What Should We Want from Trade Policy?

By Mike Koetting          July 25, 2018

My last post suggested that, while very few of us will be experts on trade policy, as long as this is a major issue, citizens probably have some obligation to have ideas beyond vague catch-words. This post makes some suggestions, borrowing heavily from people who really do know a lot about this issue–specifically Robert Kuttner in various articles and, particularly, a Foreign Affairs article by Timothy Meyer and Ganesh Sitharaman.

For openers, let me make a painfully obvious point: what one wants out of trade policy in part depends on whether you believe the economy works because a smallish group of talented people create jobs and benefits flow down to the rest of us; or you believe that an economy is driven by the nature of the communally shaped economic structures. In the real world, few hold either of these models to be the stark incarnation of how an economy works. Still, these different starting spots lead people to different conceptions about economic policy—including trade policy.

As for me, while I recognize that some individuals make outstanding economic contributions, it seems to me that the key to modern societies is that income is spread broadly enough to create strong demand through multiple sectors of the economy. It also seems to me that even “job creators” (and I use the term without sarcasm) depend on the infrastructure of the broader society—legal, intellectual, and social, as well physical. I can’t think of a single, epic economic advance in the last 150 years that wasn’t as much due to the broader social environment, including direct government support

Again, this is not to disparage the great captains of industry, past or current, but merely to assert that their role in driving the overall economy is less important than the credit ascribed to them, often by others who want to use it as justification for the degree of their unequal rewards.

This overall social-economic model drives my notions of what we need from a sensible trade policy. Indeed, objective number one is to improve the distribution of income—and the correlates of income such as stability and a sense of productivity. In other words, I think we should be less interested in the overall total “benefits” of trade and more interested in how those benefits accrue to the broadest section of the population. While there have benefits from the trade explosion of the last 25 years for many sectors of the economy, all the available evidence suggests that in the developed world those benefits have gone disproportionately to capital as opposed to labor. (The aggregated global data in the below graph shows the substantial increases in the top deciles, but it also shows increases in the middle deciles. Most of middle decile increases are in dramatically developing countries—primarily China and Southeast Asia. In the already developed countries–US, Europe, Japan–almost of the income growth was in the top one or two deciles.)

Global Income DistributionLakner-Milanovic (2013) World Panel Income Distribution

It is not always obvious which trade policy actually makes the most contributions to improving income equity, and politicians of all stripes have some numbers to support their arguments. But generally speaking, Congressional Budget Office (CBO) estimates turn out to be fairly even-handed and one can use the New York Times and the Wall Street Journal as the bounds of sensible estimates to evaluate any specific proposal.

Objective number two is to further foreign policy objectives. One of the reasons Trump trade policies appear so incoherent is that his foreign policy objectives are incoherent. Prior to Trump, we had two major foreign policy goals—to protect American interests (freedom from attack, ability to sell our products, ability to get critical products from other countries) and to spread democracy. To be sure, the latter was subjected to the former often enough to wonder how sincere the goal was. But through the ebbs and flows, this commitment did keep bobbing to the surface.  Trump’s “America first” policy has explicitly withdrawn any commitment to spreading democracy. With regard to protecting American interests, in the name of “America first” Trump makes it clear he sees all deals as a zero-sum game. This works particularly badly in foreign policy—or trade policy—because these are multi-lateral affairs and it is easier to get what you need when many people are in the mix. Ian Bremmer, in a Washington Post op-ed, puts it nicely:

The problem is that the triumphs that Trump craves — strength, safety, prosperity — cannot be achieved alone. They require friends and allies, and they require the president to see those people as partners, not competitors. But Trump doesn’t know how to do that, which makes everyone suspicious; other governments don’t like to be punching bags, the only role he appears to envision for them. Mutual distrust imperils the collaboration the United States needs to succeed. Which is to say, Trump’s determination to win could easily position the country to lose.

As far as our evaluation of the role of trade deals serving foreign policy, the first test is whether we can figure out what the policy objective is. Beyond that it will get complicated, but raising this issue at least gives us a perspective on which to judge.

Objective number three is to improve the trade pacts. Unless one’s main interest is to roll back globalization entirely—a fool’s errand—it is necessary to have trade pacts to keep the global economy from descending into anarchy. The current multilateral trade-pacts are not inherently bad, but the terms have been deeply problematic because they over-reflected the interest of owners and investors and under-represented the rest of us. Moreover, we need to be realistic about what trade pacts can accomplish.  For instance, none of the existing trade pacts are constructed to deal with a Chinese economy that operates on a fundamentally different model than Western Economies. The United States (and allies) must clarify goals and move aggressively to achieve them. It is also true, that there ae inherent conflicts between nations designing their own economies and the development of a global economy. Still, getting the U.S. out of these organizations is not in itself a useful goal.

Beyond the objectives of trade policy per se, it is necessary to develop real mechanisms to help the losers in the global economy. Virtually all economists agree that the net effect of freer trade is good for America but they also agree that there are winners and losers. For the last twenty years, all political parties have given lip-service to helping the adversely impacted, but have done nothing remotely commensurate with the magnitude of the issues. Part of the answer is to commit to redistribution within the trade policy. There are several technical options, but the easiest to grasp is a small transaction tax on trade within the pact that is available to participating countries for softening adverse impacts. Beyond the trade agreements, the country should put sufficient resources into determining where trade has created problems and then offer assistance sufficient to help workers adjust.

This will be neither cheap nor easy. But Canada, for instance, has done a nice job of participating in the global economy while not using it as a mechanism for jacking up income inequities like the United States. Of course, as I have pointed out in several other posts, the long-term future of employment is challenging. But figuring this out is one of the essential challenges facing humanity. The species is wired to participate in the community through being part of the productive process, and unless we take steps to deal with the people pushed to the margins of the economy, things go south.

In sum, trade policy is complicated and few of us are going to become close to experts. But there are some broad outlines of what needs to be included in sensible trade policies. We should lean on our representatives to pursue those instead of the simple rhetoric that has marked much of these discussions. It may be interesting or it may be frightening to see how this plays out in the 2018 and 2020 elections.

Author: mkbhhw

Mike Koetting’s career has been in health care policy and administration. But it has always been on the fringes of politics. His first job out of graduate school was conducting an evaluation of the Illinois Medicaid program for the Illinois Legislative Budget Office. In the following 40 years, he has been a health care provider, a researcher, a teacher, a regulator, a consultant and a payor. The biggest part of his career was 24 years as Vice President of Planning for the University of Chicago Medical Center. He retired from there in 2008, but in 2010 was asked to implement the ACA Medicaid expansion in Illinois, which kept him busy for another 5 years.

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