Saturday , August 19 2017

Summers on Trade

Summary:
Larry Summers has an excellent FT column, "Revoking trade deals will not help American middle classes." (If you can't access FT, these usually show up eventually on Larry's blog)The key point: whatever you think of the impact of trade and globalization, trade deals are not responsible for stagnating "middle class" wages....the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. ... the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. There is a debate to be had about the impact of globalisation on middle class wages and inequality. Increased imports have displaced jobs...My judgment is that these effects are considerably smaller than the impacts of technological progress... But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements. ...

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Larry Summers has an excellent FT column, "Revoking trade deals will not help American middle classes." (If you can't access FT, these usually show up eventually on Larry's blog)

The key point: whatever you think of the impact of trade and globalization, trade deals are not responsible for stagnating "middle class" wages.
...the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. 
... the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. 
There is a debate to be had about the impact of globalisation on middle class wages and inequality. Increased imports have displaced jobs...
My judgment is that these effects are considerably smaller than the impacts of technological progress... 
But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements. 
...The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers. 
Rather the naysayers argue that different demands should be made on other countries during negotiations - on issues including intellectual property, labour standards, dispute resolution or exchange rate manipulation....
In other words, the US was open already in the postwar period. Trade deals ask other countries to take down trade barriers in specific markets, and also to make internal changes, for the US to remain open.
The reason for the rise in US imports is not reduced trade barriers. Rather it is that emerging markets are indeed emerging. They are growing in their economic potential because of successful economic reforms and greater global integration. 
These developments would have occurred with or without US trade pacts, though the agreements have usually been an impetus to reform. Indeed, since the US does very little to reduce trade barriers in our agreements, the impetus to reform is most of what foreign policymakers value in them along with political connection to the US. 
Trade deals are very useful for many countries, including the U.S. When politicians get demands for subsidies, protection, stifling regulation, or lack of needed regulation, they can point to the trade agreement. That's a good argument for multilateral agreements as well -- look at the broad range of countries that has agreed to behave, not just look at our special deal with one country.
The truth too often denied by both sides in this debate is that incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?
Framed this way the solution appears obvious. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.
If it works, protection only enriches some Americans at the expense of foreigners and other Americans.  It is a negative-sum game. If you do not think America's role in the world is to try to send a billion Chinese and Indians back to grinding poverty, to benefit a bit selected American workers and businesses, then you ought not to be a fan.

Larry focuses on the TPP, but the trade agenda is now much larger -- a substantial increase in US trade restrictions, including a return to tariffs, industry - by - industry quantative restrictions, even in violation of trade agreements, and so on.

Larry mentions protectionism in the past, but don't get all nostalgic. That was in the far past, last seen in the universally reviled Smoot-Hawley tariff of the Great Depression. Nobody looks back to that nostalgically as part of "Great" America.

Do read the whole essay.

John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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