Beyond Free Trade vs. Protectionism

Beyond Free Trade vs. Protectionism

There was a glimmer of hope as the year began that President Obama and Congress might be able to find common ground on trade policy, if on nothing else. In his State of the Union address, the president trumpeted his plan to conclude an ambitious new market-opening agreement, the Trans-Pacific Partnership (TPP). Meanwhile, House Ways and Means Committee chairman Paul Ryan, a leading steward of Republican trade policy, committed to pressing forward with legislation to give the president "trade promotion authority," meaning that any deal would be guaranteed a simple up-or-down vote in Congress.

But policymakers will need to suppress more than mere partisanship if they are going to make progress on trade. They must also contend with two influential camps of economic ideologues that have long thwarted constructive debate. On one side are neoclassical free-traders who would happily accept any market-opening deal presented to them, no matter how little it did to confront foreign mercantilist practices. On the other side are neo-Keynesian protectionists who reflexively suspect every trade pact to be at best little more than a bill of goods and at worst a speed ramp for imports and lost U.S. jobs. Together, these old foes are amazingly accomplished at turning any civil conversation about trade policy into a heated and unproductive argument.

Those in the neoclassical camp believe in unrestricted free trade, even if it is one-sided -- our markets open and fair, theirs closed and discriminatory -- because they believe whatever is lost from ceding an industry's production in America is made up for by lower import prices. These neoclassicalists find their homes in leading think tanks in D.C. and university economics departments around the nation. They exert influence by producing report after report arguing that the trade deficit is a mere accounting fiction and that America as a whole simply cannot lose from trade.

Neoclassicalists shrug about losing specific industries to foreign competition (whether said competition is fair or unfair) because they think any industry we lose isn't one where we have a comparative advantage anyway. Kenneth Green, a scholar at the American Enterprise Institute, has written that "as long as China is selling us the products we need, the location of the manufacturing isn't really that critical for the economy." But in their single-minded embrace of free trade based on inherent comparative advantage, neoclassicalists blithely ignore the competitive advantage a country gains when it develops skills or capabilities that allow it to increase its global market share in high-wage, high-value-added sectors.

On the other side of the fence, neo-Keynesians deeply distrust globalization because they see it as a race to the bottom for wages and regulatory protections. They would prefer the United States not enter into any new trade agreements and instead focus on rolling back existing ones. Neo-Keynesians find their homes in consumer-advocacy organizations such as Public Citizen and think tanks such as the Economic Policy Institute. They lobby officials with the message that trade agreements like the TPP kill American jobs for the sake of corporate profits.

Perhaps no one articulates the neo-Keynesian perspective better than Nobel Prize-winning economist Joseph Stiglitz, who recently argued in Project Syndicate that "the negotiations to create a free-trade area between the U.S. and Europe, and another between the U.S. and much of the Pacific ... are not about establishing a true free-trade system. Instead, the goal is a managed trade regime -- managed, that is, to serve the special interests that have long dominated trade policy in the West." But in their deep and abiding distrust of corporate interests, neo-Keynesians fail to recognize that what's good for GM is still at least somewhat good for the U.S., and that open markets encourage innovation and progress by allowing firms to gain global scale while allowing nations to specialize in key industries.

At the end of the day, the neoclassical-versus-neo-Keynesian trade argument is doomed to run in circles. If we want to break the cycle and make progress, we need to move beyond tired old dogmas and embrace a new understanding of trade and globalization grounded in what we at the Information Technology and Innovation Foundation call "Innovation Economics." This doctrine recognizes that the key goal of trade is not to boost short-term worker or consumer welfare, but to drive innovation and productivity by producers in the United States. It argues that a rules-based, global trading system can benefit everyone, but only as long as there are mechanisms in place to ensure everyone plays by the rules.

In the 21st-century knowledge economy, this means agreements that allow for effective intellectual-property enforcement and prohibit new mercantilist practices (such as forced technology transfer, data-residency requirements, and standards manipulation). It also means our nation should neither be indifferent to its industrial mix nor try to preserve its existing mix indefinitely. Rather, trade policy should be a means to drive U.S. global competitiveness in the knowledge-based industries of the future. In other words, computer chips are more important than potato chips.

President Obama and Republican leaders in Congress do have an opportunity to make great progress this year on trade. But to gain the support they need, they must persuade forward-looking lawmakers in their respective parties to embrace new thinking about trade.

Michelle Wein is a trade policy analyst with the Information Technology and Innovation Foundation and co-author of the report "The Intellectual Basis of U.S. Trade Policy Trench Warfare."

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