I believe that in a regime of free trade between two countries both of the countries benefit due to the workings of comparative advantage, just as David Ricardo pointed out two centuries ago. I believe that when one or both of the countries erects barriers to free trade the country with the most barriers is hurt the most as economists demonstrated long ago.
I also agree with what Adam Smith wrote nearly three centuries ago:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
You can write a free trade agreement on the back of a cocktail napkin. It could hardly be simpler. What’s being negotiated in the Trans-Pacific Partnership agreement
The great Seraphic Lords and Cherubim
In close recess and secret conclave sat
A thousand Demy-Gods on golden seats,
Frequent and full. After short silence then
And summons read, the great consult began.
is not free trade but the terms of managed trade. It’s impossible to determine the effects of the agreement, who will benefit or lose, without seeing the agreement but I think we can reasonably speculate that it falls well within Adam Smith’s old warning.
Many of the countries negotiating the agreement, in full recognition of David Ricardo’s observation, have found a clever way of ensuring that the benefits of trade accrue more to their own countries than would otherwise be the case, by buying U. S. government securities rather than using the dollars they obtain in trade to purchase goods made here and services performed here. They are, in effect, exporting goods to the U. S. and importing employment and Treasury notes from the U. S.
The editors of the Wall Street Journal comment on the TPP:
A bipartisan coalition in Congress is moving a trade bill that would help American economic growth and strategic interests. But this is Congress, so naturally a rump protectionist caucus is trying to prevent it. The big surprise is that the ambushers include Ohio Republican and former U.S. Trade Representative Rob Portman.
On Wednesday the Senate Finance Committee plans to begin marking up Trade Promotion Authority (TPA) legislation, also known as fast-track, that is necessary for the Administration to complete trade accords with the European Union and 11 Pacific Rim countries. The bill outlines U.S. negotiating objectives on trade agreements and guarantees an up-or-down vote without amendments. Nearly every President since Franklin Roosevelt has had this power.
The bill had been moving well since Finance Chairman Orrin Hatch and ranking Democrat Ron Wyden agreed last week on compromise language that the Obama Administration also supports. The compromise includes language directing the Administration to ensure that foreign partners “avoid manipulating exchange rates†via “cooperative mechanisms, enforceable rules, reporting, monitoring, transparency, or other means, as appropriate.â€
But, lo, that isn’t good enough for labor unions and other protectionists, who want to use charges of currency manipulation to kill fast track. They’ve recruited the usual suspects—Democrats Debbie Stabenow (Michigan), Sherrod Brown (Ohio) and Bob Casey (Pennsylvania)—to offer an amendment that would make it easier to Congress to use the currency excuse to scuttle trade deals.
Enter Mr. Portman, who should know better. The Ohio Republican promoted trade agreements in the Bush Administration. But he is running for re-election next year, and now we hear he may co-sponsor an amendment that would establish “strong and enforceable rules against exchange rate manipulation, which are subject to the same dispute settlement and remedies as other enforceable obligations.†That means retaliatory tariffs, and if it passes the Senate it could kill the trade bill.
Whatever the editors’ views of organized labor, when negotiating the terms of managed trade it’s only sensible for us to try to secure the best deal we possibly can and, since “currency manipulation” of the sort I’ve described above is a major trade issue for us, it’s not unreasonable to include that in the agreement.
I probably should add that David Ricardo could not possibly have imagined the massive trade barriers we’ve erected in the form of intellectual property laws and professional licensing but that’s a subject for another post.
