The TPP Could Bring Storm Clouds

Imagine that humans have colonized Mars by 2045. Would the people of this newfound space colony be more certain of their survival if they had to ship their food from Earth or if they could grow it themselves? That’s the question at the center of trade policy — whether trade is between planets or nations. Here on Earth, we’ve seen the severity of conflict arising from trading Middle Eastern oil, African diamonds, and American corn. Trading these goods is undoubtedly useful for human society, and trade is pivotal to increases in international living standards, but overzealous free trade has been far from problem-free.

Free trade agreements passed by Congress in the past have come with promises of economic prosperity for the American people. So far, these promises have been empty, and the Trans-Pacific Partnership (TPP) is likely to be no different. Vitamins are good, but that doesn’t mean you would want to eat a plate full of them every day. Free trade, like anything, requires moderation.

There are a few core arguments for free trade dating back more than 40 years.

  1. It allows Americans to access cheaper goods so we can have more material belongings.
  2. It increases competitive pressure on U.S. businesses to make them leaner and more efficient.
  3. It benefits high-skill workers in export-oriented industries.

To some extent, these claims are true, but trade agreements don’t come with warning labels.

Gains in business efficiency from free trade often come with sacrifices to salaries & wages, true efficiency, environmental protection, health & safety standards, and innovation. Large trade imbalances often develop with countries that have relatively low wages and standards, leading to downward domestic wage pressure. On top of that, innovation relies on reciprocal intellectual property protections which aren’t typically in place.

China, for example, has an incredible ecosystem for innovation with its world-leading manufacturing sector. If it protects the advantage that gives the gift of 7%+ annual GDP growth, Chinese companies will be forced to innovate rather than outsource. The two decades following WWII in the U.S. offer another example of a booming domestic manufacturing sector that worked wonders for economic growth.

International interdependence exacerbates the global impact of individual economic shocks. Prior to globalization, a banking crisis in the U.S. might have had virtually no impact on Europe, whereas nowadays the aftershocks ripple throughout the world. Sluggish economic growth in one region often has a contagious effect. Finally, the rate of globalization plays a critical role in the smoothness of transitioning to a more interconnected world. Entire industries are uprooting themselves at a breakneck pace, but the world needs time to equilibrate.

Some sources state that free trade only hurts manufacturing workers, who must be sacrificed for the greater good. If that’s true, how does the U.S. remain a leader in engineering when manufacturing is located overseas? What kind of superpower can’t make its own goods? What happens when service jobs are outsourced? Could Stanford students pay less tuition if the school outsourced professors’ duties to foreign instructors connecting by webcam?

If we consistently import more than we export, it’s a simple recipe for failure. Unfortunately, multi-billion dollar annual trade deficits that grow larger every year have become the norm. No matter how much sugarcoating it gets, a decades-long trade deficit is not good for the 99%. Anyone who runs a household knows that if a family spends more money than they make, they’re going into debt or going broke.

The age of massive trade imbalances is over. Now is the time to champion fair trade.

Further Reading

Bloomberg Quicktake sums up the movement quite nicely.

Most economics textbooks were written by free trade proponents, but modern economists are seeing the need for balance. Ian Fletcher, an economist and author, explains that “companies need enough competition to keep them on their toes, but not so much as to knock them off their feet.”