Three more facts to add to the CEAs 10 facts about trade

May 4th, 2015 at 6:16 am

As part of the administration’s ongoing full-court press to sell the Trans-Pacific Partnership trade deal, the Council of Economic Advisers released a report on the benefits of trade last week. It’s a good, substantive read as you’d expect from CEA chair Jason Furman and member Maury Obstfeld, one of the nation’s leading trade economists. International trade is a potentially positive force, and the CEA’s “10 facts about trade” showed that it is often associated with greater productivity, higher pay in jobs that produce exports, and lower prices for the goods and services that are more amply supplied in a world with more trade.

That said, trade in the real world is more complicated, and its benefits more varied, than their presentation would suggest. Here are three facts the CEA left out that provide a more balanced view of the impact of trade—and trade agreements—in the US and other economies.

Fact #11: The US has run large trade deficits for over three decades, and to look solely at the benefits from exports without considering the costs of negative net exports (imports>exports) is a partial analysis.

The figure shows the trade deficit as a share of GDP. Though there are always lots of moving parts at work in our macroeconomy, the trade deficit is definitionally a drag on growth, and in recent decades it has led to two problems. First, since our deficit is wholly in manufactured goods, it means that we’ve exported millions of better-than-average jobs in that sector by meeting much of our domestic demand for manufactured goods from foreign sources. Second, it means that to offset the trade deficit, we’ve had to increase other sources of growth, and that’s contributed to asset bubbles with stark consequences.

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We do not need to run balanced trade—and CEA correctly points out that our trade deficit has come down significantly in recent years. But as no less than Ben Bernanke has pointed out, these persistent imbalances are one reason why demand has been anemic in the US economy in recent years.

One confusing point from the CEA report is in regards to “foreign direct investment.” The CEA claims that when “countries make trade deals with China, outsourcing of American jobs increases, while U.S. trade agreements do not change the rate of U.S. investment abroad.” The implication is that U.S. trade agreements do not lead to increased outsourcing, or “offshoring” of U.S. jobs. The problem is that “investment abroad,” as measured by FDI, does not count outsourcing jobs by American firms.

If GE builds a factory abroad, that’s FDI. But if GE outsources parts supply to Mexican firms, or Microsoft routes calls to an Indian call center, that doesn’t show up in FDI. So unless they’ve tweaked the FDI data to include this significant and negative offshoring effect, they’re missing an important way in which globalization has diminished US employment.

To be clear, I’m not saying trade deals increase the type of offshoring I just noted. Sending jobs abroad is a function of globalization and IT; I doubt it correlates much with trade deals either way. But you can’t learn about this phenomenon just by observing investment flows.

Fact #12: The obvious message from the CEA report is that the Trans-Pacific Partnership trade deal will boost all these benefits by increasing our net exports. But that’s far from obvious.

As I’ve written many times, do not conflate trade deals with more net exports, or even more globalization. They are no more nor less than rules of the global road agreed upon by signatories (for the record, we already have trade deals with half of the countries in the TPP). Some of those rules lower tariff barriers and are likely to trigger the types of benefits CEA rightly touts. But other rules go the other way, increasing protective patents or intellectual property rights, for example, in ways most economists would find inconsistent with “free trade.”

It’s impossible to have a fully informed discussion of the TPP in this regard because the deal is negotiated in secret. However, the investment chapter was leaked to Wikileaks, and some of what’s in there is more protectionist than free trade, in ways that potentially hurt segments of our economy as well as developing countries that sign on to the deal.

For example, under the TPP foreign investors could invoke intellectual property right protections that would restrict the ability of U.S. public programs, like Medicare, to save on drug costs by purchasing generics. Such rules can also reduce poor countries’ access to affordable medicines by extending US patents. “Rules of origin” restrictions can also offset the benefits of tariff reductions to textile exporters in developing countries.

As Simon Johnson and I point out in a new piece, it’s critical to learn as much as we can about the impact of these rules—and I’ve seen but one of 29 chapters in this beast of a trade deal!—before we sign the dotted line.

Fact #13: An important determinant of our trade balance is the exchange rate—the value of our currency relative to that of our trading partners. This is not discussed at all in the CEA report and it remains a serious omission from the TPP negotiations.

