Trade Myths and Trans-Pacific Partnership (TPP) Strategy

By Edelman and Flinchbaugh

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ME. Professor, it is often professional practice to not respond to reader commentary unless the reply author includes a name. But given the role of trade in the economy and the emerging social media standards, is it not more important to set the record straight? Do you agree?

BF. As a professional, my advice has always been to focus on the economic arguments and not get side-tracked into denigrating people, professions, institutions or interest groups. People are entitled to their own opinions, but not their own set of facts. Those who have misperceptions, have the same rights to be educated as everyone else. And it is useful to set the record straight so others don't adopt the myths and misconceptions.

ME. Good. Since the 1930 Smoot Hawley Tariff Act was signed 86 years ago, few if any first hand advisors are still around. However, we do know that President Hoover signed the Smoot-Hawley Act after receiving a petition signed by 1,028 American economists advising him against signing the measure. The roll out of Smoot-Hawley occurred during a period of tight money policy, falling GDP, and deflation. Historical analysts suggest that while Smoot-Hawley advanced prices on imports a nominal amount from 40% to 48%, by 1932, the real tariff impacts grew from a 40% to 59% in real prices after factoring in deflation that was simultaneously occurring. Smoot-Hawley soured trade relationships, other trading nations retaliated, and that compounded the downward economic spiral that ultimately resulted in 25 percent unemployment, thousands of bank closings, and hundreds of thousands in farm and business failures. 

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BF. A tariff by definition is a tax on the global trading system. Those who argue for maintaining higher tariffs are by definition arguing for maintaining higher taxes on the global trading system. When we talk tax policy, some interests typically attempt to shift the tax burden from themselves to others. It is the same with trade tariffs. Certainly there are times and circumstances when open trade does not make sense for reasons of national security or health and safety. Creating a level playing field in labor and environmental standards is an important part of the trade negotiations. However the biggest issue in the current debate has to do with global alignment of the major geopolitical forces in forming coalitions of trading nations. The TPP coalition favors open markets and competition in trade. Alternatively, a coalition could emerge where centrally-planned economies with state-owned enterprises have greater clout in drafting the rules for trade in the region.

ME. Tariffs historically were imposed on our exports under mercantilist policies practiced once upon a time by the United Kingdom and that led to the Declaration of Independence. One would hope that reasons for the Boston Tea Party would be remembered. I agree, it would be useful to ask in the current context whether a global trading system dominated by China and Russia would generate a better result for U.S. interests than a regional trading coalition favoring open trade on a level playing field? One can imagine that China and Russia are more likely to push approaches that manipulate terms of trade toward their internal benefit--similar to the mercantilist approach in history.     

BF. From a national security perspective, passage of the TPP is perhaps the single most important thing that Congress and the President can do in the lame duck session or in 2017. Look at the nations that negotiated the TPP. In addition to the United States, the TTP negotiations included Canada, Mexico, Japan, Australia, New Zealand, Peru, Chile, Brunei, Malaysia, Vietnam, and Singapore.  The bottom line is if TPP does not pass, China will likely be more dominant in the Pacific Rim trade. For those who want to see better trade deals with China, it would be useful to compare the potential outcomes. What if the U.S. approved TPP? A coalition of a dozen or more nations favoring open trade would be negotiating and enforcing regional trade rules as China considers whether or not to join the coalition. Alternatively if the United States does not approve TPP, we take on the role of negotiating with China by ourselves while we spend more time renegotiating TPP with nations who already thought they had a deal. 

ME. The problem with isolationism is that, “What you don't know, can hurt you.” TPP reduces over 18,000 taxes that other countries place on made-in-America exports. For example, current tariffs in some the TPP countries raise prices by up to 59% for U.S. autos and up to 40% for U.S. poultry. TPP would open up these markets and help labor and businesses to compete on a level playing field in these markets. In general, the U.S. already has a relatively open market for many of the TPP partners. The TPP focus is on providing leadership in reducing the tariffs currently imposed by others and setting the rules for other Pacific nations that might consider joining TPP in the future-like China.

BF. With TPP, a coalition of nations works together to promote more open trade outcomes in the region and impose sanctions on the behavior of others that violate the rules of trade in the agreement.  If we go it alone and turn down TPP, we undercut an alliance that includes some of our best trading partners and we are less likely to achieve successful outcomes. In addition, some of our Pacific Rim trading partners may likely begin to cut deals with China to protect their own longer-term strategic regional interests.

ME. In the days following WWII, the U.S. accounted for half of the global economy and most of world's military might. That is when the U.S. led creation of the global institutions and policy framework for developing trade liberalization and economic development. The U.S. had a “big stick” and we used it in shaping the United Nations, International Monetary Fund, World Bank and General Agreement on Tariffs and Trade. We led the efforts to set the course toward global interdependence to reduce odds for future world wars. Today the U.S. economy accounts for less than 20 percent of the global economy. China's economy is about the same size as the U.S. economy. The playground of international relationships has changed. It is useful to have coalition clout signed up before engaging those who would potentially be detractors from the open trade and level playing field rules. The question is whether or not a “Go it alone” trade strategy policy makes any sense in modern times?

Mark Edelman is a professor of Economics at Iowa State University and Barry Flinchbaugh is an emeritus professor of Agricultural Economics at Kansas State University.

 

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