Trade Liberalization After the U.S. Election

The TPP is dead, as is the assumption that future free-trade agreements can be negotiated by experts alone

The Council of Economic Advisors warned earlier this month that 5 million U.S. jobs will be lost with the collapse of the Trans-Pacific Partnership trade agreement — a probability now confirmed by the White House, which noted that the TPP won’t pass Congress following the election of Donald Trump as president.

The widespread popular opposition to the mega trade deal, which prompted both presidential candidates promising not to sign it in its present form, make clear that trade policy will no longer be set by economic experts alone.

The CEA brief emphasized that forgoing TPP would jeopardize access to markets that currently account for nearly 45% of U.S. exports, and with it anticipated increases in productivity, investment, and GDP growth. The report included a detailed analysis on the impact of differential access to the Japanese market if TPP doesn’t pass but an alternative deal including China but excluding the U.S. (the Regional Comprehensive Economic Partnership, or RECP) were to come to effect. That eventuality, the CEA concluded, would threaten the market share of  the 35 U.S. industries that annually export $5.3 billion goods to Japan.

Traditional arguments for tariff reductions and freer trade invoke economic efficiency and comparative advantage principles. Trade, they maintain, raises domestic welfare to the extent that cheaper imported goods become available, and countries reallocate resources into sectors in which they possess comparative advantage in order to afford the imports. However, with global tariffs substantially lower today than they were a few decades ago, arguments such as those put forward by CEA in defense of the TPP are sounding increasingly mercantilistic: These “exports are good and imports are bad” views stand in stark contradiction with trade liberalization arguments, which promise relatively small gains if traditional manufacturing sectors were opened up further.

To be clear, economists differ in their assessments of TPP’s likely impact on the U.S. economy. While the CEA emphasized the potential risks to U.S. industries and jobs, other models that tried to put a number on the TPP’s impact do not always agree on the direction of the effect on U.S. GDP, let alone its magnitude.  Their conclusions depend on assumptions made in the models. A study published by the Peterson Institute for International Economics sees TPP adding 0.5% to the U.S. economy by 2030, raising U.S. wages with no effect on employment levels. In contrast, scholars at Tufts University predict declines in U.S. GDP with TPP. While proponents also list benefits such as improved labor, environmental, and human rights standards that TPP is supposed to bring, the record of enforcement of such standards once trade deals take effect hasn’t been particularly impressive. Job shifts and labor market dislocations as a result of such deals, however, seem all too real to the public.

In a domestic political environment more focused on income inequality and stagnant middle-class earnings, and where no effective institutions provide the transfers necessary to compensate those left behind, trade agreements are no longer a no-brainer for political candidates. They become even more politically toxic when those challenging such deals point out the lack of transparency in the negotiating process, and the fact that those most likely to be negatively affected are deliberately kept away from the table. As Jared Bernstein put it:

“Who would you rather have writing the rules, us or the Chinese?” isn’t the right question. That is, the answer is surely “us,” but who is “us?”

And as Senator Elizabeth Warren argued, when making the negotiation process more transparent risks raising public opposition, it may well be the deal itself — rather than the opposition — that is the problem.

The rapidly changing and increasingly unpredictable domestic political environment has stripped trade liberalization of its conventional-wisdom status in the minds of elected leaders. Economists are certainly realizing that trade deals are no longer up to them to decide on behalf of a citizenry that has felt the impact of some of those agreements, and have — by the votes they cast — shown little regard for the experts who assure them that trade liberalization is in their best interests.  

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