Three Reasons The Pacific Trade Pact Is Critical to U.S. Economy
By Dr. Pinar Cebi Wilber
Published in Investors Business Daily
Trade policy geeks have been enjoying a rare but interesting clash of titans in Washington, D.C. The fight over trade promotion authority (known by some as fast track) unveiled a deep division within party lines and provided for strange bedfellows.
In a dramatic fashion that only Washington can muster, the agreement on trade promotion authority (TPA) died, only to come back from the dead within the same week. Though the Senate agreed to pass it, TPA still faces an uphill battle as the action moves to the House.
During this commotion, President Obama’s Council of Economic Advisers (CEA), led by Jason Furman, released a nicely thought-out report that lists 10 major points about the importance of international trade for the U.S. economy.Three of these points deserve closer examination:
1.Trade raises our standard of living.
The increased variety of products available through imports increases our choices for consumption and decreases prices, thanks to increased competition. These factors have a positive impact on consumer welfare. According to one study, the value of this boost was equivalent to 2.6% of GDP in 2014.
Another study cited in the CEA report highlights the fact that middle-class Americans gain more than a quarter of their purchasing power from international trade. These statistics underline the importance of trade for the average American’s pocketbook.
2. Trade’s impact on the gender wage gap.
While many economists, myself included, emphasize the positive effect of trade on wages, little research has focused on what trade does to the difference in wages between males and females. The evidence suggests that trade may improve that gap.
In fact, the CEA report analyzed data from the U.S. Current Population Survey and found that U.S. industries that experienced larger tariff decreases during the 1990s and 2000s witnessed larger relative income gains for women.
Given that tariff barriers in America were already low, the finding that trade had a positive impact on closing the gender wage gap is encouraging for the rest of the world. It suggests that for less-developed countries with high tariff protections, encouraging free trade could be another tool to help tighten that differentiation, as well as pull people, especially women, out of poverty.
3. The impact on productivity.
A new report, sponsored by the American Council for Capital Formation and conducted by the Aspen Institute’s Manufacturing & Society in the 21st Century program and the MAPI Foundation, finds that productivity growth has slowed since 2004.
From 2005 to 2014, labor productivity grew at an average annual rate of 1.5%. Worse, since 2011, productivity growth has averaged just 0.7%. Much of this slowness can be attributed to sluggish capital investment over the past eight years — a byproduct of the archaic U.S. corporate tax structure, regulatory overreach and, as the CEA underscores, lack of free-trade agreements.
Alan Blinder, former vice chairman of the Federal Reserve, concurs on the wet productivity blanket being thrown on increased living standards. In a recent op-ed, he soberly asked, “Are you worrying about America’s recent dismal productivity performance?”
The CEA analysis shows that over the past 20 years, an increase in exports for the average industry meant 8% higher labor productivity, the result of increased investment. CEA economists show that the average industry invested 22% more over the two decades vs. a case with no change in exports.
Given recent trends in productivity numbers, large trade agreements such as the Trans-Pacific Partnership and the Trans-Atlantic Trade & Investment Partnership could give a much-needed boost to U.S. productivity and our international competitiveness.
Lawmakers should double down on the rare bipartisanship on these agreements and get them across the finish line.
Wilber is a senior economist for the American Council for Capital Formation, a nonprofit, nonpartisan organization promoting pro-capital formation policies and cost-effective regulatory policies.