Tag: trade

International Trade Policy’s Fatal Conceit

Two recent economic studies purporting to estimate the impact of the Trans-Pacific Partnership (TPP) agreement on the U.S. economy have sparked a kerfuffle between the deal’s advocates and detractors. One study, published by the Peterson Institute for International Economics, estimates increases to U.S. income of 0.5 percent by 2030 with gains to labor accruing slightly more than gains to capital.  The other, published by Tufts University’s Global Development and Environment Institute, estimates that the TPP would reduce U.S. income by 0.5 percent, reduce employment by almost half a million jobs, and increase income inequality.  The findings of each study are being trumpeted as dispositive by their respective constituencies. Who’s right?

In a recent blog post, PIIE-affiliated economist Robert Lawrence wrote that to judge the credibility of these models, three questions should be asked: Is the model used appropriate for exploring trade policy? Does the model depict TPP sensibly? Are the results credible? Lawrence then goes on to explain why he answers “yes” to each question regarding the PIIE study and “no” to each regarding the Tufts study. Well sure, Bob, at a minimum, those criteria are important. And they help distinguish the PIIE model as relatively credible – that is, relative to the Tufts model. But what about relative to reality?  

A model might depict TPP sensibly, but incompletely and imprecisely.  How can we be sure those imperfections don’t have a large impact on the results?  And even if the results are credible, in that they don’t deviate dramatically from expectations, their purpose – or, at least, the weight assigned to these studies in the public’s mind – is to produce reasonable estimates, not to corroborate the model’s capacity to process reasonable expectations.

With apologies to my trade economist friends, anyone who treats the estimates produced by economic models as mathematical truths is, well, part of the problem. Lawrence doesn’t do that, but too many trade policy combatants do. Certainly, some models are more rigorous than others, but all rely on assumptions. The greater the number and complexity of exogenous policy changes being modeled, the greater the number of estimates and assumptions to incorporate, and the further removed from reality the results will be. Sometimes the estimates are merely best guesses and sometimes the assumptions have no better than a 50 percent probability of occurrence.  For example, many of the economic benefits of TPP will derive from reductions in non-tariff barriers to trade, such as regulatory opaqueness.  How does one model the increase in regulatory transparency?  How does one account for stricter environmental or labor or intellectual property regulations? How does one assign numeric values to rules limiting restrictions on cross-border data flows?

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Former USTR Rob Portman Opposes TPP for the Worst Reasons

Yesterday, Senator Rob Portman (R-OH), a former U.S. Trade Representative during the George W. Bush administration, announced his opposition to the Trans-Pacific Partnership. 

According to Reuters:

Portman, from Ohio, said the Pacific trade deal fails to meet the needs of his state’s workers because it lacks an enforceable provision to fight currency manipulation and because of new, less-stringent country-of-origin rules for auto parts.

“I cannot support the TPP in its current form because it doesn’t provide that level playing field,” Portman said in a statement.

The announcement is significant because passage of the TPP will rely on broad Republican support and because Senator Portman’s credentials (as former USTR and member of the Senate Finance Committee who represents a traditionally trade-skeptic region of the country) have earned him a prominent voice on trade policy in Washington.

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How To Get Back To Multilateral Trade Liberalization: Cut Agriculture Subsidies!

Recent discussions of trade negotiations have focused on the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), often referred to as “mega-regional” trade talks.  But most economists and other trade experts agree that trade liberalization would be more beneficial if done on a multilateral basis, at the World Trade Organization (WTO).  There are talks going on at the WTO, referred to as the Doha Round, but they started in 2001 and are widely seen as not likely to achieve much.

What would it take to get WTO liberalization going again?  There are lots of theories on this, but my view is that it’s really pretty simple:  The major trading countries need to propose significant liberalization.  That hasn’t happened yet, and that’s why there has been so little progress.

Trade Is Not a Trade-Off: The Stronger Case for Free Trade

Too many advocates of trade liberalization don’t really understand the case for free trade. Consider this sympathetic interview by Steve Inskeep of NPR with U.S. Trade Representative Michael Froman, the chief negotiator of the Trans-Pacific Partnership:

INSKEEP: Froman argues the TPP, the Trans-Pacific Partnership, will give U.S. industries more access to foreign markets. Granted, there’s a trade-off. Other nations get more access to the U.S. for their products. Froman contends that, at least, happens slowly as tariffs or import taxes drop.

FROMAN: The tariff on imported trucks from Japan, as an example, won’t go away for 30 years. On apparel and textiles, we worked very closely with the textile manufacturers in the U.S. to come up with an outcome that they could be comfortable with, so that we’ll let in clothes coming that are made Vietnam or made in Malaysia, but they’ve got to use U.S. fabric.

