Trade in the real world — Jared Bernstein and Simon Johnson

MIT Sloan Prof. Simon Johnson

MIT Sloan Prof. Simon Johnson

From The Washington Post

Supporters of the Trans-Pacific Partnership (TPP), a trade agreement under negotiation between the United States and 11 other countries, make this case: Trade between countries is always good, and more trade with more countries is even better. Harvard economist Greg Mankiw goes further in a recent New York Times piece, arguing that anyone opposed to trade deals does not understand elementary economics.

The arguments made by these advocates do not match the reality of the modern world and are not helpful for thinking about what is at stake in the TPP. It’s not a question of understanding economics. It’s a question of knowing precisely what we’re agreeing to when we sign the TPP.

In the simple models of introductory textbooks, countries improve their respective economic outcomes by specializing in their “comparative advantage” — the goods they produce more efficiently than their trade partners — thereby increasing the supply of goods and lowering prices. No government subsidy is involved, nobody cheats, everyone is well-informed about the nature of the deal, and pretty much all parties come out ahead. If anyone loses their job, in those models either they get another good job or they can be fairly compensated by the people who gain extra income.

In the real world, governments have trade strategies designed to help powerful interests in their countries or to gain advantage over a trading partner. Some officials provide large subsidies to state enterprises; look carefully at how Vietnam works. Others, such as China, have manipulated their currencies to subsidize their exports to us and tax our imports to them. Others just keep our goods out – try selling autos or auto parts to Japan. The implicit subsidies in these strategies are an important reason we’ve lost millions of manufacturing jobs since the 1990s.

And cheating is widespread, in the sense that some countries blatantly violate international rules – including with regard to child labor, workers’ rights and environmental protection.

Read the full post at The Washington Post.

Jared Bernstein, a former chief economist to Vice President Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of the new book ‘The Reconnection Agenda: Reuniting Growth and Prosperity.’

Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at the MIT Sloan School of Management.

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