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The case for the TPP

Nov 02,2015 - Last updated at Nov 02,2015

Following the conclusion of the Trans-Pacific Partnership (TPP) by 12 Pacific Rim countries, debates about the costs and benefits of trade liberalisation are intensifying.

The early leaders in the United States’ presidential campaign, both the Republican Donald Trump and the Democrat Hillary Clinton, have expressed opposition to the TPP, though as secretary of state, Clinton called it the “the gold standard of trade deals”.

The right level of trade openness is not a new debate.

Historically, trade systems have ranged from rather open to severely restricted by rules, tariffs, or non-tariff barriers, driven by shifts in the relative strength of liberalising or protectionist economic and political forces.

But even in closed systems, however severe the penalties they impose on trade, black markets usually develop, owing to the “gains from trade” generated by natural economic forces.

The desire to trade arises whenever the domestic benefits of importing a good (whether a finished product or component) exceed the price paid — for example, if the imported good cannot be produced domestically, or only at a higher cost.

As the British economist David Ricardo demonstrated two centuries ago, it can even be better for a country to import goods that it can produce more cheaply, if doing so enables the production of other goods that are still cheaper to produce.

Additional gains from trade include increased variety and the economies of scale implied by producing for global markets.

Of course, there are potential downsides to trade.

Alexander Hamilton, the first US treasury secretary, argued that allowing lower-cost imports would impede the development of domestic “infant” industry, which needed time to scale up enough to reduce costs to a competitive level.

In recent decades, the anti-trade argument has focused largely on “unfair” competition and economic dislocation.

But the reality is that, if two sides willingly trade, it can be assumed that both are better off; otherwise, one of them would refuse to trade.

So, while trade liberalisation may entail some (smaller) losses for certain groups, these can — and should — be addressed through domestic relocation and assistance schemes, such as America’s Trade Adjustment Assistance programme and transition rules for affected industries, firms and workers.

Past experience reinforces the view that, ultimately, voluntary trade is a good thing. Extreme protectionism in the early 1930s, following an era of relatively free international trade, had devastating consequences, ultimately setting the stage for World War II.

As the MIT economist Charles Kindleberger showed, America’s Smoot-Hawley Tariff, in particular, helped turn a deep recession into a global depression.

Even before the war was over, major powers convened in Bretton Woods, New Hampshire, to establish a new international trade and finance regime, including the General Agreement on Tariffs and Trade (GATT).

Through a succession of lengthy and difficult global negotiations — the so-called “GATT rounds” — tariffs were steadily lowered for an increasing variety of goods.

As a result, global trade grew faster than world GDP for most of the post-war period.

Virtually all economists agree that this shift towards freer trade greatly benefited the world’s citizens and enhanced global growth.

The economists Jeffrey Frankel and David Romer estimate that, in general, trade has a sizeable positive effect on growth.

At a time when growth is failing to meet expectations almost everywhere, the TPP thus seems like a good move.

To be sure, because tariffs in the TPP member countries are already low (with some exceptions, such as Canada’s tariffs on dairy products and Japan’s on beef), the net benefit of eliminating them would be modest (except for a few items that are very sensitive to small price changes).

But the TPP is also expected to reduce non-tariff barriers (such as red tape and protection of state enterprises); harmonise policies and procedures; and include dispute-settlement mechanisms.

Though the TPP’s precise provisions have not been made public, political leaders in the member countries predict that the deal, once ratified and implemented, will add hundreds of billions of dollars to their economies and bolster employment. Smaller and developing economies will probably gain the most, relative to size, but everyone will benefit overall.

Other important outcomes are not included in these calculations. The alternative to liberalising trade is not the status quo; it is a consistent move away from openness.

This can occur in a number of ways, such as the erection of non-tariff barriers that favour domestic incumbents at the expense of lower-priced potential imports that would benefit consumers.

Moreover, it is much easier to build mutually beneficial trade relationships than it is to resolve military and geopolitical issues, such as combating Daesh or resolving tensions in the South China Sea.

But strong trade relationships have the potential to encourage cooperation — or, at least, discourage escalation of conflict — in other, more contentious areas.

Still, there are some legitimate concerns about the TPP. Some worry that it could divert trade from non-member countries or undermine the moribund Doha round of multilateral trade negotiations (though 20 years ago, the North American Free Trade Agreement had the opposite effect, kick-starting the Uruguay round).

Given all of this — not to mention renewed attention to national borders, owing to contentious immigration issues, such as the influx of Middle Eastern refugees in Europe — the TPP’s ratification is far from certain, especially in the US. The concentrated interests that oppose the agreement may turn out to be more influential than the diffuse interests of all consumers.

That would be a major loss.

Allowing existing protectionist trade barriers to remain in place — or worsen — would not only deprive citizens in TPP countries of higher incomes, it would also deal a damaging blow to international cooperation.

 

The writer, professor of economics at Stanford University and senior fellow at the Hoover Institution, was chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993. ©Project Syndicate, 2015. www.project-syndicate.org

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