The case for free trade and the Trans-Pacific Partnership remains strong. Free trade itself is not the problem. The issue is implementation. Trade agreements like the TPP have always lacked a meaningful mechanism for the winners to compensate the inevitable losers.
While past trade deals enjoyed bipartisan support, opposition to TPP was at the forefront of both political conventions. Working class voters are no longer willing to go along with deals that put their jobs at risk, jeopardizing President Obama’s chance of winning Congressional approval of TPP before his term ends. Is there a viable path for TPP in this new political climate?
To find a way forward, we need to understand where we have gone wrong. Economists since David Ricardo in the early 19th century have espoused the benefits of cutting tariffs: higher incomes—on average—through specialization and bigger markets. There is also wide agreement on the downside: lost jobs and failed businesses during the adjustment to a new normal. Ricardo argued that the benefits of reduced tariffs are large enough to make up for these adjustments provided there is a mechanism that distributes some of the gains to displaced workers.
Those mechanisms have missing, risking the sustainability of the free trade agreement. Economist Branko Milanovic at City University of New York has neatly summarized in one chart the immense global benefit of freer trade—and also the giant political problems it creates for advanced economies like the US. Plotting income growth across the global income distribution, Milanovic found dramatic gains from 1988 to 2008, during the greatest expansion of trade in history. Among the winners were the global poor, especially in Asia. Those in the middle of the global income distribution saw their incomes double (annual household incomes in 1988 between roughly $3000 and $7500 in today’s dollars, adjusted for purchasing power). This was perhaps the largest anti-poverty gain in history, though they remain below US poverty lines.
One group did not see much growth: those between the 75 and 90 percentile of global income. This happens to be about the income span of the American working class (roughly any household earning less than $32,000 per year in 1988, or $65,000 in today’s dollars). These households found themselves competing against 1 billion people willing to do the same work for much less.
In theory, the US has a system that provides some support, through progressive taxes that fund our social safety net, including modest job training for those workers whose skills or industries have become uncompetitive. Also, if the nation as a whole benefits from a trade agreement, the aggregate gains should create better job opportunities for displaced workers once they retool. Despite this, the transition has been painful. Recent research documents what we already suspected, that American workers displaced by Chinese competition have not generally found other good jobs even after a decade or more.
The benefits of the TPP would probably be spread similarly among the member countries, though on a much smaller scale. Pro-TPP researchers estimate that cumulative real U.S. GDP growth due to TPP 15 years after implementation would be less than one percent. At the same time, poorer countries like Vietnam and Malaysia will experience significant growth. That said, economists are not very good at estimating what would probably be the main benefit to Americans from greater production efficiencies in U.S. firms.
Why then should U.S. politicians support policies like the TPP? To a large degree globalization is inevitable because wage differences are just too large to be sustainable. Another billion workers in low-wage countries will be competing for jobs in the next couple of decades, even without new trade deals. Political pressure to raise the drawbridge on free trade is not going away.
Participating in trade deals allows us to shape the process of globalization. The best path forward is to fix the usual trade deal formula to include robust measures ensuring that displaced workers get help to adjust. The TPP includes the best labor protection measures we have ever negotiated, but some American workers will still become uncompetitive.
Necessary measures would go far beyond job training. Various proposals have been put forward, including wage insurance and more substantial worker re-training. Even universal basic income has recently been gaining attention. Ensuring high-quality education for children in working class communities is the best long-run strategy for giving all Americans a chance to benefit from free trade.
These are not easy policies to implement, for reasons both practical and political. But if we want to have any hope of a politically viable future for free trade deals, it must be bundled in a convincing package. Too many voters have been burned too many times by promises of net job gains and higher overall GDP growth. It is necessary to win them over with something that is visibly, concretely in their interest.