Wednesday, June 29, 2016

Free Trade is not a Zero Sum Game for Workers in Developed and Developing Countries

This past February the US entered into the Trans Pacific Partnership Agreement (TPP) with Pacific Rim countries.  The 12 signatory countries to the TPP are: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, USA, and Vietnam. The agreement will take effect only after at least six countries ratify it (comprising not less than 85 percent of GDP of the whole group). They have two years to get this done. See Jones Day blog HERE. Since the USA has 62 percent share of GDP in this group, the fate of this agreement rests largely with us.

Bernie Sanders and Donald Trump say we should walk away from this agreement. They suggest free trade is a zero sum game between American workers and workers in developing countries. Trump has vowed to withdraw the US from the TPP; Sanders presumably would do the same. Under pressure from Sanders, Hillary Clinton is doing her best not to commit on TPP, and last week the Democratic platform Committee managed to waffle on the agreement.

Obama, of course is strongly in favor of the agreement. Here is the simplistic "cherry on top" explanation found at White You can find more information HERE, including the text of the agreement.

Republicans voted to grant Obama fast track authority to complete the negotiations, and according to Fortune, most of them are in favor of ratification, as are dozens of Democrats. The ranking Democrat  on the House Ways and Means committee, however, expresses concerns that, he says, "require greater understanding:"
The trade agreement covers a range of subjects far beyond those negotiated in any previous multilateral negotiation, concerning everything from intellectual property and access to medicines, to financial regulations, food safety measures, basic labor and environmental standards, cross-border data flows, and state-owned enterprises.
House Democrats have identified a number of key issue areas in TPP that require greater understanding before Congress votes, including the environment, worker rights, access to medicines, auto rules of origin, investment, and currency manipulation.
This past April, at Project Syndicate, Harvard professor Dani Rodrik provided some perspective. Free trade agreements are not necessarily a zero sum game between American workers and workers in developing countries, he says. They can be win-win if we structure the agreements right.

What's clear, says Rodrik, is that globalization has not lifted all boats. Many working families have lost jobs on account of low cost imports from China and elsewhere. But our changing economy--including growing inequality--is about more than globalization. In addition to global trade, technological innovation has (and will continue) to reduce the number of jobs in manufacturing. Automation has taken an especially large number of the low-skill (but well compensated) jobs that Trump and Bernie voters may have in mind as having been lost to China, Korea, Indonesia, India, Mexico, etc.

Obama makes the argument that global trade is about more than jobs. It's also about international relations and living in a connected world. A connected world that provides opportunities for economic growth for all is a more peaceful and just world.

Of course, to turn away from trade, to put up trade barriers--as Trump and Sanders are suggesting--would harm the world’s poorest, by diminishing their prospect of escaping poverty through export-led growth. But even if we want to prioritize American workers over workers in Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, says Rodrik, it's not as simple as turning our back on the TPP.

First, suggests Rodrik, without trade agreements like the TPP, developing countries are unconstrained by WTO-type rules. Jobs are going to go there anyway, and developing countries are freer to compete in ways that harm developed countries, their workers, and consumers.
[T]he standard narrative about how trade has benefited developing economies omits a crucial feature of their experience. Countries that managed to leverage globalization, such as China and Vietnam, employed a mixed strategy of export promotion and a variety of policies that violate current trade rules. Subsidies, domestic-content requirements, investment regulations, and, yes, often import barriers were critical to the creation of new, higher-value industries. Countries that rely on free trade alone (Mexico comes immediately to mind) have languished
That is why trade agreements that tighten the rules [like the TPP] are in fact mixed blessings for developing countries. China would not have been able to pursue its phenomenally successful industrialization strategy if the country had been constrained by WTO-type rules during the 1980s and 1990s. With the TPP, Vietnam gets some assurance of continued access to the US market (existing barriers on the US side are already quite low), but in return must submit to restrictions on subsidies, patent rules, and investment regulations. 
Second, says Rodrik, trade barriers, as suggested by Trump and Sanders, won't necessarily shield American workers from competition.
[T]here is nothing in the historical record to suggest that poor countries require very low or zero barriers in the advanced economies in order to benefit greatly from globalization. In fact, the most phenomenal export-oriented growth experiences to date – Japan, South Korea, Taiwan, and China – all occurred when import tariffs in the US and Europe were at moderate levels, and higher than where they are today. 
Trade agreements properly structured, says Rodrik, can mitigate against inequality in developed countries (protect American jobs) and reduce poverty in poor countries.
So, for progressives who worry both about inequality in the rich countries and poverty in the rest of the world, the good news is that it is indeed possible to advance on both fronts. But to do so, we must transform our approach to trade deals in some drastic ways.... 
The time has come to embrace a ... logic ...of “exchange of policy space.” Poor and rich countries alike need to carve out greater space for pursuing their respective objectives. The former need to restructure their economies and promote new industries, and the latter must address domestic concerns over inequality and distributive justice. This requires placing some sand in the wheels of globalization.
Some sand in the wheels of globalization, however, is not the same as walking away from a commitment to free trade. It also suggests that, perhaps, we need to look at complementary domestic measures to supplement what a trade agreement can accomplish.

How do we measure the TPP as creating an effective "exchange of policy space?" How do we evaluate what other measures might need to be taken to supplement TPP to mitigate against its adverse effects on specific groups of workers? We have to examine the agreement provision by provision. To be realistic, we also have to examine what could be obtained in negotiation, and what could not. As the TPP is a long and complicated agreement, this is not easy to do. Predicting its effects over time is not easy to do either. But what's clear is, it's not simply a matter of "Trade agreements are bad and we must walk away from them."

You can follow me on Twitter @RolandNikles.