November 20, 2017
Robert Samuelson comes in behind Donald Trump when it comes to mastering the logic of international trade. In his column telling readers that “Trump gets the trade problem all wrong,” Samuelson gets three really big things about trade wrong:
1) The dollar’s status as the major global currency is not a major factor in the trade deficit;
2) In contrast to Samuelson’s trade agenda, most workers have no reason to want the U.S. government to devote greater efforts to enforcing patent and copyright protection elsewhere; and
3) The Trans-Pacific Partnership (TPP) was not about free trade; in fact, it can with more legitimacy be called a protectionist pact.
On the first point, the dollar has long been the major global currency. That did not lead the United States to run trade deficits in the 1950s and 1960s. In fact, through most of the next three decades, it ran considerably smaller deficits than it is running now.
The reason the U.S. is running such large trade deficits was the decision by many developing countries to accumulate huge amounts of reserves following the botched bailout from the East Asian financial crisis in 1997. This was a serious failure of the international financial system, managed by the United States. (That would be Clinton, Rubin, and Summers if we want to name names.)
The huge trade surpluses run by developing countries in subsequent years were the basis of the “global savings glut” that led to the imbalances associated with the housing bubbles in the United States and Europe. There is nothing inevitable about this story. More competent management of the international financial system would have prevented the problem in the first place and more competent trade and financial policy today would reverse the reserve buildups in developing countries, lowering the value of the dollar and bringing our trade deficit closer to balance.
The second point follows directly from the first. Samuelson tells readers:
“To be sure, the United States should be more aggressive in pursuing trade complaints against countries that steal intellectual property (patents) …”
Why exactly should your ordinary steelworker in Ohio or auto worker in Michigan want the government to be more aggressive in pushing other countries to pay Pfizer for its drug patents or Bill Gates for Microsoft’s software? While there may be some trivial trickle down, the more immediate issue is that increased foreign payments for U.S. patents and copyrights will increase demand for dollars, thereby raising its value against other currencies.
A higher valued dollar will make U.S. manufacturing goods less competitive, worsening our trade deficit in the sector. I suppose more money for Bill Gates may make some workers proud wearing their “Make America Great Again” hats, but it won’t get them jobs or put money in their pockets.
The third point is that we should quit the clowning, the TPP was not about free trade. In reality, it did very little to reduce protectionist barriers primarily because the trade barriers between the countries in the pact were already very low. (The United States already has trade pacts with six of the other eleven countries in the TPP.)
This is why the non-partisan United States International Trade Commission (USITC) projected that the TPP would raise gross national income in the United States by 0.23 percent when its effects are fully felt 15 years from now. That is roughly half the 0.3–0.8 percent gain in GDP by 2027 that the Penn-Wharton model projected to be the effect of the Republican tax cut, which Paul Krugman recently dismissed as “basically an invisible effect against background noise.” (Krugman is right.)
While it may not be the case in Washington, elsewhere in the world, something that is half the size of an item that is “basically an invisible effect against background noise,” must also be inconsequential. In other words, all the folks who dismiss the growth implications of the Republican tax cut as inconsequential must also dismiss the potential gains from the TPP as inconsequential.
But, it gets worse. The TPP includes extensive protectionist provisions in the form of stronger and longer protections for patents, copyrights, and other types of intellectual property claims. The USITC didn’t include the impact of these protectionist measures in its projections. It is entirely possible that if it had, the net effect on growth would be negative.
While most of the remaining tariffs between these countries are in the single digits, patents and copyrights typically raise the price of the protected items by a factor of ten or even a hundred, making them equivalent to tariffs of thousands or tens of thousands percent. And, as everyone at all familiar with trade theory knows, the economic distortions resulting from a tariff are proportionate to the square of the size of the tariff.
The TPP also included a number of other provisions designed to make regulations in the twelve countries in the pact more business-friendly, including a special court only open to foreign investors. But on a free trade-protectionist scale, the pact can quite legitimately be called “protectionist” even if people calling themselves “free traders” supported it.
After all, this is not Alice in Wonderland where they get to make something true by saying it three times.
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