globalization and comparative advantage
In 1817, David Ricardo wrote On the Principles of Economy and Taxation, in which he advanced the theory of comparative advantage (I wrote about this at length in a post some years ago). The basic idea: rather than each country producing all it needs internally, each country should focus on the industries it does best and trade extra output with others for everything else it needs. Ricardo’s assertion, which has been the general guiding light of trade policy since, is that every country is better off this way, even those who aren’t particularly good at anything. A corollary: erecting trade barriers makes not only the world as a whole, but in particular the country that does so, worse off, not better.
The latest iteration of free trade policy is the Trans-Pacific Partnership, a proposed agreement that would govern trade in almost half the world. It has two main characteristics that I think have big implications for Americans. It offers new protections for American intellectual property abroad, which I think is a big plus; and–my main objection–China is deliberately excluded.
Trump on TPP
President-elect Trump says he’ll withdraw the US from TPP on his first day in office. Withdrawal will likely have several negative consequences, however:
1.IT, entertainment, pharmaceutical and other industries that export intellectual property will lose promised protections
2.To the degree that Americans lose favorable trading arrangements, our standard of living will decline, at least in comparison with TPP insiders, if not in absolute terms
3.China is advancing an alternative to TPP called the Regional Comprehensive Economic Partnership. Although this is at present a trade agreement focused on the Pacific–and which excludes the US–the collapse of TPP on US withdrawal could prompt China to expand the RCEP to include TPP countries ex the US. That would presumably leave us on the outside looking in on getting preferential trading arrangements with two-thirds or more of the world.
Unhappily, I see no evidence that Mr. Trump is aware of any of this. In fact, from his public persona it’s hard to disagree with Republican critics who have said that, despite his Wharton degree, he doesn’t seem to know any economics at all.
There is a downside to globalization. As countries specialize, workers in non-competitive industries lose their jobs. In economic theory, government steps in to support them and to offer retraining so they can be reemployed again. As far as I can see, any such efforts from Washington to date have been way less than is needed and even less effective than the VA. To my mind, this is at the heart of what Trump voters mean when they say they want change.
Ironically, Donald Trump’s campaign statements will likely make the situation worse, not better, for all Americans–and for his forgotten-American supporters in particular. Dawning realization may be the source of the deer-in-the-headlights vibe Mr. Trump seems to me to be giving off these days.