One of the reasons for fact #11—persistent trade deficits—is that countries subsidize their exports to us and tax ours to them by managing their currency such that its value stays low relative to the dollar. Many economists and policy makers have argued for including enforceable currency disciplines in the TPP but the administration has resisted, arguing (convincingly, in my view) that to do so would derail the deal and (unconvincingly) that such rules cannot be constructed or implemented.

Why is their resistance to go after unfair currency practices such a serious mistake? One, because historically, it is one cause of our trade deficit problem and thus, according to various researchers, the source of millions of jobs lost. Two, because a currency move can quickly reverse the benefits of the tariff reductions that are a main positive feature of the TPP.

CEA chair Furman presented a useful discussion of the issue of trade imbalances and currencies in a speech earlier this year, but the omission of any discussion in this new piece is another way in which it avoids a more nuanced, and I’d argue, more accurate assessment of the benefits…and costs…of international trade.

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5 comments in reply to "Three more facts to add to the CEAs 10 facts about trade"

  1. Smith says:

    The very huge trade imbalance with Japan would not really be affected by TPP. No amount of increased American beef exports or any other product would even remotely offset Japan’s trade surplus in automobiles. Neither would any agreement attack the myriad ways in which Japanese laws block foreign competition, promote exports, while cultural norms reinforce domestic preferences. That’s not to let American business off the hook for neglecting the Japanese market, especially in the years before Japan became such an economic power house, or Detroit’s inability to compete with Japanese fuel efficiency and reliability, notwithstanding exploding airbags.

    The net trade surplus with Canada and Mexico is huge and not all energy related. Figure that one out before considering a new trade pact.

    TPP won’t affect trade with China, although supporters say it’s needed to counter China’s influence. What is needed to counter China’s influence is a healthy American economy that passes new legislation halting and reversing the transfer of jobs and just as importantly, new technology, to China.
    http://www.nytimes.com/2015/04/20/business/ibm-project-in-china-raises-us-concerns.html

    American businesses will continue to eat it’s young by selling out the America worker unless you pass laws to stop them.

    We have a large trade deficit because what American businesses are best at exporting are American jobs.


  2. Wondering says:

    RE: Fact #13,

    I suspect one of the major problems in this entire debate revolves around this fact. The entire debate is framed incorrectly from the outset, because the international finance system is not designed to work properly. The arguments about currency valuations and export subsidies actually can’t be addressed objectively in the full way they should addressed, because it isn’t within the rules of the international finance system to address them.

    What am I talking about? Export subsidies are subjective and so is currency manipulation. Even if we address both of these it won’t balance our trade deficit with any country by any reliable means.

    Is this an argument to leave export subsidies and currency manipulation out of the discussion? No, of course not. It is an argument to the effect that we don’t have anyone competent to write this large a trade agreement in the shadow of Wall Street and the corporate leaders that created the agreement.

    They don’t care about workers at all. I’m horribly disappointed in Obama for advocating this agreement, and it will sour my view of him forever. The progressives will undo the deal in the future, that is a promise.

    The time for this discussion was in the wake of the financial collapse. They propped back up the corrupt system and now they’re adding on even more obstacles to ever addressing the real problems.

    This is a disaster. I really do require that any candidate that is to receive my support and vote cannot stand in favor of this agreement. If they aren’t ready to stop it, they’re not my candidate.


  3. Kevin Rica says:

    Trade is being used as a trojan horse to conceal a very unsavory set of “protections” for foreign investors. Remove the investment chapter and the rest of the TPP might be acceptable.

    Notice how the business community wants the US government to give them extraordinary protections when the go abroad. No laissez-faire for them. They want the active protection of the US government (which they refuse to pay taxes to). But there is no reason that they should get anything better than national treatment. If that’s not good enough, let them stay home.

    But if we are to give foreign investors guarantees that they won’t be adversely affected by the normal functions of government without compensation, then domestic businesses will claim that they shouldn’t be left at a competitive disadvantage. It’s win-win for US businesses. They can’t be adversely affected by foreign law and they can’t be adversely affected by American law. Pretty soon, corporations will be entirely beyond the reach of the law. They have been deregulated, they are never criminally prosecuted, litigation reform assures that they can’t be sued, and now TPP guarantees that they can’t be adversely affected by any act of government.


  4. purple says:

    TPP is another aircraft carrier to paraphrase our defense secretary and has little to do with free trade. It’s a way to play hardball with China, by choking off its ability to do business with other countries in Asia. And it will be profoundly destabilizing in the way all sphere of influence projects are.


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