Balancing the Future of Free Trade Agreements

Phil Levy is a senior fellow on the global economy at The Chicago Council on Global Affairs. He was formerly a resident scholar at the American Enterprise Institute and taught at Columbia University’s School of International and Public Affairs. From 2003 to 2006, he served as senior economist for trade for President Bush’s Council of Economic Advisers and as a member of Secretary of State Rice’s Policy Planning Staff. Before working in government, he was a faculty member of Yale University’s Department of Economics. His academic writings have appeared in The American Economic Review, Economic Journal, and the Journal of International Economics. He is a regular contributor to Foreign Policy magazine.

Recently, the Trans-Pacific Partnership (TPP) has been the center of attention due to the negotiations that are said to finalize the agreement. What is the potential influence of TPP on the global economy if it does conclude, and more specifically its influence on the US?

The important first question is whether the TTP will conclude. Let’s just for the sake of argument assume that everything goes as planned. The purpose of the TPP is to set new standards for how you would govern trade. It’s supposed to fill a void that was left when the multilateral trade round—the Doha Round—did not succeed. So one of the things that the Obama administration has trumpeted in their goals is that this will be a 21^st century trade agreement, by which they mean it will take on a lot of the issues that haven’t been addressed as well, things like what happens when you are operating supply chains that are distributed all over the world.

The goal of TPP is first to set those kinds of high standards as well as to harmonize and simplify trading rules between a number of countries. The two defining characteristics of TPP from before the time the US joined, when it was just the P4 countries, were: one, high standards; and two, open to newcomers. So if it works as planned, its expansion will continue.

You asked what it does for the United States. It actually gives real meat to the US claim that it’s turning towards Asia—the idea of a pivot or reorientation towards Asia. This would be the commercial backbone of that. The US benefits tremendously from its trade and from an open global trading system. This is a push towards having those issues addressed and having best practices put in place. If you look at what the US trades, moving towards these high standards issues, these novel issues address a lot of the US concerns. The US is very good at services; the US is very good at producing things that have high intellectual property content, for example, pharmaceuticals or entertainment. So it’s no coincidence that the US is eager to see these kinds of things addressed, and the US would directly benefit. Consumers benefit when you see lower trade barriers. However, that entire answer was wearing a very optimistic hat where everybody comes together, holds hands, sing songs, and they get everything through according to schedule. I think that’s relatively unlikely.

As the world’s number two economy, China has not joined the negotiations of TPP. Many believe that China will have to be involved in the pact. What is your take on China’s lack of interest in TPP at the current stage? And if China does join the TPP later, what do you think this would bring to China?

I think that the US and China have had different ideas about what trade agreements should cover. From the time when China was trying to join the World Trade Organization (WTO), there was a vigorous discussion about what obligations China would undertake. Traditionally, there have not been very heavy burdens on developing countries, so China thought it should be largely exempt. The US position and that of countries like Europe, Canada, and others was, it may be developing, but China is a very large country and getting economically more significant by the year. It should therefore have to take on more obligations.

China took on obligations that were as substantial as anyone had ever taken on when it joined the WTO in 2001 and was working hard to implement all of the obligations. That left China much less inclined to take on new obligations. That’s all a long preface to saying, when we get to the present time, even in 2008, the last serious attempt to conclude Doha, China did not want the high standards that the US was advocating.

What that has meant is that China has not been ready to take on some of these kinds of tasks. If one were to consider the question of whether China should join the TPP, it wouldn’t be able to unless China had completely changed its mind about the level of obligations it was going to take on. There would be a threat of diluting what was supposed to be done with the TPP, and this is not a special concern aimed at China. Exactly these same discussions were aimed at Japan and Canada before they were allowed in. So this is not a particular anti-Chinese approach. This is taking each newcomer and saying, are you really committed to these high standards? And if you are not, the concern is you’re going to get in and you’re going to block us from establishing these high standards agreements. There is a balancing act, which is the more countries you bring in, the greater the size, the greater the significance. I think with China the argument is if the odds are so low that at this particular point in time China wants to undertake that level of commitments, then the time isn’t right.

Another very important free trade agreement is the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US. What is your opinion on the prospect of this agreement?

Both of them are very challenging agreements. The TPP has 12 countries that they are trying to get together and maybe South Korea knocking on the door. The TTIP has taken a different approach. It’s only got two, but there are a number of really big challenges out there for TTIP. It’s a vibrant area. The US and the EU have lots of trade and lots of potential for what can be done.

With the US and the EU, they have been conducting trade negotiations for a very long time through all of the rounds of the trade negotiations under the General Agreement on Tariffs and Trade (GATT), which had US-European discussions at the core starting in the late 1940s. Even after the Uruguay Round in the 1990s, you had bilateral efforts to liberalize US-EU trade through things like the Transatlantic Economic Council (TEC). What that means is that the issues that are left over are pretty much exclusively the really hard issues—you’ve selected for that. The countries set themselves a very short timeline and a really tough task.

204,000 new jobs were created in the US in October, which was way more than expected. While the North American Free Trade Agreement (NAFTA) has been criticized for taking jobs away from the US, what do you think of the role international free trade treaties play in creating more jobs and reducing unemployment in the US?

As a general rule, trade economists do not like to think about trade as a way to create or destroy jobs on net. It’s a way of reallocating jobs. You had opponents of NAFTA talking about how it destroyed a million jobs. What that usually is based on is some very faulty math where people would look at trade balances and say that every billion dollars of exports gets you a certain number of jobs and every billion dollars of imports costs you a certain number of jobs.

One way you can see that this is misleading, and I wrote about this in 2008, was if you take the period right after NAFTA was adopted in the 1990s, this was in Bill Clinton’s presidency, we had very good economic times. In fact, the unemployment rate was pushed down to about the lowest level that the Fed was comfortable with. So people say, NAFTA cost a million jobs. But what would have happened if we had a million more jobs? Then you would have pushed that unemployment rate below the level that the Fed was comfortable with. The Fed would have tightened. It would have tried to slow the economy, so you would not have had those jobs.

So that’s the argument that trade economists make, that things like monetary policy and labor market policies would help determine the overall level of employment in the economy. Trade helps determine where those jobs are and can push people towards more productive pursuits.

In October 2013, the Chicago Council held an International Global Economy Conference, “Frontiers of Economic Integration,” where trade policy and monetary policy were discussed in depth. Apart from what we have talked about today, could you give us a recap or some takeaways from the conference discussions?

One of the things that was rather novel about this conference was that we decided to take on, very directly, this question of currency manipulation in trade agreements. We had a panel where the former Governor of Missouri Matt Blunt was making the argument for linking currency and trade agreements, and Dr. Yu Yongding was making the argument against.

I think the two sides of the issue may be characterized as follows: those who push for a linkage are worried. They look at a country like Japan and say, what good does it do us if we get Japan to drop, say, a 10 percent tariff, but then Japan depreciates its currency by 10 percent so now our goods still aren’t any more competitive? The other side of the issue is that we don’t have very good definitions of what it means for currency to be manipulated, of how we distinguish between objectionable manipulation and just appropriate monetary policy.

Feature Photo: cc/ (Trey Ratcliff)