That free trade is advantageous to both sides is the rarest of political propositions—provable, indeed mathematically.
—Charles Krauthammer, 20151
Campaigning in Michigan in March 2016, Senator Bernie Sanders blamed the “disappearance of the American middle class” on international trade deals such as the 1994 North American Free Trade Agreement (NAFTA), which facilitated the exchange of goods and services between the United States, Canada, and Mexico. “Corporate America made the decision that they didn’t want to pay workers in this country a living wage,” he argued. “What they wanted to do was shut down plants in America, go to Mexico, go to China…and then bring their products back into America.” Sanders had an unlikely ally. “Michigan’s been stripped,” said the Republican presidential hopeful Donald Trump, describing the impact of trade. “You look at those empty factories all over the place.” Trump called NAFTA “a disaster for our country,” and described the trade deficit with China (the fact that China exports more goods and services to the United States than vice versa) as “the greatest theft in the history of the world.”2 The people of Michigan, once the home of the auto industry, agreed with the two political outsiders. More than 50 percent of voters in each party said that international trade costs the United States jobs, and Sanders and Trump won the state’s primary elections.3
Michiganders may be particularly opposed to foreign trade, given the role of Japanese competition in the decline of the local auto industry, but the state is not an outlier. In a recent Bloomberg national poll, respondents favored more restrictions on imports (“to protect American jobs”) by 65 percent to 22 percent (the remainder were unsure); 44 percent thought that NAFTA was bad for the U.S. economy, compared to 29 percent who thought it was beneficial.4 The idea that imports force Americans out of work has intuitive appeal. Since the late 1970s, as foreign trade has grown, the United States has lost more than 7 million of the manufacturing jobs that enabled working families to join the middle class in the decades after World War II. In 2015, we imported more than $2.7 trillion worth of goods and services ranging from Chinese iPhones to German cars to Indian customer support. (At the same time, our exports totaled about $2.2 trillion, leaving a trade deficit of more than $500 billion.)5 Many unemployed or underemployed Americans would be happy to make those products or take those phone calls. In today’s climate of economic insecurity, the fear of getting laid off because of outsourcing or foreign competition has led many people to question the merits of international trade.
ORANGES AND BANANAS
In the sunny world of Economics 101, however, trade is always good. On one level, this follows directly from the basic model of supply and demand. If a company can make a snow shovel for $10 and a consumer would get $20 of value from that shovel, it doesn’t matter whether or not they happen to be in the same country; trade will make them both better off, increasing social welfare—if “society” is defined to include the entire world.
Seen from a national perspective, there might appear to be a problem. If an American person buys a snow shovel from an American company, then both the consumer surplus and the producer surplus remain within the country. But suppose a Chinese manufacturer can make shovels more cheaply. If an American buys a Chinese snow shovel, the producer surplus—and the jobs making the shovel—are lost across the Pacific. The United States as a whole appears to be worse off. Now imagine that China can supply everything more cheaply than the United States, perhaps because its workers make less money. This might make you think that Americans would end up buying everything from Chinese companies, leaving no jobs in the United States.
Not to worry, however. The answer lies in the theory of comparative advantage, developed by the economist David Ricardo in the early nineteenth century. In Economics 101, this concept is usually illustrated with an idyllic example such as the following: Imagine two people living on neighboring tropical islands who can each plant orange and banana trees. If Mickey plants only orange trees, he can produce one hundred oranges per month; if he plants only banana trees, he can produce two hundred bananas per month. He can also plant some combination of the two, as shown in Figure 8.1; for example, if he covers half of the island with each fruit tree, he will grow fifty oranges and one hundred bananas per month. Minnie faces the same choices, except her island’s soil is less fertile, particularly for orange trees. If she covers her island with orange trees, she can harvest only twenty-five oranges per month; if she plants only banana trees, she can harvest one hundred bananas per month; or she can plant some combination, also shown in Figure 8.1.
