Trade isn’t going away. That’s good. FTAs may be going away. That’s also good.

March 14th, 2016 at 8:43 am

In an oped in the NYT today, I riff off of the prediction that we may well see little in the way of “free trade agreements” (FTAs) in the next administration. I argue this is largely a positive, because while I see a rationale for establishing “rules of the road” between trading partners, the contemporary FTA model has broken down. The process has been captured by corrupting forces and it has long lost public trust.

Real estate being in short supply on the Times oped page, I had to significantly whittle the thing down, so let me add some nuance here, where real estate is dirt cheap.

First, let me underscore that my argument is not an attack on expanded trade or globalization. I’m a supporter, and not just because of the expanded supply of goods, but because I want the Bangladeshis et al to have the opportunity to lift their national income through trade with wealthier countries. Furthermore, regardless of how you feel about it, the globalization toothpaste ain’t going back in the tube.

Second, this is not an attack on the TPP, though it’s got problems. I do think the Obama administration worked hard to get some labor rights into the agreement, for example, and to make some other improvements, like taking tobacco out of the TPPs Investor State Dispute Settlement (ISDS) provisions (though the tobacco exclusion is telling: surely there are other industries in which an ISDS mechanism can present a threat to hard-won environmental and/or labor rights in member countries, and not just the US).

What I’m trying to say is that the people have long lost faith in the FTA process for good reason. The benefits are unclear, and not just here but in emerging economies as well. The “I’m-for-FTAs-because-I-care-about-the-world’s-poor” is invariably a position by those who’ve never read an FTA. This view is also inconsistent with one of the FTAs big selling points: we’ll make other countries lower their tariffs. In addition, the benefits of FTAs are often hugely exaggerated by boosters (as are the costs by detractors).

Meanwhile, the impact of persistently large US trade deficits are very clear to those displaced by these deficits. The extent to which people in this debate ignore this point drives me nuts, as if it’s purely exports, as opposed to net exports, that matter. I listened to a whole hour of a Diane Rehm show on the future of trade yesterday, and the economist on the panel never mentioned the fact that we’ve had economically large trade deficits for decades. They’ve been both a drag on growth and a contributor to damaging bubbles. (Read chapter 5 in the Reconnection Agenda.)

There are more determinants of trade than I squeezed into the NYT piece, of course, including relative income trends (countries with faster-growing incomes might import more, depending on real exchange rates) and tariff and non-tariff barriers (NTBs).

Given the latter, don’t we still need FTAs to lower them? One argument that we don’t maintains that tariffs are already low, and that’s true on average. But I recently was discussing this with a politician from a state that exports a lot, and he assured me that tariffs remain relatively high on various agricultural products, which the administration also argued when negotiating the TPP.

But without rules against currency management, which TPP negotiators claimed to be a deal breaker, our competitors can easily offset any tariff reductions we throw at them.

In fact, as candidates Trump, Clinton, and Sanders have claimed, currency management is one of the most important NTBs. But Trump is of course completely unpredictable, and Sanders has largely inveighed against “disastrous trade agreements.” As I stress in the Times piece, that conflates trade and trade agreements.

What we need to hear are strategies that both promote the type of industrial policies I reference regarding advanced manufacturing, and dollar policy.

On the former, I noted the work of Mark Muro of the Brookings Institution. Check out his many pieces on the status of advanced manufacturing and ways to promote its growth.

Hillary Clinton is articulating specific policies to support advanced manufacturing, building up supply chains here in the spirit of the question I ask in the piece (“Can we, for example, build high value-added supply chains such that we don’t just design the new goods the world demands, but instead of outsourcing their production, produce them here?”), tougher standards for “rules of origin,” and going after currency manipulators.

Yes, she’s politically motivated, and trying to keep what happened in Michigan from happening in Ohio. There’s nothing wrong with that, if she sticks to these commitments should she make it to the White House. If so, the next Clinton administration would be a pretty different one on trade than the first Clinton administration.

Of course, the same finger-waggling scolds I mentioned in the piece will cry “picking winners!” here, but we already do so extensively through the tax code, favoring sectors and activities—including, foolishly, outsourcing—with no coherent strategy at all.

If I’m right, FTAs are on the run yet globalization will proceed apace. The FTA community can rend their garments in agony, but it would be better to see if there’s a way to tap populist sentiments from the election and generate some truly progressive movement in this critical space.

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2 comments in reply to "Trade isn’t going away. That’s good. FTAs may be going away. That’s also good."

  1. jo6pac says:

    “I do think the Obama administration worked hard to get some labor rights into the agreement,”

    This satire right;)

  2. Michael N. Alexander says:

    Good article, with overdue observations.

    Your prescriptions about revivifying manufacturing echo comments that engineers and scientists involved in electronics and manufacturing have made for years & years — but what do such people know about economic/worldly matters? Knowledgeable people from the technical community should be at the center of future FTA & related policymaking and negotiations.