Obama free trade isn’t so free for US

The fight for fast track legislation to allow President Obama to negotiate the secretive Trans-Pacific Partnership trade deal is over. After pulling out all the stops to push the deal through Congress, the President signed legislation giving him the authority to negotiate the trade agreement and put it before Congress for a straight up-or-down vote with no amendments allowed.

Americans are told that free trade is the best strategy for advancing global economic development, reducing poverty and achieving world peace. There is a lot to be said on behalf of the utopian dreams of free traders if you ladle enough frosting on the cake to compensate for its shortcomings. But if we want to help the American middle class -the stated goal of virtually  every politician -we would pursue different policy priorities.

To say that everyone benefits from free trade is misleading. Trade creates winners and losers and every American deserves to know the details buried in these deals. The benefits of the North American Free Trade Agreement and other trade deals have not been shared as broadly as promised.

Economists, businessmen and politicians, the most devoted acolytes, say technological advances lead to increased productivity, which means fewer workers are needed to get the job done. Yes, we have substituted capital for labor. But we have also substituted cheap offshore labor for American workers and the result is that Americans are losing jobs, their wages are stagnating and the middle class is coming apart at the seams.

How countries trade and whether they benefit from it are important questions. Starting with Adam Smith, economists have emphasized specialization and exchange as essential to increasing productivity and raising living standards.

The economic argument for free trade relies on the principle of comparative advantage developed by David Riccardo in 1817. His quaint theory, which built on Smith’s work, remains the cornerstone of free trade economics. So what in simple terms is comparative advantage?

Let’s assume that Lady Gaga, the world-famous entertainer, also happens to be a world- class typist. Rather than both entertaining and typing, she should specialize in entertaining, where her comparative advantage is greatest and she could maximize her income. This key insight is still endorsed today by the overwhelming majority  of economists.

Americans who lose their jobs are becoming less rich so people in foreign countries can be less poor. In the aggregate, people are better off, but domestic workers bear the cost. It should be clear by now that on the home front, free trade contributes to rising inequality, wage stagnation, and lost jobs .

The gains from trade are often widely dispersed, while the losses are concentrated. The extent to which offshore outsourcing is responsible for some of our current labor market woes has become highly contentious in recent years.

Perhaps it is time to adopt a national strategy that can make the American economy grow fast enough to produce decent jobs for every member of the American family who wants to work. How about if we start by investing in our broken infrastructure so it can generate economic growth instead of hamstringing it, and educating our children so they become world leaders in something besides sports?

Then we just might become internationally competitive again, and restore our economy to full employment while we’re at it

originally published: July 11, 2015

Cost of being wrong about trade is paid by American workers

President Obama, powerful business and government elites, special interests and reflexive free trade advocates are working hard to garner congressional support to consummate the ambitious and furtive 12- nation trade agreement known as the Trans-Pacific Partnership (TPP). This is a big deal; linking 40 percent of the world’s economy- so big that it has been negotiated in secret.

We are told that free trade means the unimpeded flow of goods, services, capital and labor across international markets. In this best of all free trade worlds, consumers get the lowest prices.

This is all well and good for American consumers, but what about the increased unemployment and reduced wages free trade also brings? Unless consumer prices have fallen by more than the average worker’s income in recent decades, this may not be such a great deal.

In the real world, critics say the TPP is more like managed trade than free trade. America’s trading partners engage in currency manipulation to make their exports cheaper and U.S. exports more expensive than if exchange rates were determined by market forces. Consequently, some lawmakers worry that currency manipulation by trading partners is an important cause of the large and growing U.S. trade deficit, and will further injure domestic industries and workers. For them, many of the arguments for free trade are just globaloney.

Japan, a member of the proposed TPP deal, is by its own admission a currency manipulator. Its leaders want a relatively low exchange rate for its currency, the yen, because it makes their goods and services cheaper in the United States. Automakers and other manufacturers believe such currency manipulation constrains sales of American products.

Here is a simple example: The Japanese central bank prints more yen and then buys assets denominated in dollars. This increases demand for the dollar, which increases its value while at the same time driving down the value of the yen. By manipulating their currency Japan is subsidizing its exports by making them cheaper and placing a hidden tariff on imports. The U.S.-Japan goods trade deficit reached $78.3 billion in 2013, costing U.S. workers thousands of jobs. The U.S. is acquiescing in outsourcing the value of the dollar to a trading partner who wants to win jobs and gain higher incomes for their people.

On the other hand, there are those who see the trade deficit in a positive light as it provides foreigners with dollars that they recycle by bingeing on United States Treasury debt, thus financing federal budget deficits.

Opponents of the current deal complain that, among other things, it does not address currency manipulation, which subsidizes Japan’s exports and taxes American ones. A bipartisan amendment that would have cracked down on countries that manipulate their currencies was offered by Senator Rob Portman, R-Ohio, and Senator Debbie Stabenow, D-Michigan, during the Senate consideration of the TPP, but it failed by a narrow 51-48 vote.

The Obama administration has done a good job of sealing itself off from any discordant feedback, threatening to veto the bill if the amendment passed.

Wages for American workers have been stagnant for decades and the U.S. economy has kept going by substituting growth in consumer debt for growth in consumer income.

The essential unanswered question about TPP is whether the aggregate benefits of lower prices to American consumers that leave them allegedly with more discretionary income offset job losses for the American worker and displacement of American industries.

It’s easy to be wrong about the answer to this question when the costs of being wrong are paid by others – namely the American worker.

originally published: June 13,2015