As Mickey is better at cultivating both oranges and bananas, you might think there is no reason for him to trade with Minnie. But here’s the trick: Mickey is only twice as good at growing bananas as growing oranges (two hundred versus one hundred), while Minnie is four times as efficient (one hundred versus twenty-five). To produce two more bananas, Mickey has to produce one less orange; for him, the price of two bananas is one orange. If Minnie wants one more orange, she has to give up four bananas; for her, the price of an orange is four bananas. This makes possible a mutually beneficial deal: Mickey can trade one orange to Minnie for three bananas. Instead of producing one less orange and producing two bananas in its place, he trades the orange to Minnie for three bananas. Instead of growing four fewer bananas and growing one orange in their place, she trades three bananas to Mickey for an orange (and keeps the fourth banana). Both of them are better off than they would be on their own.
This works because Mickey has a comparative advantage over Minnie in oranges—he has to give up fewer bananas than she does to grow one orange—while she has a comparative advantage in bananas. Mickey has two ways to get bananas: he can grow them himself, or he can grow oranges and trade them for bananas. Because his comparative advantage is in oranges, he gets more bananas by choosing the latter. Substitute computers for oranges and clothing for bananas (Ricardo used English cloth and Portuguese wine), and you can see why international trade always makes both countries better off.
The principle of comparative advantage explains why, in the world of Economics 101, protectionism—limiting imports in order to shield domestic companies and workers from competition—is unequivocally bad. Restrictions on trade, such as tariffs (taxes on imports) or regulations that disadvantage foreign companies, prevent mutually beneficial cross-border transactions from occurring. Eliminating import barriers is even good for a country’s residents—the people behind the barriers—regardless of other countries’ trade policies, because the increase in consumer surplus due to lower prices outweighs the decrease in producer surplus caused by foreign competition.
The idea that the United States should open its borders to products from overseas, regardless of whether other countries reciprocate, seems counterintuitive. That might appear to harm American workers, who face competition from imports but are barred from exporting goods abroad. But international trade has to be seen as a complete system. When American consumers buy goods from overseas, we pay for them with U.S. dollars. The only thing foreign companies can do with those dollars is either buy American products (our exports) or invest in American assets, both of which are generally good for our economy, at least in theory.*1 The idea that we could buy everything from overseas, and that no jobs would be left for us to do, is simply self-contradictory. The lesson of comparative advantage is so compelling that most students leave Economics 101 with the conviction that free trade is indisputably good for everyone.
Milton Friedman was a lifelong advocate for free trade. In 1970, he dismissed as “utter nonsense” the idea that the United States should impose restrictions on Japanese imports because Japan did not open its markets to American companies. “Exports are the cost of trade, imports the return from trade, not the other way around,” he wrote. Unlike on many other issues, however, conventional economic wisdom was already on Friedman’s side. John Maynard Keynes also generally favored free trade, although he thought protectionist policies might have tactical usefulness, depending on the terms of the international financial system (a caveat with which Friedman agreed).6 Indeed, compared with the other Economics 101 lessons discussed in this book, the idea that trade is generally good for both sides—not just in theory, but in the real world as well—is remarkably popular among professional economists. According to the commentator Matt Yglesias, “There is almost nothing in the whole wide world that economists like better than recounting David Ricardo’s basic case for free trade.” A panel of economists polled by the Chicago Booth School of Business was virtually unanimous in agreeing that the benefits of trade, in the form of efficiency and consumer choice, were “much larger” than the costs of any potential job losses and that U.S. citizens were made better off by NAFTA.7 The economist and international trade specialist Paul Krugman, who sits at the opposite end of the political spectrum from Friedman on most policy issues, agrees with him on the merits of free trade. In Capitalism and Freedom, Friedman argued, “Our tariffs hurt us as well as other countries. We would be benefited by dispensing with our tariffs even if other countries did not.” Four decades later, Krugman wrote, “A country serves its own interests by pursuing free trade regardless of what other countries may do.”8
International trade is also one area in which policy makers seem to have listened to economists. After World War II, the United States generally sought to lower trade barriers—in part to ensure export markets for American companies, in part to accelerate our allies’ redevelopment by giving them access to American customers, and in part to establish a network of peaceful co-dependence among countries outside the communist bloc. More recently, the United States has pushed for bilateral and multilateral trade agreements with many of our trading partners. The long-standing consensus between economists and politicians that free trade is good for America is one reason that many commentators are horrified by Donald Trump’s call for tariffs of 35 percent or 45 percent on imports from Mexico or China.9
WINNERS AND LOSERS
Despite this apparent unanimity among economists and the political elite, large segments of the public persist in questioning the wisdom of free trade. There are certainly bad reasons why someone might oppose free trade, such as xenophobia. But there are legitimate economic reasons as well—reasons that are often mentioned in Economics 101 but then overlooked or forgotten.
