Opinion: Reforming trade rules could be big win for economy

March 23, 2016


Current U.S. trade policies have become deeply unpopular with a critical mass of Americans — that much is clear from recent primary results and exit polls, and the longer running presidential campaign success of Republican Donald Trump and Democrat Bernie Sanders. Voters mainly, and understandably, fear that their job and wage prospects have been kneecapped by free trade agreements and related policy decisions like ignoring predatory practices by foreign governments.

Alex Tonelson| March 22, 2016 |Market Watch]

Yet Washington’s decades-long, bipartisan trade strategy has fueled an more fundamental problem — dramatically slowing an already dismal U.S. economic recovery.

National economies can’t truly be healthy without enough good jobs to enable their people to pay for most expenses by earning, rather than by borrowing. But achieving this goal in turn requires strong inflation-adjusted growth (the measure followed most closely by economists and policy makers). The current recovery’s annual average 2.22% real rate of expansion since it began in 2009 is an all-time low for American expansions. Although many culprits can be blamed, the nation’s recent trade performance deserves special attention.

According to the standard method of calculating the economy’s size and how it changes, an improving trade balance — whether a bigger surplus or smaller deficit — contributes to growth. A worsening trade balance — whether a smaller trade surplus or a bigger deficit — subtracts from growth.

The U.S. government’s official figures show that real (after-inflation) output so far has expanded by a little less than $2.1 trillion during the current recovery. The price-adjusted trade deficit, however, grew by a little more than $190 billion. That figure represents the amount of inflation-adjusted U.S. growth lost due to the trade deficit’s rebound. Alternatively put, it’s slowed the recovery by a little over 9% in real terms. Even more disturbing, nearly all this lost output has been concentrated in the private sector — which in a free market-oriented economy like America’s is supposed to be the best bet for healthy growth.

In fact, had the real trade deficit simply not gotten bigger between 2014 and last year alone, inflation-adjusted growth would have been 3.04% rather than 2.40%. Reaching the 3% figure would have been especially important, since the nation hasn’t achieved that goal — its average rate since just after World War II ended — in a decade.

When it comes to trade policy and its effects, however, the story doesn’t stop here.

For the trade shortfall has surged even though the nation’s huge, chronic deficits in oil have shrunk dramatically. Since trade policies have not dealt with energy until the recent decision to start permitting U.S. oil exports once again, measuring the growth effect of Washington’s trade decisions needs to strip out these flows. Ditto for services trade. The United States runs a big, rising surplus on this front (though it’s not nearly as big as the shortfall in goods trade). But trade agreements have made only modest progress in reducing global barriers.

Conveniently, the government both tracks the remaining non-oil goods deficit — which is heavily influenced by trade policies — and adjusts it for inflation. Since the recovery began, its real growth of just under $420 billion has slowed the economy’s already feeble expansion by fully 19.91% — again, all in the private sector.

The trade deficit’s comeback hasn’t been the only drag on the weak recovery. Until last year, smaller federal budget deficits subtracted from inflation-adjusted growth as well. But fueling more growth with bigger federal deficits also increases the already towering national debt. Fueling more growth by curbing or even reducing the trade deficit would enable to economy to grow debt-free.

It’s still unclear whether trade policy overhaul will be winning politics this year. But numbers taken seriously by America’s political leaders and economists alike leave little doubt that it would be winning economics.

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