Joe Nocera used his NYT column this morning to beat up on a number of politicians who oppose President Obama's call for fast-track authority to facilitate passage of the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP). He claims that they have the trade story badly wrong and that recent trade deals have actually been a big help to the country.
While Nocera may be correct in saying that many politicians have exaggerated the negative impact on NAFTA and other recent trade deals (stop the presses! politicians exaggerating!), but their basic story is correct. There are three points that people should understand in assessing the impact of trade and the meaning of these trade deals:
1) Trade has been an important factor increasing inequality in the United States;
2) The trade deficit is the major reason that the economy has weak demand and remains far below full employment;
3) The TPP and TTIP are about imposing a corporate friendly regulation structure, not trade.
Taking these in turn, the fact that trade has been a major factor contributing to inequality is no longer just a claim from the fringe lefty types. Paul Krugman has written about as has M.I.T. economist David Autor. It was even highlighted in the report of the commission on inclusive prosperity set up by the Center for American Progress and co-chaired by Larry Summers.
The basic point is a simple one. We constructed trade agreements designed to put our steelworkers and textile workers in direct competition with low-paid workers in the developing world. The predicted and actual effect of this policy is to lower the wages of steelworkers and textile workers.
If anyone finds this difficult to understand, imagine that the trade deals of the last quarter century were focused on making it as easy as possible for smart kids in India, China, and other developing countries to train to U.S. standards and then work as doctors, lawyers, dentists and in other highly paid professions in the United States. What would we expect to happen to the wages of doctors, lawyers, dentists and other highly paid professionals? They would fall, bingo!
The story on the trade deficit should be equally straightforward. Our annual trade deficit of $500 billion (@ 3.0 percent of GDP) is a direct drain on domestic demand. This represents money being spent by workers and companies in the United States that is creating demand in other countries, not in the United States. In the good old days, mainstream economists ridiculed the idea that a trade deficit could lead to a shortfall in demand because they assumed as an article of faith that any demand lost due to a trade deficit would be made by increased demand from other sources.
Well, now we have "secular stagnation," a story of a sustained shortfall in demand. And this is not a story just coming from the left, it's being preached by all sorts of very mainstream economists. While the recognition that the economy can suffer from a shortfall in demand is a great step forward for the economics profession, they keep looking for the causes in the wrong places. We keep hearing about depressed consumers and balance sheet problems discouraging consumption. However fans of the data know that consumption is actually relatively high. The current saving rate of less than 5.0 percent of disposable income is actually quite low by historic standards (low savings means high consumption).
This means that those looking for the basis for our secular stagnation in low consumption are looking for something that is not there. (It's even scarier when they find it.) Anyhow, the obvious source of our shortfall in demand is the large trade deficit. This can be blamed in part on the trade deals, but most immediately it should be blamed on the dollar being over-valued against other currencies. This is due to the fact that many countries (most notably China) deliberately prop up the value of the dollar against their currency by buying up large amounts of dollars.
The United States could address this in its trade policy and in trade deals like TPP and TTIP, but chooses not to since powerful interests benefit from an over-valued dollar. Walmart has spent years and tens of billions of dollars developing a low-cost supply chain in the developing world. GE has moved much of its manufacturing overseas to take advantage of low-cost labor. The Wall Street boys are bigger actors in the rest of the world with a strong dollar. Besides, it helps them to fight their arch enemy: inflation.
In short, people are absolutely right to blame the trade deficit for the loss of millions of jobs. Furthermore, the resulting high unemployment and weak labor market has a large effect in depressing the wages of tens of millions of workers.
Finally, Nocera is badly mistaken in imagining that the TPP and TTIP are about trade. With few exceptions, the formal trade barriers between these countries and the United States are already very low. While there may be some benefit to eliminating them altogether, no one would spend years negotiating a trade pact to knock a tariff of 1-2 percent down to zero. It just doesn't matter much.
Rather these trade deals are about imposing a corporate friendly regulatory structure both on our trading partners and the United States. In the case of drugs, the pharmaceutical industry wants stronger and longer patent related protections (yes, I said "protections") that will raise drug prices. The entertainment industry wants stronger and longer copyright protection. (Remember the Stop On-Line Piracy Act? It might be back in these deals.) There will be limits on the ability of state, local, and national governments to impose environmental regulations, health and safety standards, and even financial regulation like Dodd-Frank. Best of all, the final determination of whether a law violates the trade agreements will be taken out of the hands of the U.S. legal system and turned over to an extra-territorial investor-state dispute resolution tribunal.
So that is what Nocera is pushing for in his column today. He is not arguing for trade, he is arguing for a new set of rules that will make the economy even more friendly to corporate interests than is already the case.