The key issue is that, within each country, foreign trade can often produce winners and losers. In our tropical island example, trade with Minnie causes Mickey to produce fewer bananas and more oranges. If Mickey is a country, and if oranges and bananas are two sectors of its economy, then the orange industry gains jobs at the expense of the banana industry. Ideally, people who used to work for banana companies find employment growing and selling oranges. In practice, the people losing jobs to foreign competition may differ from those gaining work because of increased exports; but things still balance out on the whole, because job increases in the orange sector should equal decreases in the banana sector.10 As Friedman wrote in 1981, “Some jobs are certainly being lost to imports—jobs in industries especially affected. But other jobs are being created by imports—jobs in industries producing the exports that are purchased by the dollars foreigners earn from the goods we import.”11 Meanwhile, everyone benefits from cheaper bananas (thanks to imports from Minnie).
The same story reads differently from the perspective of the losers, however. When a rich country like the United States increases trade with a poor country, some industries will lose jobs because of competition from cheaper foreign labor. This can mean concentrated layoffs in specific sectors, as has happened to American manufacturing. Although those job losses may be balanced by gains in other parts of the economy, longtime assembly-line workers at automotive parts manufacturers in the Midwest cannot easily get hired by New Jersey pharmaceutical companies or Silicon Valley software firms. For them and their families, the direct impact of trade is long-term unemployment and financial hardship. The other losers from trade are workers in industries facing heightened overseas competition. Cheap imports, as well as the threat that American companies will send jobs overseas, reduce their ability to negotiate for higher pay, suppressing wages.
In a developed economy like the United States, then, foreign trade adversely affects low-wage workers who can be replaced by even cheaper workers in developing countries. Advanced economies’ comparative advantage is not in labor-intensive sectors, but in those industries with the highest productivity levels and the most skilled employees—software companies, not banana farms. Companies in these industries enjoy higher revenues and profits because they can now sell to customers all around the globe, enriching their shareholders and employees. Within a rich country, in short, the primary winners are people who are already well-off, and therefore one result of increased trade with poor countries is greater inequality within the U.S. workforce.
In addition to people in high-productivity industries, the other group of winners from trade is American consumers, who gain access to a wider range of products and services, often with lower prices or higher quality. But their gains are relatively small, at least compared with the harm suffered by laid-off workers. People tend to notice when their jobs are eliminated or threatened by foreign competition; they tend not to notice that prices are lower than they would be without that same competition. If you were laid off from a General Motors factory, the fact that you can now buy a cheap, reliable Toyota is not particularly comforting. So it is understandable that free trade is less popular among ordinary people than it is among economists.
In theory, because trade makes the total pie bigger for everyone, both globally and within any one country, there should be a way to redistribute some of the gains from the winners (consumers and workers in export industries) to the losers (workers in industries exposed to foreign competition). In practice, however, this would require an increase in taxes to pay additional benefits to the long-term unemployed—something that is virtually inconceivable in the contemporary American political landscape. As a result, the likely effect of international trade is to force concentrated groups of families into poverty and suppress working-class wages in certain industries while boosting high-end incomes and making everyone else slightly better off—ultimately increasing overall inequality.
THE REAL IMPACT OF TRADE
In summary, Economics 101 teaches us two things about international trade. First, for any participating country, seen as a whole, the benefits of trade outweigh its costs; this simple principle has been absorbed into the worldview of economism. Second, and often forgotten, those costs and benefits are distributed unequally within each country, making some people better off and others worse off. But how well do these lessons apply to the real world?