Inskeep refers to the lowering of U.S. tariffs as “a trade-off,” and Froman accepts that characterization. Both operate from the premise that Americans want other countries to reduce their barriers to our exports, and that the “trade-off” for that benefit is that we must reduce our own trade barriers.

That’s backwards. The benefit of trade is that we get access to goods and services that we might not get otherwise, or we get to pay lower prices for the goods we want. More broadly, we want free – or at least freer – trade in order to remove the impediments that prevent people from finding the best ways to satisfy their wants. Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale.

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Transatlantic Regulatory Cooperation: Possible, But Don’t Bet the House

As the prominence of tariffs in the transatlantic relationship has receded and transnational supply chains and investment have proliferated, regulatory barriers to transatlantic trade have become more evident. Reducing duplicative regulations that increase production and compliance costs without providing any meaningful social benefits is a chief aim of the Transatlantic Trade and Investment Partnership negotiations. Indeed, most of the economic gains from the TTIP are expected to come from this exercise.

But that is easier said than done.  According to University of California-Irvine law school professor Gregory Shaffer, “regulatory barriers to trade can be more pernicious and more difficult to reduce than tariff barriers because they often reflect certain cultural values and preferences, and there are often more interests vested in the status quo.” In his Cato Online Forum essay, submitted in conjunction with last month’s TTIP conference, Shaffer describes five different approaches to regulatory coherence/harmonization (with pros and cons) that could be undertaken by U.S. and EU negotiators.

Depsite vastly different approaches to regulation on opposite sides of the Atlantic, Shaffer points to examples of successful cooperation in recent years as evidence that the TTIP’s regulatory coherence discussions could bear fruit. But he doesn’t bet the house on that outcome. Instead, he writes:

We should nonetheless be cautious in our optimism given the serious impediments to achieving regulatory coherence. Removing regulatory barriers to trade and investment while continuing to reflect local preferences and retain democratic accountability is, and always has been, a challenging undertaking.

Read Shaffer’s essay here.  Read the other Cato Online Forum essays here.

TTIP Is More Likely to Reinvigorate Than Subvert the WTO

In his Cato Online Forum essay, Georgetown University law professor Joost Pauwelyn deftly rebuts some of the central – but, as you will be convinced, outdated – objections to the Transatlantic Trade and Investment Partnership. Joost’s essay supports two main points:

First, the Transatlantic Trade and Investment Partnership (TTIP) is less of a threat to multilateral trade than were first generation free trade agreements (FTAs), which involved a proliferation of preferential tariff treatment.  And second, unlike these shallow FTAs, deep FTAs – such as TTIP – force us to re-think the operating system of the World Trade Organization (WTO).

Thoughout his presentation, Pauwelyn challenges certain long-held assumptions about the trade-diverting effects of preferential trade agreements, making a compelling case for why TTIP is a different animal.  He also exposes some of the conventional wisdom and calls into question some of the purist gospel about the need for WTO primacy, arguing that its role should be diminished and more focued.

Read Joost’s essay here.

Read the other essays published in conjuction with the Cato TTIP conference here.

Estimating TTIP’s Benefits and Costs: Not an Exact Science, But Enlightening Nevertheless?

Note: A previous version of this blog post included an incorrect claim that the Bertelsmann study was funded by the German government. It was not.

Ever since two econometric studies (CEPR and Bertelsmann) purporting to estimate the gains from a successful Transatlantic Trade and Investment Partnership agreement were published in 2013 revealing positive – but vastly disparate – outcomes, TTIP opponents have been on the offensive, dismissing economic modelling as a subjective and politically motivated exercise.

Although estimating the benefits and costs of a massive trade agreement (for which the terms remain unknown) can hardly be considered an exact science, there is value to the public and to policymakers in understanding the range of possibilities. So, in other words, perhaps the problem is not the production of econometric estimates but, rather, the manner in which those estimates can be misused or misinterpreted that should concern us.

At the Cato TTIP conference earlier this month, there was a whole session devoted to the topic: Understanding the Economic Models and the Estimates They Produce.  That discussion is fleshed out a bit in two Cato Online Forum essays, which I want to bring to your attention.

The first is a critique of the models from University of Manchester economics professor Gabriel Siles-Brugge, who articulates his perception of the problem and suggests some remedies.  The second is a defense and broader explaination of the models from University of Munich professor and director of the Ifo Center for International Economics Gabriel Felbermayr, who is the primary modeller/author of the Bertelsmann study.

Other conference-related essays, including a couple more on econometric models (from Laura Baughman and Dan Pearson), can be found here.