Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Obama from 2009 through 2010.
Trade agreements have been central to U.S. politics for some years. The idea that renegotiating trade agreements will “make America great again” by substantially increasing job creation and economic growth swept Donald Trump into office.
More broadly, the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major U.S. political parties.
As Daniel Patrick Moynihan once observed, participants in political debate are entitled to their own opinions but not their own facts. The reality is that the impact of trade and globalization on wages is debatable and could be substantial. But the idea that the U.S. trade agreements of the past generation have caused impoverishment to any significant extent is absurd.
There is a debate to be had about the impact of globalization on middle-class wages and inequality. Increased imports have displaced jobs. Companies have been able to drive harder bargains with workers, particularly in unionized sectors, because of the threat they can outsource. The advent of global supply chains has changed production patterns in the United States.
My judgment is that these effects are considerably smaller than the impacts of technological progress. This is based on a variety of economic studies, experience in hypercompetitive Germany and the observation that the proportion of U.S. workers in manufacturing has been steadily declining for 75 years. That said, I acknowledge that global trends and new studies show that the impact of trade on wages is much more pronounced than it was a decade ago.
But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on U.S. wages and jobs for the simple reason that the U.S. market was almost completely open 40 years ago, before the United States entered into any of the controversial agreements.
American tariffs on Mexican goods, for example, averaged about 4 percent before NAFTA came into force. China had what was then called “most favored nation” trading status with the United States, before its accession to the World Trade Organization, and received the same access as other countries. Before the Korea Free Trade Agreement, U.S. tariffs on Korea averaged a paltry 2.8 percent.
The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down U.S. trade barriers.
Rather, the naysayers argue that different demands should be made on other countries during negotiations — on issues including intellectual property, labor standards, dispute resolution and exchange-rate manipulation. I am sympathetic to the criticisms of TPP, but even if they were all correct, they would not justify the conclusion that signing the deal would increase the challenges facing the American middle class.
The reason for the rise in U.S. imports is not reduced trade barriers. Rather, it is that emerging markets are indeed emerging. They are growing in their economic potential because of successful economic reforms and greater global integration.
These developments would have occurred with or without U.S. trade pacts, though the agreements have usually been an impetus to reform. Indeed, because the United States does little to reduce trade barriers in our agreements, the impetus to reform is most of what foreign policymakers value in them, along with political connection to the United States.
The truth too often denied by both sides in this debate is that incremental agreements such as TPP have been largely irrelevant to the fate of middle-class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the United States want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?
Framed this way, the solution appears obvious. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.