What we’re arguing about when we’re arguing about trade deals.

May 18th, 2015 at 10:20 am


One problem in this whole debate over the Trans-Pacific Partnership is that we lose the forest for the trees. We end up arguing about trade deals—and worse, a deal almost no one has read (because it’s negotiated in secret)—as opposed to the broader underlying issues of the economic impact of trade from the perspective of what matters most: growth, jobs, wages, incomes, and inequality.

I draw that distinction because what follows is not about politics. Many players in this debate form their views based on perceived labor or corporate interests, or the fact that their constituents are convinced, often legitimately, that prior trade deals have hurt them. That’s not what I’m thinking about here. What follows is instead is my brief take on the economic questions invoked by the debate. For a deeper dive into much of what’s here, see Chapter 5 in the Reconnection Agenda (I’m not saying it’s any good, but I will say that I spent a lot of time trying to make some of the less intuitive parts of this as clear as possible.)

There’s trade and then there’s trade deficits: Economists and the punditry typically pull for more trade because its benefits are well known: greater supplies of goods (and thus lower prices), the opportunities for trading partners to produce and sell more of the goods and services in which they specialize, greater interdependence between countries, the opportunity for developing countries to spur their development.

Of course there are costs to those displaced by trade, but in the textbook model, the benefits are more widely felt than the costs.

That’s not, however, the full story in the US by a longshot. The key distinction is, as the figure above shows, that we’ve run large—in terms of their impact on the generally benign scenario just described—trade deficits since the mid-1970s.

So why is that a problem?

Trade and full employment: First, since the trade deficit is a drag on GDP growth, it means that unless we make up that drag through some other component of growth, demand will be too weak to get to full employment. Note that as the figure shows, even while the trade deficit as a share of GDP has improved in recent years, it has still averaged -4 percent since 2000. That’s a steep barrier to full employment.

Notably, both Ben Bernanke and Larry Summers have made this point, adding these negative trade balances as a factor in their “secular stagnation” (persistently weak demand) discussions.

And yet, while the trade deficit/GDP was -4 percent in 2000, so was the unemployment rate 4 percent that year, because the other components of GDP—consumption, investment, government spending—more than made up the difference. The problem is, these global imbalances have contributed to the bubbles that have doomed the last few business cycles. In other words, the question is not whether we can get to full employment with large trade deficits—we know that we can. But can we do so without damaging bubbles? Perhaps so, but that’s not occurred in recent decades.

Second, as Josh Bivens points out, it’s not the case, as is often said, that the winners from trade are many and the losers are few. He estimates that that our persistent trade deficits have cost the 70 percent of the workforce that’s non-college educated about $1,800 per year in lost earnings. To be clear, that’s not just the impact of the directly displaced. It’s also the impact on those with whom they compete, post-displacement, in lower-wage service sectors.

The point is that large, persistent trade deficits make it harder to get to full employment without lastingly damaging bubbles. Moreover, even at full employment, these deficits affect the composition of jobs in ways that hurt the majority of the workforce.

There’s trade and then there’s trade deals: What does all of this have to do with the TPP, NAFTA, etc.? As you’ve hopefully gleaned from the above, the main question is whether and how such deals affect trade flows. The answer, as far as I can tell, is not in the ways you’d think from listening to the rhetoric.

Boosters of US trade deals say we’re running trade surpluses with the countries with whom we’ve got trade deals; Public Citizen says that’s wrong (one good point they make is that you have to exclude “re-exports”—foreign-made goods that pass through US ports on their way to other countries—from the tally of US exports). It’s certainly true that our trade deficits with Mexico and South Korea increased post those bi-lateral trade deals, but there are so many different factors that determine these net balances that it’s beyond my understanding to make the call either way.

So, with the critical exception of the currency point below, I wouldn’t base support or opposition for a trade deal on the belief that it’s going to raise or lower the trade deficit. I’d recognize that these agreements include both “free-trade” measures, like tariff reductions, and “protectionist” measures, like patent extensions. Though I’ll have to see it to believe it, I trust our trade reps and the President when they say labor protections are stronger in the TPP than in the NAFTA. But the deal also includes dispute settlement mechanisms that can supersede sovereign courts.

You will find none of that stuff in the textbooks on the benefits of trade and globalization. So do not conflate trade deals with the simple “trade good…more trade better” argument that dominates.