Looking at the historical record, it’s far from clear that open borders are better than trade barriers. In the nineteenth century, the United States became the world’s leading economy not by pursuing free trade but by limiting imports. Alexander Hamilton, the first Treasury secretary, imposed high tariffs, which were maintained throughout the nineteenth century with the support of industrial interests. Those tariffs shielded U.S. companies from much more efficient British competitors until they were able to compete effectively. What the economists Stephen Cohen and Brad DeLong call the “Hamiltonian system” then inspired later-industrializing countries, including Germany in the late nineteenth century and Japan, South Korea, and China in the twentieth century. Each of the latter East Asian countries became an export powerhouse in part by protecting its infant manufacturing industries and carefully managing interactions with the outside world—not by allowing foreign companies free access to its markets.12
These history lessons may not apply to the contemporary United States, however, which is long beyond the initial stage of industrialization and has a large population of relatively affluent consumers eager to buy goods and services from around the world. In recent decades, increases in international trade have yielded mixed results for Americans—perhaps improving overall social welfare but certainly creating winners and losers. While the ongoing debate over NAFTA remains fierce, free trade with Mexico and Canada has had a relatively small impact on the U.S. economy as a whole. The Congressional Budget Office estimated that by 2001 NAFTA had increased exports to Mexico by 11 percent and imports from Mexico by 8 percent. Even so, the U.S. economy is so large that these additional imports only amounted to 0.1 percent of gross domestic product (GDP), implying that the trade deal’s impact on jobs was small. Estimates by the Economic Policy Institute (generally anti-NAFTA) and the Peterson Institute for International Economics (generally pro-NAFTA) put net U.S. employment losses due to rising trade with Mexico in the range of fifteen thousand to forty thousand jobs per year—much less than one-tenth of 1 percent of the total labor market. Similarly, NAFTA’s overall impact on the U.S. economy, including lower prices for consumers, has been small. Looking at multiple industry sectors, the economists Lorenzo Caliendo and Fernando Parro found that the United States experienced an overall welfare gain from NAFTA of just 0.08 percent.13
Although the impact of NAFTA on the United States appears to be relatively benign in aggregate,*2 the same is not true on the local level. As discussed above, many people “displaced” from jobs by foreign competition have difficulty finding work in other industries because they lack the necessary skills or cannot easily relocate. The economists Shushanik Hakobyan and John McLaren studied the impact of NAFTA on local labor markets and found that blue-collar wages in regions that were particularly vulnerable to Mexican competition grew significantly more slowly than in other areas. In summary, “the effect of NAFTA on most workers and on the average worker is likely modest, but for an important minority of workers the effects are very negative.”15 In a real-world labor market, trade agreements do create clear losers.
When it comes to international commerce, the major event of the past two decades has been not a free trade agreement with Mexico but the rise of China as a major exporter. In the United States, critics of free trade like to blame Chinese competitors for the decline in domestic manufacturing and the loss of well-paying, skilled jobs. There may be something to these claims. One group of economists separately measured the impact of Chinese trade on different industries and on local labor markets; they estimated that Chinese imports cost the American economy between 2 million and 2.4 million jobs from 1999 to 2011. Industries exposed to Chinese competition suffered job losses, as expected, but other industries did not see corresponding increases in employment.16 This increase in imports from China did not result from an explicit free trade agreement. In 2000, however, the United States did grant permanent normal trade relations status to China, guaranteeing the maintenance of low tariffs; the economists Justin Pierce and Peter Schott have identified this policy change as the trigger for a rapid decline in U.S. manufacturing employment.17
That decline was concentrated in particular local labor markets. The economists David Autor, David Dorn, and Gordon Hanson analyzed the impact of increased imports across different geographic areas within the United States. Not surprisingly, the regions most exposed to foreign competition experienced the largest decline in manufacturing jobs. However, those regions saw no corresponding employment gains in other industries; instead, lost manufacturing jobs translated directly into higher unemployment or a decline in the workforce. The impact was greatest on workers who did not go to college—in general, those who were least well-off to begin with.18 Another recent paper by the same team found that foreign trade reduced wages both in regions particularly exposed to import competition and in highly vulnerable industries whose workers were not easily able to shift to other sectors. The authors conclude,
If one had to project the impact of China’s momentous economic reform for the U.S. labor market with nothing to go on other than a standard undergraduate international economics textbook, one would predict large movements of workers between U.S. tradable industries,…limited reallocation of jobs from tradables [products that can easily be traded between countries] to non-tradables, and no net impacts on U.S. aggregate employment.
