Michael J. Boskin
Michael J. Boskin is Professor of
Economics at Stanford University and Senior Fellow at the Hoover
Institution. He was Chairman of George H. W. Bush’s Council of Economic
Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a
congressional advisory body that highlighted errors in … read more
STANFORD – Following the conclusion of the Trans-Pacific Partnership
by 12 Pacific Rim countries, debates about the costs and benefits of
trade liberalization are intensifying. The early leaders in the United
States’ presidential campaign, both the Republican Donald Trump and the
Democrat Hillary Clinton, have expressed opposition to the TPP, though
as Secretary of State, Clinton called it the “the gold standard of trade
deals.”
The
right level of trade openness is not a new debate. Historically, trade
systems have ranged from rather open to severely restricted by rules,
tariffs, or non-tariff barriers, driven by shifts in the relative
strength of liberalizing or protectionist economic and political forces.
But even in closed systems, however severe the penalties they impose on
trade, black markets usually develop, owing to the “gains from trade”
generated by natural economic forces.
The
desire to trade arises whenever the domestic benefits of importing a
good (whether a finished product or component) exceed the price paid –
for example, if the imported good cannot be produced domestically, or
only at a higher cost. As the British economist David Ricardo
demonstrated two centuries ago, it can even be better for a country to
import goods that it can produce more cheaply, if doing so enables the
production of other goods that are still cheaper to produce. Additional
gains from trade include increased variety and the economies of scale
implied by producing for global markets.
Of
course, there are potential downsides to trade. Alexander Hamilton, the
first US treasury secretary, argued that allowing lower-cost imports
would impede the development of domestic “infant” industry, which needed
time to scale up enough to reduce costs to a competitive level. In
recent decades, the anti-trade argument has focused largely on “unfair”
competition and economic dislocation.
But
the reality is that, if two sides willingly trade, it can be assumed
that both are better off; otherwise, one of them would refuse to trade.
So, while trade liberalization may entail some (smaller) losses for
certain groups, these can – and should – be addressed through domestic
relocation and assistance schemes, such as America’s Trade Adjustment Assistance program, and transition rules for affected industries, firms, and workers.
Past
experience reinforces the view that, ultimately, voluntary trade is a
good thing. Extreme protectionism in the early 1930s, following an era
of relatively free international trade, had devastating consequences,
ultimately setting the stage for World War II. As the MIT economist
Charles Kindleberger showed, America’s Smoot-Hawley Tariff, in particular, helped to turn a deep recession into a global depression.
Even
before the war was over, major powers convened in Bretton Woods, New
Hampshire, to establish a new international trade and finance regime,
including the General Agreement on Tariffs and Trade.
Through a succession of lengthy and difficult global negotiations – the
so-called “GATT rounds” – tariffs were steadily lowered for an
increasing variety of goods. As a result, global trade grew faster than
world GDP for most of the post-war period.
Virtually
all economists agree that this shift toward freer trade greatly
benefited the world’s citizens and enhanced global growth. The
economists Jeffrey Frankel and David Romer estimate that, in general, trade has a sizeable positive effect on growth.
At
a time when growth is failing to meet expectations almost everywhere,
the TPP thus seems like a good move. To be sure, because tariffs in the
TPP member countries are already low (with some exceptions, such as
Canada’s tariffs on dairy products and Japan’s on beef), the net benefit
of eliminating them would be modest (except for a few items that are
very sensitive to small price changes). But the TPP is also expected to
reduce non-tariff barriers (such as red tape and protection of state
enterprises); harmonize policies and procedures; and include
dispute-settlement mechanisms.
Though
the TPP’s precise provisions have not been made public, political
leaders in the member countries predict that the deal, once ratified and
implemented, will add hundreds of billions of dollars to their
economies and bolster employment. Smaller and developing economies will
probably gain the most, relative to size, but everyone will benefit
overall.
Other important outcomes are not included in these calculations. The alternative to liberalizing trade is not the status quo;
it is a consistent move away from openness. This can occur in a number
of ways, such as the erection of non-tariff barriers that favor domestic
incumbents at the expense of lower-priced potential imports that would
benefit consumers.
Moreover,
it is much easier to build mutually beneficial trade relationships than
it is to resolve military and geopolitical issues, such as combating
the Islamic State or resolving tensions in the South China Sea. But
strong trade relationships have the potential to encourage cooperation –
or, at least, discourage escalation of conflict – in other, more
contentious areas.
Still,
there are some legitimate concerns about the TPP. Some worry that it
could divert trade from non-member countries or undermine the moribund
Doha round of multilateral trade negotiations (though 20 years ago, the
North American Free Trade Agreement had the opposite effect,
kick-starting the Uruguay round).
Given
all of this – not to mention renewed attention to national borders,
owing to contentious immigration issues, such as the influx of Middle
Eastern refugees in Europe – the TPP’s ratification is far from certain,
especially in the US. The concentrated interests that oppose the
agreement may turn out to be more influential than the diffuse interests
of all consumers.
That
would be a major loss. Allowing existing protectionist trade barriers
to remain in place – or worsen – would not only deprive citizens in TPP
countries of higher incomes; it would also deal a damaging blow to
international cooperation.
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