Currency matters: Finally, I’ve written extensively about the importance of currency rules in or around these trade deals. “In” is better, as it’s more effective to have a neutral tribunal making the call and imposing corrective measures than an individual country acting unilaterally. But if, as the administration plausibly maintains, they can’t get a currency deal in the bill, then there’s got to be something outside the bill.

Remember, the key factor in all of this is the trade deficit, and the punchline of the currency/exchange rate piece of it is that a country that lowers its tariffs in a trade deal can almost instantaneously reverse that impact by devaluing their currency by the same amount.

Interestingly, the Senate has two options in play to fight back: the Bennet amendment and the Schumer amendment. The Schumer bill’s been around for a while but I’m still learning about the Bennet one, and I’ll post on them once I’ve done more homework. My initial take is that Bennet is better in terms of diagnosing currency-induced export subsidies, but has weak teeth relative to Schumer’s approach of countervailing duties on subsidized exports.


End of the day, as I say in Chapter 5, I’m all for more trade and globalization, and not just for us but for developing economies as well. And it wouldn’t matter if I wasn’t. That toothpaste ain’t goin’ back in the tube. But a useful debate must be informed by the real benefits and costs I’ve tried to summarize above.

There are those who disagree, strongly, with many of these assertions. The President’s economic council, for example, has quite different views on trade deficits (see box 7-3 here)—and while I disagree, I’ve got great respect for those guys/gals. The admin and the US trade rep also believe currency management is no longer much of a threat and not something we could block without implicating our Fed, views I also think are wrong.

But those are good debates to have, and I welcome them.

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17 comments in reply to "What we’re arguing about when we’re arguing about trade deals."

  1. dwb says:

    Well, most of this seems like more of an argument for a higher inflation target. The US has been pursuing disinflation (with associated higher average unemployment) since late 1970s. If countries like China want to import inflation, that is their business.

  2. rjs says:

    the popular movement against these trade agreements is about the Investor-State Dispute Settlement (ISDS) provisions, as revealed by Wikileaks, which give international investors sovereignty equivalent to national governments…under ISDS, a multinational corporation can get compensation from a signatory government if one of that government’s laws interferes with the corporation’s profits…it sets up a supra-national court under the World Trade Organization’s Dispute Settlement Body, whereby foreign firms can sue governments and obtain taxpayer compensation for whatever “expected future profits” that the government’s law encumbered…the adjudication of these disputes would not be by elected officials of any of the signatory governments, but by a tribunal of international trade attorneys representing the multinational corporations….in effect, this trade agreement, and the similar trade agreement that we are negotiating with Europe, gives these world trade tribunals trump power over federal, state or local financial and environmental regulations, patent law, labor laws and worker safety rules, public health, anti-smoking legislation and drug laws, or any law that could be construed as interfering with corporate profits…

  3. Wondering says:

    RE: Box 7-3,

    You are more tactful than I. Box 7-3 is what objective people would call rationalization rather than reasoning. They take a position and rationalize it through relative movements without magnitudes. This is the same way Reagan justified lowering taxes to raise revenues.

    Voodoo trade, we might call it.

    Actually, I believe import tariffs should always be a last resort of punishment for misbehavior. It shouldn’t be a part of the system.

    Something all of these kinds of arguments use is an us vs. them mentality — that this is some sort of competition that cannot be regulated, as if the market system itself is based upon the market dynamics of trade regulations.

    I don’t expect you to make any headway when discussing things with people like this. They have only one goal in mind: maximize the profits of the businesses we invest in.

    That’s it. The rest of the talk about labor standards is just political rhetoric on their part. It is deceptive, non-democratic and unacceptable behavior for national leaders. There’s no shame.

    And the worst possible argument they could make, the most hideous, dishonest, disingenuous BS is to claim that they care about foreign workers. It is an absolute lie. They don’t even care about domestic workers.

  4. Wondering says:

    “but there are so many different factors that determine these net balances that it’s beyond my understanding to make the call either way.”

    With the right system in place, you don’t need to understand the different factors. Over time those factors will become more obvious in the data, but the mathematical relationships will be too complex to model effectively without a feedback control loop. You can tune the system over time to prevent over and undershooting, to account for shifts in economic conditions, etc…

    The most important thing, however, is to start with a few feedback mechanisms based upon a fair system. Enact those feedback mechanisms until balance (world-wide) is achieved for all nations on average.

