible downsides like when Carrier relocates a plant from Indianapolis, as they recently did, and diffuse, and largely invisible, upsides that are hard to isolate from other economic trends.  Trade is as unpopular as it is because people relate to people they see and know losing their jobs more than they appreciate the aggregate savings of spending a dollar less here and there on imported goods or understand whether a new company in their region would exist due to higher profits a company makes from exports and lower costs.

Thus, in general, it’s hard not to support freer trade and some economists have analogized lost jobs to the effect of electric lighting on candle-makers – bad for candle-makers, good for the rest of us.  That being said, the growing income divide in this country is almost certainly, in part, a result of freer global trade – a fact that belies Republican narrative that everyone pretty much gets paid what they’re worth and suggests that we need more, not less, redistribution of income in this country.

Other concerns about the TPP revolve about many of the other provisions of the treaty (the full version has not yet been released to the public).  One of those concerns involves the ability of corporations to sue the US government over unfair trade practices (i.e. potential environmental and labor legislation) at an independent tribunal.  But, as this article points out, such provisions are written into all trade legislation and, since 1993, the US government has been brought before 13 such tribunals – while foreign cases in traditional civil courts number about 700,000.  There is little reason to suspect that the US government will suddenly witness “a flood of lawsuits,” and, if it does, we can simply leave the agreement if we choose.

Another major contention is that the agreement seeks to strengthen and clarify international intellectual property laws.  This is particularly concerning if it makes pharmaceuticals more expensive and inaccessible in poorer countries.  Groups like Doctors without Borders have been vocal about such provisions.  However, as one writer for the Council of Foreign Relations explains, the empirical evidence from past trade deals with similar intellectual properties safeguards seems to suggest that there is little effect on the subsequent price of medicine.  In the end, the issue is an important one – but should there be a surge in accessible drug prices, drug companies have been successfully pressured before to offer alternatives.

Such potentially concerning issues are outweighed, in the end, by other factors that will positively affect lives in the developing countries involved.  More so than any past trade deals, the TPP is said to contain stronger provisions that explicitly protect local environment and fisheries (environmental groups are divided), strengthen labor standards, and promote stronger measures against corruption.  While the estimated economic impact on the US will be quite modest, some countries, like Vietnam, are expected to benefit greatly, potentially lifting millions out of severe poverty.

Some of the most important benefits to the US would be political.  Trade agreements like this are a strong symbolic commitment of the US to the countries involved – and vice-versa.  The US currently has free trade agreements with 20 countries – many of them key allies in volatile regions like Colombia, Jordan, and South Korea.  The political impact of these agreements are sometimes intangible, but nevertheless influential.  Like it or not, we are competing with China for the hearts, minds, allegiances, and pocketbooks of much of Southeast and East Asia.  No country’s leadership would be more gleeful to see the agreement rejected than that of China . . . except maybe a Trump administration.

The politics of trade in the country have become genuinely weird as Republicans compete for blue collar voters while educated, middle and upper class Democrats, many of whom shook their heads at the supposed insanity of the UK choosing to leave the EU, shout their support for Bernie Sanders’ anti-TPP positions.  Hillary Clinton has disavowed a treaty she openly supported, while her new running mate flipped his position as soon as it became clear he would be on the ticket.

There is a precedent to Democrats retreating from free trade stances when it is politically favorable to do so.  The lowest point in the Obama campaign of 2008, for me, occurred when he pandered to his perceived audience by promising to “renegotiate NAFTA.”  All I could do is shake my head and think, “no, you won’t.”  And he didn’t.

When the smoke clears from the campaigns, the Obama administration will still have two months to introduce and pass the TPP during the “lame duck” Congress (it’s unlikely the administration would try sooner).  Freed from the constraints of the current electoral cycle, I think there is a reasonable chance it will pass – a prospect Sanders’ vowed to block in his Monday DNC speech.  If it does, it will benefit most Americans in small ways and hurt some in big ways.  It will help lift many Asians and Latin Americans out of poverty, and improve governance and workplace standards in several countries.  It will likely help the environment in some ways, and harm it in other ways.  As a colleague indicated in his book title, “real world economics” is “complex and messy.”  The weight of evidence suggests, however, that the TPP would be good for the US overall as well as the citizens of the other countries involved.