This optimistic forecast, however, has not been borne out in practice: “The reality of adjustment to the China trade shock has been far different. Offsetting employment gains either in export-oriented tradables or in non-tradables have, for the most part, failed to materialize.”19
In summary, recent U.S. experience differs from the simple model of comparative advantage in two ways. First, the overall reallocation of capital and labor from products that are now being imported to products that can be exported—from bananas to oranges, for the island of Mickey—is not seamless and may never be complete. Otherwise, increased trade with China could not have resulted in the net loss of more than two million American jobs. On one level, this is not a surprise, because no one really believes that companies and workers can change what they are doing overnight. But the fact that the U.S. economy has adjusted to Chinese competition so slowly and imperfectly calls into question the simple case for free trade.
Second, individual workers and their families may never successfully adapt to the dislocation caused by lower-cost imports, especially if they live in areas dominated by industries vulnerable to foreign competition—such as the old industrial centers of Michigan and Ohio. This fact does not directly contradict the Economics 101 model, which recognizes that opening borders to overseas companies can create winners and losers. It demonstrates, however, that even if there are overall gains from trade in some aggregate sense—that is, comparing the benefits we all gain in the form of cheaper clothes, toys, and electronics with the harm suffered by laid-off workers—those gains come at the cost of increased inequality. Lower-skilled, less-educated people are most likely to lose their jobs or see their wages stagnate. As a practical matter, the United States has failed to help them share in the prosperity that is theoretically generated by increased international commerce. Meanwhile, corporations that can successfully export goods and services have become larger and more profitable, yielding even bigger paydays for their executives. According to the former Treasury secretary Lawrence Summers, “The view now is that trade and globalisation have increased inequality in the U.S. by allowing more earning opportunities for those at the top and exposing ordinary workers to more competition.”20 In this setting, free trade policies present a trade-off between modestly greater overall welfare (largely in the form of cheaper consumer goods) and worse outcomes for the working class, with the net result of increased inequality.
BAIT AND SWITCH
For a careful student of introductory economics, then, the case for free trade is nuanced. Lower tariffs should increase overall welfare in the long run, but the benefits for a developed country like the United States are relatively modest. This is especially true today, when import barriers are already low; as Krugman says, “Comparative advantage…suggests that once trade is already fairly open, the gains from opening it further are small.”21 At the same time, the dislocations inevitably caused by increased trade will hurt some low-wage workers and increase inequality. But when it comes to actual policy questions, many commentators and politicians on both sides of the aisle reflexively repeat the headline—free trade is good, full stop—while forgetting the details.
In the United States, the major trade issue in recent years has been the Trans-Pacific Partnership (TPP), an agreement signed in February 2016 by representatives of twelve Pacific Rim countries—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.*3 (This agreement is important not only because of its scope but also because it is expected to serve as a precedent for a future Transatlantic Trade and Investment Partnership between the United States and the European Union.) The TPP was one of President Barack Obama’s top legislative priorities during his second term in office. The deal was politically controversial ever since preliminary negotiations began in 2008; in 2015, Obama barely persuaded Congress to give him “fast track” authority—meaning that once the agreement was negotiated, it would get an expedited up or down vote with no amendments. Although the TPP is often described as a free trade deal, and one of its sections would lower tariffs on many goods, in reality it is a complex treaty covering everything from domestic regulations and labor and environmental standards to patents and dispute resolution processes.
Nevertheless, the primary argument by TPP supporters has been “Go read David Ricardo!” Jason Furman, chair of the Obama administration’s Council of Economic Advisers, opened his case for the TPP with the theory of comparative advantage. The columnist Charles Krauthammer began this way: “That free trade is advantageous to both sides is the rarest of political propositions—provable, indeed mathematically. David Ricardo did so in 1817. The Law of Comparative Advantage has held up nicely for 198 years.” The financial writer Roger Lowenstein similarly wrote, “Two hundred years ago, David Ricardo explained why foreign trade was beneficial; today’s trade-deal opponents ignore him at their peril.” He continued, “Hopefully, at some point before the TPP comes up for debate again, members of Congress will dedicate 10 minutes to learning about the man who, along with Adam Smith and Robert Malthus, virtually invented modern economics.” The economist Gregory Mankiw reduced the TPP to a simple textbook question, asking, “If Congress were to take an exam in Economics 101, would it pass?…Among economists,” he confidently asserted, “the issue is a no-brainer.”22 The common theme is one we’ve seen over and over again: people who oppose trade agreements just don’t understand economics.
