March 21, 2016
President Obama’s allies in the media are working hard laying the groundwork for Congressional approval of the Trans-Pacific Partnership (TPP). Robert Samuelson did his part with a column warning that it would be “dangerous” if the next president repudiated the TPP. I suppose the piece is worth some brownie points with the administration, but it doesn’t make much sense.
He tells readers:
“The United States has had continuous annual trade deficits since 1976, well before the North American Free Trade Agreement (1994) and China’s joining the World Trade Organization (2001). The explanation is that the dollar is widely used to settle trade transactions, to make cross-border investments and — for governments — to hold as international reserves.
“The resulting dollar demand on foreign exchange markets raises the dollar’s value in relation to other currencies. This makes U.S. exports more expensive and imports into the United States cheaper.”
There is a big difference between the relatively modest trade deficit (@ 1 percent of GDP) the United States ran in most of the years from 1976 to 1997 and the much larger trade deficits the United States ran in the years after the East Asian financial crisis in 1997. This was when developing countries began accumulating massive amounts of reserves. As a result the deficit expanded to a peak of almost 6 percent of GDP and is now somewhat over $500 billion (@ 3 percent of GDP).
The difference of 2 percent of GDP, or $360 billion a year is the demand that the United States must make up from other sources. We could make up the demand with larger budget deficits, but Samuelson and his colleagues at the Washington Post and other Very Serious People would yell and scream about the deficits and how we are bankrupting our children. So we don’t make up the deficit, we have higher unemployment.
There is also the issue of the currency management that other counties use to ensure the dollar stays high relative to their currency, making U.S. made goods and services less competitive in the world economy. (Contrary to what Samuelson seems to be implying, no one needs to buy massive amounts of dollars — that story explains zero but it’s good to tell children and ill-informed members of Congress.) Samuelson acknowledges the problem of currency management, which many have argued is a reason for rejecting the TPP since it does not address currency management.
But Samuelson argues that we should still approve the TPP, saying “it’s better to police for currency manipulation and illegal subsidies.” Right, and when is the United States going to do something about currency management if not in the TPP. Undoubtedly it is a top priority of the Obama administration, they just forgot to include it in the TPP.
We also have Samuelson’s confused effort to deal with the arithmetic of job loss from trade:
“True, a flood of Chinese imports over the past 15 years has cost hordes of U.S. jobs. In a recent paper, three respected economists — David Autor of the Massachusetts Institute of Technology, David Dorn of the University of Zurich and Gordon Hanson of the University of California at San Diego — estimated the loss of manufacturing jobs at 985,000 from 1999 to 2011.
“But this large number needs context. Over the same period, all U.S. manufacturing jobs dropped 5.8 million; the share caused by China was a bit less than one-fifth. When the economists added China’s impact on non-manufacturing firms, the job decline more than doubled to 2.4 million. Still, that’s less than 2 percent of total payroll employment of 131 million in 2011 and 143 million now. A more powerful job destroyer was the Great Recession (8.7 million jobs lost over two years).”
It sounds like a great marketing slogan, “support the TPP, better than the Great Recession.”
Okay, give Samuelson a visit to the White House for the effort, but this one doesn’t pass the laugh test. The TPP does very little to reduce formal tariff barriers since they were mostly low or non-existent. The deal actually does a lot to increase protectionist barriers in the form of stronger and longer patent and copyright protection. These protections raise the price of the affected goods and services, most importantly prescription drugs, by several thousand percent above their free market price. (The market doesn’t care that important people like patents and copyrights, they have the same effect as tariffs of several thousand percent.) Unfortunately, it doesn’t seem that the modelers noticed the impact of these protections when they assessed the impact of the deal.
There are also the extra-judicial investor-state dispute settlement (ISDS) mechanisms that are an integral part of the TPP. These ISDS can overturn state, local, and federal regulations on health and safety issues, environmental issues, and even labor standards. (I know, they don’t actually overturn laws, they just impose huge fines that makes it impossible to keep them.)
President Obama and other supporters of the TPP assure us that the ISDS will never overturn legitimate regulations in these areas and ask us to trust them. There would be a simple way to provide greater confidence in this assurance. How about supporters of the TPP agreed to have their bank accounts attached to cover the costs of any penalties assessed by the ISDS for these regulations? That would make their assurances credible, otherwise the rest of us might prefer to live under the judicial system we’ve had for the last 225 years.
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