    This is where you start. The investment and financial markets complicate matters, but they can be handled the same way. My pie in the sky wish would be for any imbalance investment to be monetary investment without collateral. If the loans default, then the investors need to be more careful next time. There’s more to it that this, but this is the gist of a fair, balanced, efficient system that can avoid economic and military warfare much more effectively than the system we have now.

  5. Wondering says:

    RE: “not something we could block without implicating our Fed, views I also think are wrong.”

    I think they’re thinking not about direct fed easing but the result of fed easing, directed through the large banks, and redirected with a little help from the elimination of Glass-Steagall into foreign markets.

    There’s an indirect link from the fed into foreign markets, and the banks really, really like this. This is not part of a reasonable system.

  6. Wondering says:

    I was in a hurry before, but I realized that there’s a second page to box 7-3. I cringed when I began reading paragraph 4, and I stopped reading. Why? It is nonsense. No need to go further.

    The biggest problem that occurs in this kind of discussion is the mixing of financial markets with the trade of goods and services. Our international system was designed around finance, and that is why it doesn’t work well. There was good reason to set it up this way after the wars, because we wanted the capitalist model to overcome capitalism, and in order to do that, financial power was used as a means of war and force. That doesn’t work anymore.

    Again, it is absolute nonsense. If anyone wants to start a serious discussion on this topic alone, it might be worth fleshing out, but I doubt anyone in Washington is listening. If they are, then this discussion needs to be taken up in an open, serious way.

    Business leaders have no reason to address it because it doesn’t affect THEM.

  7. Wondering says:

    Sometimes I have to go off and speculate as to the political undertones of things that just seem to nonsensical to be put forth by people knowledgable in economics, so it has to be political, doesn’t it?

    Is Obama asking for trade promotion authority for 6 years because he plans to put something forward later, or perhaps Clinton will put something forth later that couldn’t pass a filibuster? If that is it, and if this TPP is just the smokescreen to fool the Republicans into giving up this authority to a current and future democratic president, then perhaps he’s on to something. But it is pretty difficult to sit here watching democracy fail over and over, and watching presidents create narratives for the Washington knuckleheads, assuming the citizens aren’t paying attention.

    Unfortunately, a few of us citizens are paying attention, and this show is really, really disturbing.

    I really don’t know which is the case. Is this TPP an honest attempt at a final trade arrangement, or rather it is a show to get Republicans to allow TPA. My gut says the more simple answer is more correct, that the creators of this agreement just don’t care about Americans outside of the elite circles they live in.

  8. Kevin Rica says:

    “There’s trade and then there’s trade deficits”

    Exactly! Ricardo was always writing of BALANCED trade. Exports paid for imports.

    There is no corresponding defense of the free movement of capital which is the mechanism necessary to finance trade imbalances.

    As for “Globalization,” that is a word in search of a definition that has become a policy goal in search of a rationale. If the best defense one can devise of globalization is that it’s inevitable, then you are lumping its desirability with death and taxes (people do try to avoid both and if your tax attorney and lobbyist is good enough, taxes may not be inevitable).

  9. Smith says:

    Trade deficits are 1/4 cars, 1/4 oil, and 1/2 China.
    Auto companies ship jobs to Mexico for very marginal benefits because automation means the labor component is a relatively small part of the sticker price, hence Germany with high labor costs has a thriving auto industry (though under some pressure too).
    Japan has technical (right side driver) and cultural barriers to imports, but auto companies largely ignore the market, partly because the US is so big.
    Also who is buying American for it’s engineering and reliability (Germans?, Japanese?)
    Oil is not solved with fracking, look at Germany as an example of commitment to renewables energy and without nuclear.
    Finally China, again just why are American companies so free to ship production and jobs there? Especially considering the lack of labor rights? Taft Hartley currently prevents any organized union activity to counter the trampling of labor rights overseas. But citizens can take action. When pressure builds from US workers to boycott divest and sanction goods made in China by exploited workers, and to boycott oil, trade balances will improve. Workers of the world unite. The labor movement fails when it isn’t global and corporations are, serious thinkers knew that in the 19th century.

    • Smith says:

      Ok, now we get the previous blog title about the umbrella.

      Following the link, is an excerpt with the closing lines from the article.


      “And while China is not a party to the trade negotiations, supporters of the measure say it will send a message to Beijing not to use the excuse of a slowing Chinese economy to resume heavy-handed currency intervention in the future.

