A Trade Deal Liberals Can Live With
One of the bigger economic issues under debate right now is the Trans-Pacific Partnership (TPP), the multilateral trade deal that would include most countries in the Asia-Pacific region as well as the U.S. Many people both here and abroad are suspicious of trade deals, while economists usually support them. This time around, however, the dynamic is a little bit different -- the TPP is getting some pushback from left-leaning economists such as Paul Krugman and the Center for Economic and Policy Research’s Dean Baker.
Krugman’s point is that since U.S. trade is already pretty liberalized -- tariffs and other trade barriers are low -- the effect of further liberalization will be small. With only small gains to be had, he argues, passing the TPP isn’t the optimal use of President Barack Obama’s political capital. Baker’s argument is that since U.S. interest rates are still close to zero, trade deals will hurt the U.S. economy via Keynesian effects -- since aggregate demand is scarce, he says, trade is a zero-sum game.
I’m usually more of a free-trade skeptic than the average economist. The standard argument for free trade -- the Ricardian theory of comparative advantage that everyone learns in Econ 101 -- is just too simplistic. But in this case, I’m strongly on the pro-TPP side. There are just too many good arguments in favor.
University of California-Berkeley economist Brad DeLong does some quick back-of-the-envelope calculations, and estimates that the TPP would increase the world’s wealth by a total of $3 trillion. Though that’s not a big deal in the grand scheme of things, it’s one of the best reforms that’s feasible in the current polarized political situation. DeLong dismisses Baker’s idea that the TPP would lead to demand leaking out of the U.S., pointing out that interest rates won't stay at or near zero much longer.
Economists David Autor, David Dorn and Gordon Hanson are among the authors of a famous study arguing that trade with China caused U.S. employment to take a hit. But they have written strongly in support of the TPP. They argue that manufacturing jobs are not coming back, but that the TPP’s liberalization of trade in services and knowledge industries -- areas in which the U.S. is strong -- will provide a big boost to U.S. workers. They write:
Anti-competitive asymmetries in the world trade system disproportionately harm U.S. firms at present. Enactment of the TPP would establish protections against these asymmetries for U.S. companies...
A responsible trade agenda should instead seek to provide the supporting policy structure – protections for intellectual property and freedom from confiscatory regulations – that allows U.S. companies to excel in the sectors where they are strong.
There is definitely evidence to support these scholars’ prediction. Economists Jenny Lin of Oregon State and William Lincoln of Johns Hopkins have found that although only 9 percent of U.S. manufacturing companies hold patents, 89 percent of exporters do. They find that U.S. manufacturing exporters are extremely sensitive to patent protection -- the more intellectual property is protected internationally, the more these companies can export.
Given the U.S.’s big trade deficit in manufactured goods, this should be an important reason to support the TPP. Services are important, of course, but manufacturing is where the vast majority of productivity gains are made. By having stronger international intellectual property laws, we will allow export-oriented U.S. manufacturers to thrive, and these manufacturers will invest in research and development that will raise productivity.
Another reason to support the TPP involves not economics, but geopolitics. Tyler Cowen of George Mason University notes that the treaty gives the U.S. a chance to cement its Asia-Pacific alliances at a time when China’s rising power is destabilizing the region:
[E]ither this deal happens on American terms, or an alternative deal arises on Chinese terms without our participation. For rather significant foreign policy reasons we prefer the former, and the pragmatic side of President Obama understands this pretty well.
Political science is a murky field, but there is evidence to back up Cowen’s point. Political scientist Paul Poast of Rutgers University has found that trade deals are very important for solidifying alliances, especially with “buffer states” that face a threat from a powerful neighbor. From the abstract of his paper:
I find that buffer states in alliances with trade provisions experience fewer opportunistic violations of the alliance terms, avoid occupation and invasion at a higher rate, and experience fewer third-party attacks than buffer states in other alliance arrangements.
The TPP includes many buffer states in the Asia-Pacific region, including South Korea, Japan, Singapore, Australia, Malaysia, Taiwan and Vietnam. Those are all either allies or quasi-allies of the U.S., and all have reason to worry about Chinese encroachment in the South China Sea and elsewhere. Free trade was a crucial part of U.S. foreign policy in the Cold War, and it remains an important way to cement our relationships with friendly countries.
So there are many good reasons to support the TPP. To the standard argument that trade boosts economic efficiency, we should add the boost that intellectual property protection will give our manufacturers, and the geopolitical advantages of the deal. The case against the treaty is just too weak to overcome all of these advantages.
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