Once again, pundits (and a CEO) conflate trade and trade agreements

June 6th, 2016 at 9:59 am

I found both Robert Samuelson and Jeffrey Immelt (GE’s CEO) to be largely missing the boat, if not the container ship, this AM in the former’s WaPo oped. The flaws here are a) conflating trade agreements (TAs) with globalization and b) labeling all the candidates protectionist (Immelt: “every candidate is protectionist”).

Let’s start with that last bit. It’s very important to listen carefully to what candidates are actually saying. Hillary Clinton, for example, while opposing the TPP, has emphasized, “Even if the United States never signs another trade agreement, globalization isn’t going away.”

That is not protectionism; it’s realism. It’s not just that those who insist on conflating globalization with TAs miss this forest for the trees. It’s that by failing to understand what’s really gone wrong with both trade and trade policy, their arguments incent greater anger and paradoxically risk sacrificing the benefits of expanded trade both here and abroad.

One important hint that this trade/TA conflation is misguided comes from the International Trade Commission’s recent review of the economic impacts of the TPP. They find that, by 2032, they expect the deal to increase US real GDP by $42.7 billion, or 0.15 percent, and increase employment the equivalent of 128,000 full-time jobs, or 0.07 percent.

As I wrote at the time: “…let’s wrap our head around the magnitude of these predictions. The forecast is that the TPP will boost real GDP 0.15 percent over its baseline value 15 years from now. When you back out the report’s assumed growth rates for real GDP with and without the TPP in place, you find that this is equivalent to one month of real GDP growth. That is, real GDP would hit its TPP level one month later in a world with no TPP.”

Not to mention that estimates of such a tiny magnitude based on a 6,000 page, 12-country trade deal – 15 years out – are surely statistically indistinguishable from no changes at all.

The impacts of actual globalization, on the other hand, are profound, both positive and negative, particularly in the US case wherein we have sustained economically large trade deficits for decades now.

Samuelson argues that the loss of political support for trade isn’t about pocketbook economics. It’s about the “loss of national sovereignty.” Maybe so for the punditry, but for everyday folks, it’s about the well-documented hit to their jobs and real wages. David Autor et al find that surging Chinese imports led to the loss of over 2 million jobs, a full 17 percent of manufacturing job losses over the 1990s and 2000s. Josh Bivens finds the costs of expanded trade with low-wage countries to be around $1,800 apiece for non-college graduates (who still, ftr, represent about two-thirds of the work force). And Bivens’ numbers are in real terms, i.e., accounting for the clear price gains from globalization’s expanded supply chains (Autor et al too find significant, negative, real wage impacts).

Immelt, for his part, argues that unless candidates stop saying nasty things about trade, he’s going to “localize” GE’s production, meaning produce closer to where they sell. That, he warns, will ding American exports.

If he’s truly making portentous business location decisions based on campaign rhetoric, you should probably short the stock. No question, Trump in particular is especially incoherent on trade policy (and everything else), and may well be a protectionist, though that’s not how he’s run his own businesses. Certainly, as Larry Summers writes today, a Trump presidency would potentially generate tremendous economic uncertainty, if not recession.

Even then, one would hope Immelt and other multinational CEOs would make production choices based on the numbers along with the actual political outcomes. If producing closer to where you sell makes economic sense, then GE should do so, which, for the record, has led some American companies back towards onshoring formerly foreign production. The key factors here are not politicians’ rhetoric or even, as the ITC report shows, trade deals: they’re exchange rates, relative unit labor costs (wages relative to productivity), and transportation costs.

In order to resolve the current anger in a way that might preserve and further the benefits of globalization, we must:

–recognize that not everyone who criticizes TAs is a protectionist. Stop the name calling.

–stop pretending the costs of trade have not fallen heavily on large groups of workers and their communities who are not assuaged by cheap, flat panel TVs (President Obama’s e.g. on why the working class should support the TPP in his otherwise excellent economics speech last week).

–begin to seriously contemplate how we reform the TA process such that the new rules of the road are not written by and for corporate interests but by a much broader group of stakeholders on all sides of the border with legitimate concerns about labor, environment, and sovereign rights.

I’m working with colleagues on the latter and will have something ready soon. I truly hope it contributes to a new, improved, and much more realistic conversation.


