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World Trade Policy Remains at Forefront of Political Debate

The 2016 election cycle has included a healthy dose of international trade policy debate, with one trade agreement the issue du jour: the Trans-Pacific Trade Partnership. The Trans-Pacific Trade Partnership, or TTP, is a broad-ranging trade agreement among 12 countries, including Japan, the United States, Canada and Mexico, whose combined economic activity represents 40 percent of the world’s total and about one-third of all international trade. If TPP is ratified by its February 2018 deadline, the agreement could eventually govern all 21 of the Asia-Pacific Economic Cooperation economies, plus that of India. Should that happen, TPP countries would become a free-trade zone representing about half of the world’s economy. As a certain vice president might say, this is a big deal.

Neither major-party presidential nominee claims to be down with TPP, so it’s possible that it won’t be ratified, but funny things happen to election promises. American supporters of the pact point to how TPP would blunt China’s increasing economic influence not only in the region, but worldwide. In addition, they say that TPP would create more business opportunities for Americans, increasing aggregate incomes by about 0.5 percent, and that its labor, environmental and intellectual property standards would level the playing field for U.S. workers and producers.

On the flip side, TPP opponents note that, while U.S. incomes might increase under the pact, there would be little impact on the number of jobs in the States, and TPP would shift income and wealth from the middle and working classes to the already-well-off. They also claim that TPP is just a bigger version of the early 1990s U.S./Canada/Mexico North American Free Trade Agreement (NAFTA), which they view as a big loser for the majority of Americans.

So, to TPP or not to TPP ― that is the immediate trade policy question. When pondering it, keep in mind that, in the past, physical goods were the most important products in a country’s economy. Today, costly information and intellectual property rights are more valuable than durable goods, and they’re instantly exchangeable. Because of this, the world will be pressured more than ever before to become a single marketplace. And trade policy will be in the forefront of the political debates through the next several decades, TPP or not.

History shows …
I confess I’m a bit of a world-trade geek and, for those of you are share this inclination, a brief look at the history of international trade provides a rich context for considering TPP and trade in general.

Archeological evidence shows the trajectory of world trade is inseparable from that of civilization, so it stands to reason that so are the debates about trade policy. The domestication of horses and camels sometime in the millennium before Christ meant that goods could travel across large distances, exposing people to the ideas and technologies of far-away cultures. From the ancient Middle Eastern spice routes to Marco Polo’s Silk Road to the Panama Canal, governments have always had a role in the creation, protection and regulation of land and maritime trade. Trade’s historical ebbs and flows created enormous winners and losers throughout time, changing the broad course of human events, even if economists were not generally around to quantify exactly how.

Think of any significant city in the world today, and most likely you’ll discover it was founded as a trading transfer point, either because it was located at a crossroads or at a locale where the means of transporting products changed, such as a port. Today these forces are still in play. Modern supply-chain routes have created new cities, sometimes at the expense of old ones, which require a multi-skilled resident population to thrive. These cities can attract such workers because of the money that sloshes around in places where a lot of buying and selling happens. Over time, this concentration of diversity and affluence can result in philanthropy, philosophy, science and art – the very best the human condition has to offer.

Florence, Venice and Genoa are great examples of this. Each became an important commercial center, long outliving the Roman Empire, and evolved sophisticated banking systems. By the 15th century, Europe saw the cut-off of its eastern trade routes due to the emergence of the Ottoman Empire, along with the rise of the nation-state and the widespread implementation of imported naval technologies such as the compass. These developments pointed Europe toward the Atlantic instead, leading to the rise of mercantilism as the dominant trade philosophy.

While protectionist pressures have always existed and always will – merchants making the most money from trade seek to make it difficult for others to wreck the gravy train – mercantilism elevated protectionism by baldly seeking to maximize a country’s trade surplus via government control. High import tariffs, subsidized domestic manufacturing, monopolized ports, discouragement of domestic consumption and hoarding of hard currency are all central to this school of thought. Today China is often held up as an example of a modern-day mercantilist state, and TPP is one response by the rest of the world.

