A trade deal must work for America’s middle class

Over the next few months the question of US participation in the Trans-Pacific Partnership trade deal is likely to be resolved one way or the other. It is, to put it mildly, a highly controversial issue. Proponents believe a deal is essential for both our economic and geopolitical interests; opponents fear it will benefit corporate interests and the wealthy at the expense of middle-class living standards.

Definitive judgment is not possible because the parties are still negotiating and we have not yet seen a final agreement. Our negotiators should never forget that those who “need” agreements get less good ones than those who do not. The US economy is certainly capable of prospering without an agreement. And lack of global profit opportunities for US headquartered corporations is far from one of our economy’s most pressing problems. Nonethe less I believe that the right TPP is very much in the American national interest.

First, in considering what is most fundamental — the interests of American workers — it is essential to distinguish between the effects of trade and the effects of trade agreements. The combination of changing patterns of trade, in which more activity takes place with low-wage economies, and new research has altered consensus thinking on trade. The view now is that trade and globalisation have increased inequality in the US by allowing more earning opportunities for those at the top and exposing ordinary workers to more competition.

But increases in the extent of US trade are driven largely by technology and by the increased sophistication of developing country economies — not by trade agreements. The US, for example, has had no new trade arrangements with India for 20 years. Yet the dollar volume of trade between the two countries has increased ninefold.

Arrangements such as TPP have the potential to tilt the gains from trade towards the American middle class. This is due to the fact that the US has been a very open market for a long time. It means that properly negotiated trade agreements bring down foreign barriers and promote exports to a much greater extent than they reduce American barriers and benefit imports. Additionally, they reduce pressure for outsourcing.

Crucially, TPP is necessary to let American producers compete on a level playing field, given the proliferation of arrangements that do not include the US. Currently, for example, Japanese and Southeast Asian producers get better terms in each others’ markets than the US does. Only through TPP do we have the chance to manage international competition in the interests of American workers through binding arrangements in areas such as labour and environmental standards.

So TPP should be judged not against a hypothetical past world where American workers did not face foreign competition but in the context of a world where trade integration in Asia is happening, with or without the US. Its merit will depend on US negotiating priorities.

Some matters that are pushed by elements of the business community have little or nothing to do with the interests of the vast majority of American workers. These include pressuring other countries to change health and safety regulation, to extend and strengthen patent protection and to deregulate financial services. In these areas on grounds of fairness it is reasonable for us to strive for the principle of national treatment — no discrimination against foreign firms — but not to use inherently scarce negotiating power to alter other countries’ basic choices.

Conversely, it is appropriate in TPP, and our international economic diplomacy more generally, that we use the substantial leverage we possess in areas that do bear directly on middle-class living standards. These include the prevention of inappropriate producer subsidies — including through manipulated exchange rates or distorted state enterprise accounting. And, more generally, co-operation to ensure that a world in which the greater mobility of capital and of companies does not become one in which governments lose the ability to protect citizens. If global integration means local disintegration it will be a failure.

Any international agreement must in the end be judged not just against our aspirations, but against our alternatives.

No plausible TPP agreement will achieve all that we want. But it should be possible to negotiate an agreement that is better than the alternative of growing trade shaped only by agreements that exclude the US. I hope and expect that TPP when presented for approval will meet this test.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

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Letter in response to this column:

Markets are best at managing trade / From Robert W McGee and Yeomin Yoon