Free Trade and TPP
By Pierre Lemieux
The Trans-Pacific Partnership (TPP) is a proposed trade agreement among the governments of 12 countries.1 To weigh TPP’s potential costs and benefits, it is useful to review what economics teaches about international trade.
Free international trade is beneficial. The standard, provable economic argument is that, evaluated in dollar terms, the benefits from free international trade are higher than its costs; in other words, the winners would be able to compensate the losers and still come out better off. Inefficient producers lose, but, in dollar terms, the winners gain more than the losers lose. If that were not the case, the losing domestic competitors could have offered prices acceptable to consumers.
This argument is not airtight. Since compensation is not and cannot realistically be paid, evaluating trade policy requires distributive value judgments. Moreover, welfare economics has shown that efficiency in the above sense (Marshallian efficiency) is not sufficient to guarantee Paretian efficiency—that is, a situation in which everyone comes out better off or no worse off.
It is a fair bet, however, that the vast majority of people benefit from free international trade. Producers across countries specialize in producing the goods and services for which they have comparative advantages—and, thus, can sell at lower prices. To the comparative advantage argument, we must add the dynamic benefits of competition: having to compete with foreign competitors, domestic producers become more efficient.
This evaluation assumes that foreigners count just as much as nationals. A contrary assumption is difficult to sustain from a moral viewpoint. As James Buchanan wrote, “Each man counts for one, and that is that.”2
The argument for free international trade is exactly the same as the argument for free domestic commerce. Every free exchange brings benefits to both parties to the exchange; otherwise, one or both would have declined. Moreover, a general environment of free trade increases the opportunities for the vast majority of people who are not party to a particular trade. If free trade is bad for America, so is free trade between, say, California and Texas. And so, for that matter, is free trade within California and even within San Francisco. If you see the problem with restricting San Franciscans from trading outside San Francisco, then you understand the case for free international trade.
Not surprisingly, empirical research, as well as anecdotal evidence, supports the theory that international trade enriches a country—or, more precisely, the individuals in that country. In a survey of the literature, two economists, Lill Andersen and Ronald Babula write: “Is there a link between openness and growth? Based on this survey of the more recent empirical and theoretical literature, we believe that the answer is yes. Nearly all the empirical analyses confirm this.”3
Trade agreements between national governments, however, are not really free trade, but managed trade. Free international trade doesn’t require complex treaties any more than trade between California and Maine does; what is needed is no anti-trade ban or regulation. A national government could simply declare unilateral free trade—that is, allow its citizens to import at will—and this would achieve many, if not most, of the benefits of multilateral free trade. Other countries, after exporting, would have to import or use their foreign currencies to invest in the countries to which they exported: otherwise, what would they do with the foreign currencies they have gained?4
Trade agreements may be beneficial if there is no hope of one’s own government declaring unilateral free trade and if such agreements lean more toward the free-trade side than they err on the managed-trade side. They have the related benefits of legally tying the hands of sovereign states.
Is TPP is favorable or detrimental to real free trade? The main text of the agreement comprises 599 pages and includes a large number of limitations and exceptions.5 It is not always clear what all the legalese means.
On the side of real free trade, TPP would eliminate tariffs on thousands of goods. But the process would be spread over time—sometimes over decades. For example, the elimination of the 2.5% tariff on imported Japanese cars would take 25 years; the 25% tariff on Japanese trucks, three decades. In most cases, the tariffs to be eventually abolished have already been reduced to low levels by previous trade agreements.6 TPP also attempts to liberalize trade in services, including financial services.
With its international arbitration clauses, TPP provides foreign investors with some protection against direct or indirect expropriation. Some argue that the rules of arbitration will make the process too difficult, but it is probably still a gain for freedom of trade. (Interestingly, tobacco regulation is explicitly excluded from investor protection, a hint that regulations take priority.) The treaty also tries to limit the privileges that state-owned enterprises get from their owners.
TPP, however, has many drawbacks. Its first goal is to benefit exporting producers, not the importing public. It typically defines an “injury” as an “impairment in the position of a domestic industry.” In this sense, it is just the typical, mercantilist, managed-trade agreement.
The preamble of the treaty sets the tone by stating that the parties (that is, the signatory states) “recognize their inherent right to regulate and resolve to preserve [their] flexibility… to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or nonliving exhaustible natural resources, the integrity and stability of the financial system, and public morals.”
The agreement includes the usual incantations, such as “inclusive economic growth.” It does contain pro-competition rhetoric, but the term “free market” does not appear once in the 599 pages. It is revealing that the U.S. government is trying to sell TPP based on its regulatory reach. In one of its fact sheets on TPP, the United States Trade Representative states:
TPP puts strong, fully-enforceable labor and environmental provisions at the core of the agreement. They will be the strongest labor and environment provisions ever included in a trade agreement, and they mark a sea-change from earlier trade agreements like NAFTA.7
In other words, from the perspective of real free trade, TPP will be worse than other recent trade agreements.
The labor provisions, to which a whole chapter is devoted, may be the worst measures of TPP against free trade. These provisions are inspired by the standards of the International Labour Organization, a United Nations agency that promotes the agenda of organized labor. The signatory states would have to guarantee “acceptable conditions of work with respect to minimum wages, hour of work, and occupational safety and health.”