Simple invocations of David Ricardo, however, have little to do with the actual contents of the TPP. Because the United States already has trade agreements covering most goods with many TPP countries, the textbook comparative advantage benefits of eliminating the remaining barriers are relatively small. A Peterson Institute study estimated that the TPP would have the long-term effect of increasing average incomes in the United States by 0.5 percent in 2030 and would have no impact on total employment. However, a paper published by Tufts University using different modeling assumptions—in particular, that import competition could produce unemployment and that lower wages could reduce overall demand—concluded that the U.S. economy would shrink by 0.5 percent over ten years, with a net loss of 400,000 jobs.23 While these numbers are not trivial, given the amount of uncertainty inherent in this type of forecast, they indicate that tariff reductions in the TPP will most likely have a relatively small impact on long-term economic growth. (As the economist Dean Baker put it, under the Peterson Institute’s pro-TPP estimate, “we will be as rich on January 1, 2030 as we would otherwise be on March 15, 2030.”24)
Most of the action in the TPP is elsewhere. One component of the agreement requires participating countries to expand protection of intellectual property rights, such as patents and copyrights, to match existing U.S. law. Intellectual property rights, by definition, have nothing to do with free trade; instead, they restrict the ability of companies to produce or distribute certain types of goods and services. Stronger patents and copyrights benefit companies in sectors such as pharmaceuticals and the media, many of which are headquartered in the United States, by giving them longer monopolies on products like drugs and movies. Whether they are good for the world as a whole, or even for Americans, is less clear. For one thing, lengthening pharmaceutical patents would make it harder for drug manufacturers to introduce generic competitors, thus increasing prices and reducing availability in many countries.25 More generally, if free trade is good, as assumed by TPP advocates, then strong intellectual property rights are actually bad, because they slow down the diffusion of technology from rich countries to imitators in developing countries who could make the same products at lower costs.26
Perhaps the most controversial aspect of the TPP goes by the obscure name of investor-state dispute settlement (ISDS). Under ISDS, an “investor,” typically a corporation, can sue another country’s government if it is harmed by that country’s internal laws or regulations. The case will be heard not in domestic courts but in special-purpose tribunals whose decisions are not subject to appeal. Grounds for a suit include state policies that discriminate against a foreign company or that infringe on its ability to earn profits in the future.
ISDS was initially justified as a way to protect foreign investors from arbitrary or unfair treatment by domestic governments and courts. In practice, however, it has become a way for corporations to contest new regulations, particularly those protecting the environment and public health, that cut into their business. Canada has paid almost $200 million in fines and settlements resulting from ISDS cases under NAFTA. In one example, the Canadian government banned MMT, a potentially harmful gasoline additive; the U.S.-based Ethyl Corporation contested the ban and forced Canada not only to pay a $13 million settlement but also to repeal the prohibition on MMT. When Australia required that cigarettes be sold in plain packages with warning labels, Philip Morris sued under ISDS. Although the tribunal finally ruled against the company in 2015, the case cost the Australian government $50 million in legal costs and deterred Canada from pursuing similar legislation; a similar suit against Uruguay is still under way. In one of the largest ISDS cases to date, the Swedish energy company Vattenfall sued Germany for $6 billion in profits lost when the government, following the Fukushima nuclear disaster in 2011, ordered the closure of two nuclear plants. Closer to home, after President Obama rejected the expansion of the Keystone Pipeline, TransCanada responded by suing the United States under ISDS for more than $15 billion.27
For these reasons, many people, including prominent economists such as Jeffrey Sachs and Joseph Stiglitz, are deeply suspicious of ISDS. Noting that companies can contest even government actions “taken for a legitimate and important public purpose,” Sachs and co-authors Lise Johnson and Lisa Sachs argue that ISDS “distorts the rules of the legal system and makes the economic interests of some foreign corporations much more powerful than the interests of domestic constituents.”28 There may be contexts in which ISDS makes sense; some developing countries, for example, may become more attractive to foreign investors by committing to resolve disputes under an international regime rather than in their domestic courts. The point, however, is that ISDS has nothing to do with free trade in goods and services. Instead, it is a mechanism for strengthening the rights of private businesses relative to more or less democratically elected governments.