      “I agree with those assessments,” Jared Bernstein, who served from 2009 to 2011 as chief economic adviser to Vice President Joseph R. Biden Jr., said of the Obama administration’s assurances that Asian nations have scaled back their currency interventions in recent years. “But I take no comfort from them for the same reason that I don’t destroy my umbrella on a sunny day.”

  10. Wondering says:


    You are the only prominent person involved in this conversation that doesn’t claim to know what he doesn’t know. That is your greatest asset.

    I’m constantly astounded at what economists are willing to claim as truth, all for lack of data or model.

    I really believe that the field of economics has done much more damage than good to American workers. Why? Because of the mathematics involved, it provides very concrete, microeconomic data that explains how some types of markets operate. But that concrete data also tends to create an overconfidence in the data. It creates an overconfidence in the mental models that economists use.

    They tend to become sure of things that are simply not provable. And they become so sure at times that they use this false knowledge to trump the common sense of the people affected by their recommendations.

    It is absolutely shocking to me how this has been handled by our leaders. Shocking.

    What is worse than anything is that our leaders called everything fixed, when in reality, absolutely nothing, and I mean nothing, has been fixed. Nothing.

    And the president has the gaul to undermine the motives of the most vocal supporter of the things that matter to most Americans. The only person talking for what she knows to be the democratic goals.

    This is a tragedy.

    • Wondering says:

      “The only person talking for what she knows to be the democratic goals.”

      Oops, Bernie is also taking up the cause. I don’t think a person can get elected by calling them self a Socialist, but I could be wrong. We need capitalism, and I think calling oneself a socialist exaggerates the cause.

  11. Wondering says:

    It shouldn’t be necessary for a person’s blood to boil to get their point across, but sometimes it seem the only way to get people to reconsider. How many people at this level have had somebody blow up in their face because they were wrong? Even if they were wrong, nobody would do it because it would harm their career. That’s the pitfall of being on the side of the truth — you can’t just take the money and run without compromising your belief system.

  12. Tom Cantlon says:

    I feel certain you’ll comment on Feldstein’s WSJ piece, so my apologies for posting off this topic in anticipation of that topic:
    While Mr. Feldstein has a point that quality is hard to quantify:
    1. There are things that are quantifiable. Is employment over a working life as reliable, or include as much growth as in the past? Is home ownership as accessible? While having a smartphone is a nice increase in quality of life it doesn’t compensate for a working life punctuated by layoffs, followed by accepting lesser jobs.
    2. Regardless what a dollar can buy, there is undeniably some inflation erosion of the ability to buy groceries or pay utilities. If all the GDP growth goes to the top, that’s not a healthy economy.
    3. In case he missed it, we’ve tried trickle-down for many decades now. It hasn’t helped. It has hurt.
    4. While capital accumulation is a general good, only in balance. More gas makes the car go but only in balance with air. Major corp.s and wealthy investors are sitting on vast amounts of capital. We don’t have a shortage of that, we have a shortage of demand. The engine is already sputtering on too rich of a mixture and his solution is to make it richer.

    • Jared Bernstein says:

      Thnx–I saw it but will take a closer look. You’ve given me a strong start!

  13. Robert Salzberg says:

    Dear Dr. Jared Bernstein,

    Your post, like every other post on trade that I’ve read lately, misses both the forest and the trees in terms of the environmental costs of trade deals.

    I’ve read a bit about how the proposed tribunal can undermine sovereignty by fining countries for new environmental laws but nothing about the actual environmental cost of trade.

    I read lots about tax havens but little about how trade has made pollution havens around the world.

    Have you read anything about how the TPP is instituting a carbon tax to pay for the increased pollution caused by increased trade? Or how countries that destroy rain forests to grow grains for ethanol export will pay an environmental destruction tax?

    Here’s a relevant passage on the economic impact of NAFTA:

    “The results have been costly to Mexico’s prospects for development. The INEGI studies estimate the financial costs of this environmental degradation at 10 percent of GDP from 1988 to 1999, an average of US$36 billion of damage each year (US$47 billion for 1999). The destruction overwhelms the value of economic growth, which has been just 2.5 percent annually, or US$14 billion per year.”


    Here’s a link to a Sierra Club sponsored report last year on the environmental costs of NAFTA.


    The unpaid for externalities of pollution and envirnomental degredation are likely to swamp the economic benefits of the TPP. Worse still, the TPP creates a tribunal that would pay polluters for ‘takings’ like new federal, state, and local environmental laws that increase the cost of doing business by having polluters pay for their pollution.