A lot of people are worried about the trading system these days, and are looking for ways to save it. My friends Frank Garcia and Tim Meyer are trying to save it from the left (drawing in part on Frank's forthcoming book Trade and Consent: Trading Freely in a Global Market (CUP 2018)). Here is the abstract of their new paper "Restoring Trade's Social Contract":
As we write, the United States, Canada, and Mexico are meeting in Washington, D.C. to renegotiate the North American Free Trade Agreement (NAFTA). These talks—and their possible failure—represent the biggest shift in U.S. economic policy in a generation. Since NAFTA came into force in 1994, it has transformed the North American economy. NAFTA has made possible continent-wide supply chains, in industries like the auto sector, that have reduced costs and allowed American automakers to remain competitive; it has opened markets for American agriculture; it has greatly increased the standard of living in Mexico; and it has reduced consumer prices across the continent. Despite these gains, President Trump has repeatedly threatened to pull the United States out of NAFTA if he cannot get a deal that is “fair” for American workers. These repeated threats, coupled with aggressive U.S. government proposals to roll back liberalization in NAFTA 2.0, have sent the Canadian and Mexican governments and the U.S. business community searching for new policy ideas to save free trade.
Restoring Trade’s Social Contract answers this call by proposing a financial transaction tax (FTT) in NAFTA and future trade agreements. The tax, no more than .1% of the value of securities or currency sales within the free trade area, would raise revenue to fund an expansion of adjustment assistance for workers who are displaced due to trade liberalization. An Economic Development Chapter in NAFTA and future trade agreements would mandate that this revenue be spent on expanded domestic trade adjustment assistance programs, such retraining, relocation assistance, and infrastructure investment.
Our proposed tax would thus directly harness the wealth-creating potential of trade agreements and explicitly tie funding for adjustment assistance to major financial institutions, the parties benefitting the most from trade agreements. In so doing, it would restore what we term the social contract of trade—a bargain whereby trade liberalization occurs in a way that ensures that the least well off among us are, at a minimum, not harmed. Despite its huge contributions to poverty reduction and increased human welfare since World War II, trade liberalization has contributed to significant job losses, leading to economic calamity and social disruption in industrial heartlands from the mid-Western United States to Manchester, England and Wallonia, Belgium. These economic losses, in turn, have spurred the political backlash that now threatens the international economic order. Securing the long-term benefits of trade liberalization for ourselves and our fellow citizens—making free trade politically sustainable—thus requires including in trade law itself measures to address these significant costs. With NAFTA talks ongoing and the United States debating tax reform, the time is right for an FTT dedicated to expanded adjustment assistance.
In a nutshell, they propose a financial transaction tax that will be used to fund domestic trade adjustment assistance that is legally required as part of trade agreements.
While I am also trying to save the trading system (from the sensible center, or the radical fringe, depending on your perspective!), I have some disagreements with their approach. Just so we're clear, I talked to Frank about this beforehand, so I'm not blindsiding them with criticism, but rather engaging with their arguments to promote dialogue on these issues! Here are some of my disjointed thoughts, broken down into a number of key points.
In any other U.S. administration, I would have said this proposal has absolutely no chance of being adopted. With the Trump administration, I would say the chances are even less. Trump is looking to lower taxes and deregulate (for the most part), as opposed to doing the opposite.
That doesn't mean Frank and Tim shouldn't make this proposal. I support many policies that will never be adopted! But instead of saying things like, "Politically, such an initiative could garner bipartisan support in the United States and perhaps other jurisdictions as well," if I were them I would acknowledge what an uphill battle this will be, and think about what would be necessary to give it a chance.
Who benefits from trade agreements
They say, "Our proposed tax would thus directly harness the wealth-creating potential of trade agreements and explicitly tie funding for adjustment assistance to major financial institutions, the parties benefitting the most from trade agreements." Financial institutions benefit the most from trade agreements? I'm skeptical that's true, and I'd want to hear more from them about all the parties who benefit, and why financial institutions are at the top of their list. But if it is true, then we are doing trade liberalization wrong. What we need to do is liberalize trade in financial services, forcing these companies to compete more, thereby benefitting consumers.
Free trade vs. protectionism
They say, "In so doing, it would restore what we term the social contract of trade—a bargain whereby trade liberalization occurs in a way that ensures that the least well off among us are, at a minimum, not harmed. Despite its huge contributions to poverty reduction and increased human welfare since World War II, trade liberalization has contributed to significant job losses, leading to economic calamity and social disruption in industrial heartlands from the mid-Western United States to Manchester, England and Wallonia, Belgium."
