Trade: Is Obama Right This Time?

I was hoping to sit this one out. I mean the multiple discords about the new Pacific trade treaty proposed by President Obama. I feel I need to lend a hand because there are good reasons to be confused. Plus, I taught international business for twenty-five years. My voice just might be useful this time. Here is my brief but adequate road map to the problem. I am deliberately staying away from nouns and initials because they do more harm than good.

Pres. Obama has an early draft of an international trade agreement with a large number of Pacific countries. Such agreements eliminate or lower trade barriers. So, first, they make it easier for economic actors from one country to buy a and sell things to economic actors from another country. That’s because all trade barriers are hidden taxes on consumers. They all raise prices above where they should be. Get rid of them, have more real income.

Second, the lowering or the elimination of trade barriers ultimately result in something almost magical: Economic actors stop doing what they are doing badly and start focusing on what they do well. Most items become less expensive and of better quality. Everyone benefits from this. I mean everyone in the world.*

International trade agreements do cause some to lose their jobs. They create many more jobs than they cause to disappear, however. But the loss is certain: After all, as soon as central American bananas are allowed into Canada, Canadian banana growers must lose their jobs, by and large. Incidentally, there have not been Canadian banana growers, as far as I know but you see what I mean: Canadians ought to concentrate on producing lumber, or refrigerators, or iron ore, almost anything but bananas.

The current trade project presented by Obama contains a $500 million clause to retrain at public expense those Americans who might lose their job as a result of the new agreement. This is nothing new. Previous trade agreements contained similar arrangements.

President Obama wants what is known as “fast track authority.” That’s the privilege to have the Senate vote a simple “Yes” or “No” on the final draft of the agreement with those many other countries. This is pretty necessary because if each government of each signing country has to go home and gather amendments and often, amendments to amendments, in the end, no agreement sees the light of day. It’s a practical thing, not a sinister ploy.

On the one hand, practically all previous presidents who signed international trade agreements had fast track authority. On the other hand there is a sturdy reason to deny Mr Obama fast track authority: He is a proven, extremely bad negotiator. On the third hand, the negotiations of such agreements are almost completely done by technical personnel who know their business. And, how likely is Mr Obama actually to get involved?

As I write, elected Democrats are all against everything involved because the unions think that every international trade agreement makes them lose ground. I think their perception is correct. Republicans are torn between their understanding of the world (which is more or less like mine) and their wish to give the president a black eye.

This is a small digest of a complex and interesting issue. I deal with it at leisure and extensively in nine installments on this blog. Each had the words “protectionism” or “protectionist” in the title. Again, those are installments; you may want to look at them in order. No test!

* Paradoxically, one of the best, clearest scholarly explanations of this magic – called comparative advantage – is by Paul Krugman. It’s from the days when he was not yet crazy. Bret Stephens in the WSJ 6/16/15 jogged my memory on this strange fact. It’s worth looking up Krugman, for once.

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4 thoughts on “Trade: Is Obama Right This Time?

  1. These trade deals are SUPPOSED to reduce trade barriers but do they really? Why must they be a thousand pages long? Damned if I’m going to read one of them to find out.

    As for Trade Adjustment Assistance: I suppose it’s a political necessity but in reality it like calling the hogs to supper. Free money for anybody who claims his livelihood was damaged. But if that’s the case it means their livelihood was supported by government favors. No one should be compensated for removal of special favors.

    Yes , Krugman was an excellent international economist, deserving of hos Nobel Prize.

  2. Warren: Past trade agreements did reduce trade barriers tangibly. They did in ways you could notice on your own, without study. Before NAFTA, mangoes were rare goods found only in specialty markets; shortly after NAFTA, they were in my local flea market. Just a small example.

    Trade bills are usually long for reasons of tedious detail. They have to distinguish between yellow plums and purple plums, for example, and between sweet almonds and salty almonds. Unlike Obamacare, for example, these minor adjustments result from real negotiations designed to produce political support in each country.

    I would prefer a quick wholesale lowering of trade barriers written on two sheets of paper in plain English. To my knowledge, this has never happened except by force of arms and conquest. (Someone will correct me if my historical memory of the whole world forever is failing.)

    • Right.

      I have been thinking lately about how libertarians can make better arguments in favor of trade agreements. I think that pointing out the fact that these agreements are not centrally-planned but rather bottom-up contractual agreements between parties is not done enough.

      Nobody is claiming that these agreements are perfect (unlike, say, a central planner who believes his or her knowledge will distribute goods and services more justly than the market). But they are made by representatives of voters, and they are patched together from a plethora of parochial interests, and the agreements are – for better or worse – based on compromise.

      Here is another way of thinking this through (sorry, but I am using yours and Warren’s comments to think aloud): No advocate of the market society claims that markets are perfect, and that their perfection is why societies should adopt institutions that are favorable for markets. Rather, market advocates make the inverse claim (roughly): That the imperfection of markets is precisely why they are so good at allocating resources (profits and losses made in the marketplace are far more just than profits and losses paid for by taxes, too). NAFTA was by no means perfect, but the benefits are tangible, and the losses, fixable. This last part – the fixable part – is a strength that opponents and skeptics of trade agreements don’t pay enough attention to. It’s one of the reasons why Free Trade Agreements can only be bottom-up institutions, too, rather than centrally-planned pipe dreams.

      PS: I think you nailed the politics of the TPP right on the head (a rare thing for a Party cheerleader, indeed!).

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