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8 comments in reply to "Once again, pundits (and a CEO) conflate trade and trade agreements"

  1. Smith says:

    More threatened corporate blackmail. Whatever else happens, do not lower corporate tax rates, close loopholes, do not allow a tax holiday for repatriation of profits, start to tax income earned and parked overseas by American corporations who enjoy the legal protections of being based in the U.S. End the ridiculous “Exempt” status of corporate office workers the lets big business exploit those deemed “professional” or “managerial”, companies learned long ago to designate everyone as such. Pass laws on corporate governance similar to those in Germany that mandate labor participation, and limit layoffs and factory closings, pass laws similar to those in France that mandate increased benefits so that the decline of labor union power to negotiate improved conditions is replaced by government mandates. Raise marginal income rates to confiscatory Eisenhower era levels to reduce wasteful compensation. No one can spend $10 million on themselves anyway. No one needs that much. Restore capital gains rates. End employer sponsorship requirement for immigration which denies all labor rights, hurts all workers, and did not exist 100 years ago. Free college with the increased taxes. These are not radical ideas, they merely restore conditions that existed in the post war boom.
    Sorry 1%, the 99 have spoken. As my father used to say, you want to cry? I’ll give you something to cry about.

  2. Kevin Rica says:

    Globalization is slogan that has become a policy goal without a definition in search of a justification that has been adopted without any democratic process.

    Furthermore, David Ricardo was write EXCLUSIVELY about balanced trade when he developed the term comparative advantage. Those who hurl the accusation of “protectionism” do not understand trade theory themselves or misrepresent it. All the benefits of trade can be obtained with balanced trade under normal circumstances.

    Ricardo never advocated free movement of capital.

  3. Smith says:

    It’s not just trade agreements that need to be trashed, the current concept of trade and globalization as practiced by the U.S. needs to be tossed. The lack of an enlightened policy not tailored to the 1% is why Trump exists. The Democrats are to blame for selling out to corporate America as much as establishment Republicans and the result is Trump on the extreme right and Sanders on the left seeking to restore the New Deal and common sense.
    I’m questioning why trade and globalization policy can’t be changed to favor workers for once.
    Why does China get most favored nation status, for example? Ok, this is great for the Chinese, and the 1% here, but not so great for Americans. All of the corruption that distorts trade and leads to unbalanced trade in China is encouraged by having Americans pose no penalty for unfair trade. Chinese markets are not open. Period. End of story.

  4. Final Thought says:

    “I’m working with colleagues on the latter and will have something ready soon. I truly hope it contributes to a new, improved, and much more realistic conversation.”

    I wish you luck on that goal, but there’s a much greater problem rumbling in the US right now. We’re moving towards a single-party system based upon globalization. I’m quite certain that any economic experts or business interests you attempt to gather into this conversation are not going to overcome that problem. Democracy was already on the ropes, but how we move from essentially bad choices to no choices. What is the proper word for a non-democratic, single-party system? It surely isn’t socialism or communism. And this time it came from left field rather than right field.

    Not gonna work. I see disaster on the 5-year horizon. I’m pulling out of the conversation and moving on with things that matter. There really isn’t a conversation and there won’t be one that any normal voter will care about, including myself.

    • Final Thought says:

      Sorry, Jared. I’ll be watching for your post on this. I’ve been pushing for this for like a decade and the dumbest thing I could do would be to turn it off just as the conversation is getting started.

      I actually have some general ideas here. I think it is critical to separate business interests from citizen/worker interests in the interest of keeping our system fair.

      I do believe the whole rise of Trump is due to unfair trade. Unfair to workers, that is.

      So I will listen and try to insert my thoughts.

      Sorry. I get a little ornery sometimes.

  5. I'm Ready says:

    I’m ready to hear this conversation. I do with somebody would start off with a definition of ‘free trade’ as most economists understand the term. I think most citizens are hugely in favor of ‘fair trade’ rather than ‘free trade’. I think most citizens are hugely in favor of ‘fair immigration’ also.

    The proper framing of this issue, I believe, is probably key to beating Drumpf, and beating him is mandatory!

    I do want people to know that my occasional positive remarks about his policy ideas is not in any way intended to imply that I would vote for him. I’ve said I would before, but it was really intended as a coercion to push the party towards addressing trade. I simply couldn’t live with myself if I voted for Drumpf after listening to his childish, bigoted and cruel antics.

    So let’s get the issue framed right. Can we do that? For the world’s sake?