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Ed Lotterman: Trade agreements often more about geopolitics than actual trade

It would be wrong to say the acronym of the much-disputed Trans-Pacific Partnership signifies something about tempests and teapots rather than trade and the Pacific. The underlying economic and political issues behind the TPP (or TPTP) are legitimate. But rhetoric is overwhelming the facts for both sides, and a little sober realism would be useful.

Keep things in perspective by understanding the following:

The advantages of trade remain unappreciated by many noneconomists, but they are real.

While uncoerced trade can benefit both participating nations, it does not mean everyone in each nation will benefit. Indeed, theory and history point out the opposite. There are winners from more open trade, and there well can be losers.

Another thing to consider from recent history is that the economic effects of trade deals are either minimal or would have occurred regardless of whether the deal existed; in today’s world, trade pacts are more about politics and solidifying global influence.

In general, trade improves economic efficiency and can make both countries in a relationship better off. Economic theory has argued this for two centuries, and history has largely borne it out.

Ben Franklin famously said that “no nation was ever ruined by trade,” and that remains generally true.

In modern history, the collapse of trade after 1929 made the Great Depression a global event and much worse than it might have been.

The re-establishment of trade after 1945 along the lines now embodied in the World Trade Organization was broadly beneficial.

Work done 75 years ago by economists Paul Samuelson (then still a grad student) and Wolfgang Stolper argued that when trade barriers fall between one nation with abundant capital and scarce labor, like the United States, and another nation with scarce capital and abundant labor, such as China, the returns to labor in the first country, in this case our own, would fall and the benefits to capital would rise. In the poorer country, returns to labor would rise and those to capital would fall.

In real life, that doesn’t always happen, and the degree to which it took place in our own country as a result of specific trade agreements is highly overstated.

But increased international trade clearly is a major factor in the relative decline of manufacturing in our country, in the stagnation of blue-collar wages and in the increasing inequality of income distribution.

Trade is far from the only factor in this last problem, but it is one.

So why not blame infamous trade agreements for these negative results? The answer is that most of what did happen would have happened had the status quo simply remained. Neither the Canadian-U.S. Trade Agreement, which morphed into NAFTA, nor the Uruguay Round of negotiations that transformed the General Agreement on Tariffs and Trade into the World Trade Organization involved significant lowering of U.S. trade barriers.

We didn’t reduce import barriers much because they already were low on our part and had been for decades. Most of the adjustment took place on the other sides. Moreover, there were few, if any, legal barriers to these other countries making the changes they did on a unilateral basis, even if no new deals had been reached.

The United States had low tariffs on imports from Mexico well before NAFTA. The Mexican legislation fostering “maquiladora” foreign-owned factories in that nation had been in place for decades before Mexican President Carlos Salinas approached the George H.W. Bush administration about developing NAFTA. Movement of U.S.-owned manufacturing operations to Mexico was well underway and had been a contentious issue for years.

Yes, the agreement did reduce some tariffs to zero, but usually from existing levels of just a few percent. And yes, the pact signaled businesses that Mexico had firmly changed course and that long-term investments there were safer than they would have been under prior regimes. But if we had changed no treaty and no U.S. laws, the process of U.S. firms moving operations to Mexico would have happened pretty much the same.

Ditto for the WTO. From the point of view of U.S. trade barriers, ratifying the new organization constituted minimal change from the GATT regime that had existed for 45 years.

The key factor here was letting China trade with us under the rules that applied to everyone else.

That decision was made administratively in the final days of the Carter administration as a gesture of support for the political and economic re-structuring initiated by Deng Xiaoping and in continuation of the Nixon-Kissinger strategy of fostering good relations with China as a counterpoise to the USSR. It was entirely a Cold War foreign policy and defense matter.

Its economic effects were thought minimal, because Chinese exports to the United States were minor, and China apparently had little export potential.

The Reagan administration and every other subsequent one continued that policy, even as Chinese trade with our country burgeoned. Given its “normal trade status,” that enormous growth would have taken place regardless of what the Reagan, Bush 41 and Clinton administrations did in regard to GATT and the WTO.

The domination of economic objectives by foreign and defense policy ones is near-universal. Establishing freer trade with either Canada or Mexico was not an objective of any U.S. administration nor was there strong lobbying by any U.S. interest group. In both cases, we responded to an overture from a conservative head-of-state, first Canadian Prime Minister Brian Mulroney and then Salinas, for a trade agreement that would help anchor their own domestic economic agendas.

In both cases, Republican U.S. administrations responded positively to a request from a geographic neighbor and ally. The Reagan administration negotiated and secured ratification of CUSTA. George H.W. Bush negotiated and signed NAFTA, and Bill Clinton got its ratification, just as he did for the WTO agreement negotiated by his predecessors. In all cases, as with China’s trade status, foreign policy objectives were paramount, even though there was much pious rhetoric about advantages to U.S. business or agriculture.

Now, as push comes to shove with the TPP, the same situation is emerging. The economic advantages of the agreement are slight. Many of us economists agree with Sens. Elizabeth Warren and Rand Paul on the problematic nature of the Investor-State Dispute Settlement provisions.

As in other trade negotiations over the past 20 years, U.S. efforts to give Wall Street investment firms a greater role in other countries reflects the power of cash in U.S. politics much more than any economist’s findings of benefit. It would be no great economic blow to our nation if this particular pact would wither on the vine, although its death might disadvantage specific groups like farmers.

The relevant question is how participation in the TPP, or its rejection by us after years of formal and informal negotiating, would affect the geopolitics of Asia and our power in the region relative to China. That nation is not a party to the agreement, and yet its growing economic, political and military strength overshadows other factors.

The evolving geopolitics of that region are one of the greatest challenges our country faces, but one on which economists have no special advantage of insight.

Economist and writer Edward Lotterman writes in St. Paul, Minn. Write him at boise@edlotterman.com.

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