While mercantilism might sound like a good idea – what could be wrong with seeking to win every trade? – a few bright people began to question it, most notably Adam Smith, author of 1776’s “The Wealth of Nations.” In that influential work, Smith wrote that two people will only agree to an exchange if each is better off for it, with total social welfare increased as a result, and that explicit government impetus isn’t required. He extended the reasoning to claim that trade between nations no more creates a winner and a loser than does trade between individuals. And impediments to trade, such as import tariffs, actually harm society by stopping the win-win exchanges that would otherwise have been made.

The people who created the American Experiment were quite familiar with the work of Smith and his Enlightenment contemporaries. However, American trade policy from the country’s first 150 years was a lot more protectionist than free trade. Alexander Hamilton, the nation’s first Treasury secretary (and today a Broadway star), called for import tariffs and the subsidization of domestic manufacturing, although he also greatly supported robust trade with England. The presidency of his bitter rival, ardent Anglophobe Thomas Jefferson, included a near-total shutdown on international trade in an attempt to punish England’s transgressions. Along with the War of 1812, the resultant dearth of international commerce cost the young American economy to the tune of perhaps five percent, although it may also have spurred growth in U.S. domestic manufacturing that might not have otherwise occurred.  

The American antebellum period not only included North-South divides on slavery, but also on tariff policy. The industrialized North sought to keep other countries’ manufactured goods from U.S. shores, even at the expense of our exports, and favored high tariffs. The South, which produced as much as 80 percent of the world’s cotton, much of it for export markets, not surprisingly supported low tariffs.

The two major political parties also lined up on opposite sides of the free-trade debate through the Civil War and the Depression. All but three occupants of the White House from 1861 through 1933 were Republicans, who generally were on the side of high tariffs as part of their pro-business policies. They scuttled the League of Nations which, among other things, called for an end to high global tariffs, and pushed the Smoot-Hawley Act of 1930 in an unsuccessful attempt to stimulate the domestic economy via very high import duties. President Hoover, at first opposed to Smoot-Hawley, eventually signed it into law. Franklin Roosevelt campaigned in 1932 to lower tariffs, and as president negotiated for reciprocal trade agreements with other countries until the outbreak of World War II.

That war spelled the end of American isolationism, and the U.S.-led post-war rebuild of the international order included bipartisan pro-trade initiatives such as the Bretton Woods Agreement and the General Agreement on Tariffs and Trade (GATT). These looked like winners, as the U.S. and free-world economies expanded in the 1950s and 1960s, and U.S. trade policy generally remained pro-liberalization rather than protectionist. Liberal trade became a centerpiece of American Cold War ideology, too.

America’s post-war industrial might, along with advances in transportation and telecommunications, increased the importance of trade in the U.S. economy. From 1950 to 1980, exports grew from 4.1 to 9.8 percent of the U.S. gross domestic product (GDP); industrial recovery and development increased American imports from 3.4 to 10.9 percent of its GDP. The benefits and costs of this phenomenon were unevenly distributed in the U.S. economy, though.

The 1970s and 1980s saw economic shocks, causing a rise in imports. In addition, manufacturing began to decline as American consumers, especially those with higher incomes, took advantage of the wider availability of cheaper goods produced elsewhere. But working-class incomes didn’t grow very much from 1970 through 1985, sparking protectionist sentiment in those ranks. The Democratic party, positioning itself as the champion of the common man, generally became the party of protectionism. However, the Reagan administrations undertook several high-profile protectionist measures, while President Clinton generally skewed pro-trade.

Japan’s export might was the trade tale of the 1970s and 1980s, but China is the story of the past quarter-century. China represented only about five percent of global GDP in 1980, but by 2000 it was the world’s second-largest economy (as measured in dollars), and it’s expected to soon overtake the U.S. for the number-one slot. The aftermath of the 2008 global financial collapse put China’s mercantilist trade policies in the American political crosshairs.

It is likely to remain there for some time, TPP or not.

Aug. 26, 2016