If seriously implemented, TPP’s labor regulations would partly remove the main advantage of poor countries: their relatively low price of labor. (International trade is governed by relative, not absolute, prices.) They would harm workers in poor countries to the benefit of rich workers in the United States and other wealthy countries covered by the agreement.
The agreement’s environmental chapter also has the potential for higher regulatory burden. Ironically, the “free trade” agreement aims at intensifying the repression of trade in products from protected animals, thereby strengthening a prohibition system that leads to fewer animals because nobody has a financial incentive to ranch or breed them. Under that regime, only smugglers can make money with protected animals by depleting the resource in a “tragedy of the commons.” As The Economist wrote, trade bans “tend to be inefficient because they fail to take into account the response of human beings to economic incentives.”8 Ask yourself this: Would there be more or fewer chickens if trading them were banned? The chapter covers much more than that but, encouragingly, does not contain the words “climate change.” Like labor, environmental regulation should have nothing to do with a free-trade agreement. If there is an international environmental externality, it should be part of other treaties, as many already exist and are acknowledged by TPP.
The TPP’s long chapter on intellectual property is another case of regulatory overreach. Even if one agrees on the need to protect intellectual property, the extension of America’s extreme measures—including the criminalization of violations—to the trade area covered by TPP is a cause for concern.
Many other requirements mandated by TPP are troublesome. One example is the obligation to maintain antitrust laws, which would make repealing such regulations in the future more difficult.
“Indeed, TPP is not dangerous enough, as, in many ways, it reinforces the legitimacy of states’ power of regulation and control.”
Contrary to what some critics claim, TPP is certainly not too dangerous to national sovereignty—which amounts often to nothing more than the right of a state to oppress its citizens. Indeed, TPP is not dangerous enough, as, in many ways, it reinforces the legitimacy of states’ power of regulation and control.
TPP is as much a geopolitical enterprise by the U.S. government as an effort to extend trade. The political and diplomatic goal is to contain the Chinese government’s influence in Asia. The Chinese government is not part of the agreement but could later try to accede to it under conditions that would be heavily influenced by the U.S. government. This is another reason why TPP looks like a very feeble conduit for free trade.
It is not easy to measure TPP’s positives and negatives and calculate a net effect. The net effect will depend on how the treaty is implemented and how its rules and jurisprudence evolve. Will TPP lead to a gradual spread of economic freedom? Or will it create or reinforce entrenched constituencies (labor unions, environmentalist interests, protected media companies, patent trolls) that will nibble away at the current degree of free trade? Will the loopholes in TPP be interpreted in favor of tree trade or not? This is difficult to know.
But what are the alternatives? Real multilateral free trade is not on the political agenda. Nor is a declaration of unilateral free trade by the U.S. government (which would extend American influence much more efficiently) conceivable in the foreseeable future. The alternatives right now are two forms of managed trade: the TPP or the status quo.
Looking at the two sides of the debate over TPP does not provide much guidance. From the standpoint of economic freedom and efficiency, neither side can be recommended. On the pro side, misleading free-trade rhetoric is used to foster more managed trade and more regulation. On the anti side, we find people who don’t understand the benefits of free trade. Some even wish to “close the border.” But the two main interest groups that oppose the agreement are labor unions and environmentalist organizations.9 Assuming that these groups are rational in pursuing their goals, TPP looks more positive than negative. Of course, arguments should be judged on their own merits and not by the quality or motivation of their supporters or opponents. Yet the correlation between the seriousness of an argument and the credibility of its proponents is typically positive.
Perhaps the decisive argument is about signaling. What signal would the approval or the defeat of TPP send? Defeat would likely signal in public opinion that free trade is a dead horse, while approval would hopefully signal that real free trade is still an alternative on the table. If this appraisal is correct, TPP would be a small step—a very small step—toward free trade.
This is, I suggest, how one should think about TPP. But the conclusion, as we have seen, is not clear. As French biologist Jean Rostand wrote, “We are not writing an exam where it is better to write anything than nothing.”10 One thing, however, is certain: economists and educators should continue to present the argument for real free trade, whether agreed to multilaterally or declared unilaterally.
Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam.
James M. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (1975) (Indianapolis: Liberty Fund, 2000). Online at the Library of Economics and Liberty.
Lill Andersen and Ronald Babula, “The Link Between Openness and Long-Run Economic Growth”, Journal of International Commerce and Economics (July 2008), p. 13. PDF file.
For more on this, see David R. Henderson, “The Balance of Payments Deficit: Not to Worry”, The Freeman, January 5, 2010.
“Breaking Down 5 Big Sections of the TPP,” Financial Times, November 5, 2015.
United States Trade Representative, Upgrading the North American Free Trade Agreement (NAFTA), Fact sheet. PDF file.
Samantha Page, “Environmentalists: The Trans-Pacific Trade Agreement Is a Disaster for Climate Change,” Change.org, October 5, 2015.
Jean Rostand, Ce que je crois (Paris: Grasset, 1956), p. 125.
For more articles by Pierre Lemieux, see the Archive.