The TPP is about trade, in the broad sense: economic interactions between households and businesses located in different parts of the world. But most of the agreement is not devoted to the elimination of protectionist import barriers. Instead, it regulates the relationships between workers, consumers, companies, and national governments. And the rules that it establishes were disproportionately influenced by business interests. Although negotiations were conducted in secret, the Obama administration sought advice from twenty-eight advisory committees—and 85 percent of the people on those committees were industry representatives.29 It should be no surprise that the TPP’s provisions appear to favor certain concentrated business interests, such as the pharmaceutical and entertainment industries in the case of intellectual property and the energy sector in the case of ISDS. “Whether the rules of the road favor the Lamborghinis or the Fords depends on who’s writing them,” writes the economist Jared Bernstein. “And on that point,” he continues, “it’s not the ‘good U.S. guys’ versus the ‘bad Chinese guys’; instead, it is representatives of TPP-member multinational corporations versus workers and consumers.”30 From the outside, it certainly seems that large corporations are dictating the rules that will govern the global economy.
In short, whether the rules are good or bad, the TPP “is not about Ricardo,” to quote the economists Simon Johnson and Andrei Levchenko. Economics 101 teaches that eliminating import tariffs is good, but offers no guidance on most of the complex provisions of the TPP. Yet the agreement’s supporters like nothing better than to recite the lesson of comparative advantage. “There’s a kind of bait and switch,” writes Krugman, “in which people invoke Ricardo and the gains from trade to say ‘free trade good,’ then tell scare stories about how protectionism would destroy millions of jobs and cause a global depression, which doesn’t make much sense.”31 Economism plays an unusually powerful role in discussions of international trade agreements. Not only do naive or disingenuous supporters of “free trade” forget the details that accompany the Economics 101 model—that overall welfare gains may be small, while displaced workers bear the brunt of the costs. In addition, they use that simple model, first developed using English cloth and Portuguese wine, to justify trade agreements that have nothing to do with comparative advantage and the benefits of specialization.
This does not mean that we should suddenly reverse decades of international trade policies and impose prohibitive tariffs on imports from lower-wage countries, as Donald Trump has proposed. The United States is no longer a developing country with infant industries to protect, nor should we be trying to shift our economy toward low-paying jobs. But the seductive mantra that free trade is always good drowns out the rest of the Economics 101 lesson: the benefits and costs of trade are unequally distributed, and in our case that means that the rich get richer and some of the poor get poorer. Instead of taking on faith that free trade produces the best of all possible worlds, we need to recognize that the more open our economy is to foreign competition, the more important it is to help displaced workers make the transition to new jobs. Because that transition is often difficult if not impossible, we need a more comprehensive safety net providing at least a minimum of protection from the hardships of long-term unemployment.
The rhetoric of comparative advantage also surreptitiously elides the distinction between trade and trade agreements. Much of the propaganda for the TPP obscures the fact that the actual deal does not just eliminate traditional import barriers, but also constrains the ability of national governments to pursue policies preferred by their citizens. Large corporations had a disproportionate influence on the drafting of the agreement, which effectively gave them a back-door mechanism to secure special favors that they could not obtain through ordinary domestic political processes. This is ultimately a question of political power—the power to dictate the rules of the economic game. There’s nothing inherently wrong with that; in a democracy, we expect companies and industry associations to pursue their private interests. But the pretense that international agreements are just about the Economics 101 model of comparative advantage hides the crucial question—who wins and who loses—behind the veil of economism.
*1 For example, foreign purchases of U.S. financial assets lower interest rates for households and businesses; foreign direct investment, such as building factories, provides capital to U.S. business and employs American workers. In the real world, too much foreign investment can cause other complications.
*2 There is another debate over whether NAFTA has been good for Mexico. Caliendo and Parro estimate a Mexican welfare gain of 1.31 percent (sixteen times as large as for the United States). Since 1994, however, Mexico’s growth in per capita GDP has been among the lowest in Latin America.14
*3 After signature, the TPP still required ratification by the governments of the participating countries.