Free trade used to be a rallying cry for mainstream North American politicians. Back in the 1980s, Canada’s then prime minister, Brian Mulroney, campaigned successfully on the idea that trade agreements would create “jobs, jobs, jobs”.
Today, such a slogan could well be political suicide. Indeed, during last year’s US presidential campaign, the only common ground among Bernie Sanders, Hillary Clinton and Donald Trump was their contempt for the “job killing” Trans-Pacific Partnership (TPP) trade deal among American and Asian countries.
And within a few days of reaching office, President Trump pulled the US out of the agreement. But it now seems that news of the deal’s demise was premature.
At least for now, the 11 other countries party to the agreement – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – are forging ahead, even without the participation of the world’s largest economy.
Understanding free trade
Often lost in the fiery rhetoric about free trade agreements, such as the TPP, is their true economic benefit. Trade deals aren’t meant to be about jobs in this or that industry. They’re about raising a country’s overall productivity and prosperity.
In the short term, tariffs may seem beneficial as they allow less efficient homegrown companies to hire more and produce more. And, with free trade, foreign competition dislodges local suppliers and employment in certain industries falls.
But what’s overlooked in these simple scenarios is the longer-term price of protectionism. While tariffs prop up some businesses, they limit the international flow of resources to most others.
Free trade, on the other hand, bolsters productivity. Once countries enter an agreement, resources naturally move around to the more efficient industries at home and abroad.
All countries tend to benefit from this shared increase in productivity – and, yes, from job creation in the long run.
Equally important, productivity usually rises for all countries in direct proportion to the size of the common market. The larger the scope of the trade agreement and the more countries involved, the better for everyone. The reason is simple: an exporting industry now has access to many more markets, with the associated economies of scale reducing costs and increasing profits.
Without the US in the TPP, scale effects will certainly be much smaller. But the productivity effects of new markets remain attractive. Unless, that is, the US exit prompts TPP members to consider that agreement redundant because of the Regional Comprehensive Economic Partnership (RCEP).
This partnership was first conceived as a regional trade agreement to enhance economic ties between the ten members of the Association of Southeast Asian Nations (ASEAN): Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia. It then expanded to include China, Japan, South Korea, India, Australia and New Zealand. And China has strongly backed the RCEP since the TPP was announced.
Over time, the agreement’s design evolved to become an alternative to the TPP, serving as a proxy for a political battle between the US and China. No more.
Winners and losers
Most TPP signatories are already part of the RCEP. That agreement comprises 16 countries and the TPP now has 11. Canada, Chile, Mexico and Peru belong to the TPP but not the RCEP. China, India and South Korea are in the RCEP but not the TPP. Meanwhile, China and South Korea are having talks with the other countries in the TPP.
For the Latin American countries, access to the Chinese and South Korean markets through the RCEP would be significant. After all, the US already has lower tariffs on average than emerging markets; Mexico and Canada are part of NAFTA; Chile has had an agreement with the US since 2004; and while Peru does not have an exclusive trade agreement with the US, it has had a promotion agreement to liberalise the services trade since 2009.
Even with the US departure from the TPP, Canada, Chile, Mexico and Peru are well positioned for US trade through other agreements.
For the Asian countries, losing privileged access to the American market is certainly a blow, since geographical proximity and other economic ties already give them access to the Chinese and South Korean markets.
The reason trade agreements are not more plentiful is because vested interests usually fight tooth and nail to maintain their privileged position in local markets. Local companies tend to play the nationalist card – we create jobs! – and advance only a myopic view to convince politicians to abandon free trade deals.
Importing industries are less productive than exporting industries. This is intuitive. If an importing industry were more efficient than the rest of the world, it would not be an importing industry in the first place.
More than trade
What is also lost in discussion is that the TPP is much more than a simple trade agreement. It also covers services and intellectual property.
While the US trade deficit in the first quarter of 2017 was approximately US$65 billion a month, the surplus in services offset a third of it. US exports in the service sector include over US$10 billion in royalties on the use of American intellectual property.
The TPP would have been highly beneficial to the interests of the US software, publishing and financial firms. But to try to recapture the way of life of the 1950s, American politicians are forgetting about the industries of the 21st century.
At any rate, a zero trade deficit is a mirage in the case of the US. The country does not lose by importing more than it exports. It just means that it’s productive in other sectors. The American financial sector is particularly strong worldwide.
By withdrawing from the TPP, the US left a significant gap, as the total size of the trade agreement shrunk considerably.
The RCEP may fill it, or the countries may forge ahead without the US. It won’t be the same without the American market, but it should still bring enough benefits for the remaining countries to make it worthwhile to go through the trouble of enacting it.
While it may have been politically expedient, candidate – and now President – Trump was absolutely wrong when he said that “trade reform and the negotiation of great trade deals is the quickest way to bring our jobs back to our country”.
Globalisation is inevitable and irreversible, as Vietnam’s president recently mentioned.
Most economists agree that free trade generates wider and greater benefits, and that’s why the US used to be a big promoter of deals such as the TPP.