The Great Recession wrought global havoc, but at least it did not rekindle protectionist sentiment. Or so it seemed until last week, when Senate Majority Leader Harry Reid (D-Nev.) trashed President Obama’s request for authority to expedite major trade-expanding agreements with the Pacific Rim and Europe.
It is not a bullish indicator if the man who controls Senate business says, “Everyone would be well advised just to not push this right now.”
Protectionists appear to be gaining traction with their attacks on the proposed pacts, especially the Trans-Pacific Partnership (TPP), which “could mean toxic food and environmental contamination,” according to a scary video on the AFL-CIO’s Web site.
The critics’ central claim is less lurid: The TPP would destroy U.S. jobs and wages — just as its “model,” the 20-year-old North American Free Trade Agreement (NAFTA), allegedly did.
Former Democratic congressman David E. Bonior of Michigan assembled anti-TPP talking points in a Jan. 30 New York Times op-ed: “Mr. Obama’s desire for fast-track authority . . . clashes with another priority in his [State of the Union] speech: reducing income inequality.”
Free trade is generally beneficial, on net, to all sides. Free trade with low-wage nations, though, can push down net incomes for workers in directly competing U.S. industries. This “Stolper-Samuelson effect,” as economists call it, is probably one of many hard-to-quantify factors that increased income inequality in the United States — offset, of course, by the benefits to previously impoverished people abroad.
Contrary to opponents’ implications, however, the TPP would not expose the United States to major new competition from foreign low-wage labor.
Bonior misleadingly described the TPP as a “12-nation pact with Latin American and Asian nations.” Actually, four of the 12 — the United States, Canada, Australia and New Zealand — are high-wage, developed nations neither Latin American nor Asian. Three others are Asian but decidedly high-income: Singapore, Japan and tiny oil-exporting Brunei.
The United States already has bilateral free-trade agreements with six of the TPP nations — Canada, Mexico, Australia, Singapore, Chile and Peru — and runs trade surpluses with the last four. These countries account for 80 percent of U.S. merchandise trade with the TPP area. So for that huge segment, the deal represents a mere tweak to the status quo.
To be sure, the TPP includes Malaysia, a middle-income country (per-capita income slightly higher than Mexico’s) and Vietnam, the only very-low-wage economy in the agreement. Both countries would indeed have improved access to U.S. markets in return for more access to their markets for U.S. business.
The same goes for Japan, by far the largest non-U.S. economy in the TPP. The deal is the best chance in a generation to open that country’s notoriously closed market to U.S. agricultural and service exports.
In short, what little additional low-wage competition the TPP imposes on the United States is likely to be offset, at least partially, by improved U.S. market access.
What of the notion that the TPP is NAFTA redux and that NAFTA devastated American jobs and incomes?
Don’t believe that hype. Bonior blames NAFTA for the $181 billion combined trade deficit between the United States and its NAFTA partners in 2012.
But $100.7 billion of this deficit is because of oil imports, according to U.S. government trade statistics. NAFTA has nothing to do with this; Canadian and Mexican oil imports always flowed freely.
Also, the $181 billion figure leaves out almost $90 billion worth of goods that entered this country from elsewhere and then got re-exported to Mexico or Canada. Such “re-exports” are normally included in official trade statistics.
Omitting re-exports is valid if you want to emphasize that producing them did not create jobs for U.S. workers, which is the critics’ point. Still, the U.S. re-export numbers are so big that they suggest NAFTA — or something — has encouraged a shipment business that employs, and pays, a lot of Americans.
Hard data are maddeningly elusive, but economist Michael Ferrantino of the World Bank, who has studied the subject, told me that re-exports could be worth $50 billion in annual income for the United States.
Eliminating oil and including re-exports produces a U.S.-NAFTA surplus of roughly $7 billion in the goods trade. In services, the United States enjoys robust surpluses with both Mexico and Canada — a total of $43.7 billion in 2012.
Beyond its economic impact, the TPP is crucial geopolitically; it’s a key component of Obama’s “pivot to Asia,” whose goal is to counter the rise of China and commit the region to U.S.-style reciprocal free trade rather than Beijing’s mercantilist model.
If it works, the result would be a more stable Pacific region, with all the benefits, economic and otherwise, that entails. The usual suspects are fighting hard against the TPP. Is Obama prepared to fight just as hard for it?
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