Paul Krugman: TPP at the NABE

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I was in DC yesterday, giving a talk to the National Association of Business Economists. The subject was the Trans-Pacific Partnership; slides for my talk are here.

[Reposted from The New York Times  |  Paul Krugman  |  March 11, 2015]

I was in DC yesterday, giving a talk to the National Association of Business Economists. The subject was the Trans-Pacific Partnership; slides for my talk are here.

Not to keep you in suspense, I’m thumbs down. I don’t think the proposal is likely to be the terrible, worker-destroying pact some progressives assert, but it doesn’t look like a good thing either for the world or for the United States, and you have to wonder why the Obama administration, in particular, would consider devoting any political capital to getting this through.

Actually, I was glad to see Larry Summers weigh in on the same subject in yesterday’s FT. Reading that piece, you may wonder what just happened – did Larry come out for the deal or against it? The answer, I think (slide 1), is that he basically supported an idealized TPP that could have been, but came out against the TPP that actually seems to be on the table. And that means that he and I are in a similar place.

So, about the deal. The first thing you need to know is that almost everyone exaggerates the importance of trade policy. In part, I believe, this reflects globaloney: talking about international trade sounds glamorous and forward-thinking, so everyone wants to make that the centerpiece of their remarks. (The same thing happens to an even greater extent when international money issues like the dollar’s role as a reserve currency crop up.)

Also, there’s an odd dynamic involving the role of international trade in the history of economics. Comparative advantage was an early, classic example of how economic reasoning can lead to results that are true but not obvious; naturally, economists have always wanted this intellectual victory to be important in the real world too. This leads to the odd dynamic: comparative advantage says “yay free trade”, but also suggests that once trade is already fairly open, the gains from opening it further are small. But because economists want to keep shouting yay free trade, they look for reasons why those gains might be larger – even though the stories they then end up telling are inconsistent with the competitive model that was the basis for free-trade advocacy in the first place.

One particular misuse of the yay-free-trade sentiment is the persistent effort to make protectionism a cause of economic slumps, and trade liberalization a route to recovery. How many times have you seen the Kindleberger “spiderweb” chart showing declining world trade in the early years of the Great Depression, which is then invoked as showing the evils of protectionism (slide 2)? In fact, it shows no such thing; you can draw a similar chart for the Great Recession (slide 3), when we know that there was no upsurge in protectionism.

The fact is that at this point trade is fairly free (slide 4), and estimates of the cost of protectionism from standard models are quite small (slide 5). Trade restrictions just aren’t a major drag on the world economy these days, so the gains from liberalization must be small.

What about TPP? There are still important barriers in agriculture, but advocates are pinning most of their case on services, where we’re talking about more diffuse issues of access. How much could that be worth? I try to put some upper bounds on the gains (slide 6). I’ve estimated that “hyperglobalization” – the expansion of world trade to unprecedented levels since 1990 – has added about 5 percent to world incomes; but that’s the combination of everything: containerization, drastic trade liberalization in developing countries, the internet. A better model might be Europe’s Single Market Act, which the European Commission now estimates added 1.8 percent to real incomes; but Eichengreen and Boltho suggest that about half of that reflects policy changes that would have happened anyway.

And Europe, which has a compact geography and the kind of shared institutions and culture (and transparency) that make access doable, is surely a better case than the diverse, sprawling group of countries involved in TPP. I’d argue that it’s implausible to claim that TPP could add more than a fraction of one percent to the incomes of the nations involved; even the 0.5 percent suggested by Petri et al looks high to me.

These gains aren’t nothing, but we’re not talking about a world-shaking deal here.

So why do some parties want this deal so much? Because as with many “trade” deals in recent years, the intellectual property aspects are more important than the trade aspects. Leaked documents suggest that the US is trying to get radically enhanced protection for patents and copyrights; this is largely about Hollywood and pharma rather than conventional exporters. What do we think about that (slide 7)?

Well, we should never forget that in a direct sense, protecting intellectual property means creating a monopoly – letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has a zero social marginal cost. In that direct sense this introduces a distortion that makes the world a bit poorer.

There is, of course, an offset in the form of an increased incentive to create knowledge, which is why we have patents and copyright in the first place. But do we really think that inadequate incentive to create new drugs or new movies is a major problem right now?

You might try to argue that there is a US interest in enhancing IP protection even if it’s not good for the world, because in many cases it’s US corporations with the property rights. But are they really US firms in any meaningful sense? If pharma gets to charge more for drugs in developing countries, do the benefits flow back to US workers? Probably not so much.

Which brings me to my last point: Why, exactly, should the Obama administration spend any political capital – alienating labor, disillusioning progressive activists – over such a deal?

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