Why do people worry about how trade liberalization affects the least well off, but not how protectionism affects the least well off? When you look at how trade policy would affect the least well off, I don't think there's any doubt that protectionism is vastly worse for the poorest people in society than trade liberalization is. And yet I don't hear many concerns from the left about how existing protectionism harms the poor, or how new trade remedy measures will harm the poor, and how trade adjustment assistance is needed to address that. Concerns about how trade policies affect the poor are certainly valid, but this selective application seems odd to me. As the authors acknowledge, trade liberalization has made "huge contributions to poverty reduction and increased human welfare." That implies that protectionism does the opposite (poverty expansion and reduced human welfare!), and yet nobody seems to propose doing anything to address the harms of protectionism.
The politics of trade
They say: "Despite their radical departure from conventional U.S. policy, the Administration’s actions enjoy strong support in the states that voted for President Trump, as well as from labor interests such as the AFL-CIO that traditionally align with the Democratic Party. This unprecedented political reconfiguration reminds us that today many Americans, regardless of party affiliation, feel betrayed by our current trade policies. They believe that free trade is imposed on them, at their cost and for others’ benefit."
The idea that "many Americans ... feel betrayed" by U.S. trade policies seems like an exaggeration to me. Yes, you can go to a Trump or Sanders campaign rally and hear people booing NAFTA. But how many of those booing know what NAFTA is? I'm not convinced that many people object to NAFTA itself, as opposed to just objecting to Mexico in some general sense. There is a rising anti-foreigner sentiment out there these days, but I'm not sure how much of a concern there is with trade liberalization or how much "economic anxiety" exists. My sense is that most people are pretty happy with the benefits of trade liberalization, as they demonstrate through their purchasing habits.
Dealing with disruption
I don't think most of the criticism of trade liberalization has anything to do with trade specifically. It's more about disruption of the status quo. The authors say: "Reducing trade barriers for manufactured goods has contributed to significant job losses, leading to economic calamity and social disruption in industrial heartlands from the mid-Western United States to Manchester, England and Wallonia, Belgium. Moreover, jobs of similar quality have not, as promised, emerged in these regions to replace those lost." This is all true, but misses the bigger picture. Any change in existing policy is going to have this impact. Withdrawing fossil fuel subsidies would have this impact. The question is, what, if anything, should we do about these disruptions?
Whatever the answer is, I think it has to go beyond trade. Offering up assistance specific to trade has the effect of demonizing trade as some nefarious thing that merits skepticism and concern. The reality is that trade is less disruptive than many other things going on right now (e.g., technological change or normal job churn in the economy). So, we can have adjustment policies, and we should talk about specific issues like encouraging relocation. But whatever policies we adopt, they shouldn't be trade specific.
But what about the polls? The authors say:
During the 2016 U.S. presidential campaign, a number of polls indicated that opposition to free trade enjoyed significant support in both parties. For instance, a July 2016 poll found that, while most Americans do not feel strongly either way about trade agreements, those that do feel strongly tended to be against free trade by about a 3 to 1 margin, regardless of party affiliation.22 Similarly, a March 2016 Bloomberg poll asked voters about their views on a number of protectionist policies.23 Twothirds of respondents said that they would prefer an American-owned factory in the United States that created only one thousand jobs to a Chinese-owned factory that created two thousand jobs.24 Fully 82% of respondents said they would be willing to pay more for American-produced goods.25 And 44% of respondents said NAFTA had been bad for the American economy, against only 29% who viewed the agreement as a positive.
Polls are tricky things. The answer can depend on how you ask the question. Scott Lincicome gathered a bunch of recent polls here. I liked this one:
I don't see much backlash in there.
But there has been a shift, as the authors note:
Similarly, an August 2017 poll found that only 34% of Republicans thought NAFTA was good for the United States, while 65% of Republicans thought Mexico engaged in unfair trade practices.
OK, but as Scott's slides show, the decline in Republican support was countered with a rise in Democratic support:
What should trade agreements cover
One of the reasons some people object to trade agreements is that they intrude too much into domestic policy-making. Well, a legally binding obligation to provide trade adjustment assistance intrudes greatly into domestic policy-making! I'm not sure this is the way to generate more support for trade agreements.