Is Trade Going to Save the World?



William Alan Reinsch | CSIS

The outline of a Biden trade policy is clear. It is well summarized in Secretary of State Antony Blinken’s speech last week:

We’re building on hard lessons learned. Some of us previously argued for free trade agreements because we believed Americans would broadly share in the economic gains that those – and that those deals would shape the global economy in ways that we wanted. We had good reasons to think those things. But we didn’t do enough to understand who would be negatively affected and what would be needed to adequately offset their pain, or to enforce agreements that were already on the books and help more workers and small businesses fully benefit from them.

Our approach now will be different. We will fight for every American job and for the rights, protections, and interests of all American workers. We will use every tool to stop countries from stealing our intellectual property or manipulating their currencies to get an unfair advantage. We will fight corruption, which stacks the deck against us. And our trade policies will need to answer very clearly how they will grow the American middle class, create new and better jobs, and benefit all Americans, not only those for whom the economy is already working.

Hiding behind Blinken’s words are a host of questions about how to implement those goals, and I am concerned that the administration’s answers will make using trade to grow the economy harder rather than easier. But first, let’s go back to basics. What is trade? It is the exchange of goods or services for mutual benefit. I have bread; you have butter. If we trade with each other or sell to intermediaries, we will both be better off. This reflects specialization. I could make both, but it is more efficient for me to grow the wheat and bake the bread and then buy the butter than it is to also maintain a herd of dairy cows. At this point we could detour into a discussion of Ricardo’s principle of comparative advantage, but I will spare you that. Let’s just say that trade is about exchange.

It appears, however, that for the Biden administration, trade is more than that. It is about protecting the rights of workers, promoting environmental justice, helping small businesses, attacking corruption, and promoting the role of women in the economy, among other things. Those are all important goals, and I support them, but they refocus the trade debate from how to create the benefits of trade to how to distribute them. The latter is a legitimate, even necessary, function of government, but it is not the primary purpose of trade or trade agreements. Trade is about markets and exchange. It should not be about solving every social problem in the world.

We have reached this point because we have come to understand the rising tide argument is not always correct. A rising tide does not lift all boats; it only lifts some boats, and for a long time, workers’ boats have been stuck in the muck while the owners’ yachts flow free.

The progressive left’s response to that is to say, “let’s not have new trade agreements unless they address these inequities.” There are two problems with that argument. First, it ignores the other part of the rising tide argument—no tide lifts no boats. In economic terms, if we forego the expansion of trade, we do not get the benefits trade provides, and there is nothing to distribute.

Second, it assumes that equitable distribution of benefits is the job of trade agreements, when, in fact, it is the job of governments. The job of trade agreements is to enable trade, primarily by reducing obstacles to it, both tariffs and non-tariff barriers, and also by eliminating unfair advantages that countries give their companies that violate international rules.

Once there is an agreement, governments have other jobs. One is to enforce the agreement, something the United States has not been particularly good at and something the Biden administration says it is committed to, which I wholeheartedly endorse. If we are going to have a rules-based system, then we need to make sure the rules are up to date and enforced. And, of course, we have to negotiate agreements that can be enforced.

The other job of governments is to ensure equitable distribution of benefits. There are a number of ways to do that, and they tend to fall into two categories: first, measures that redistribute benefits like requiring a higher minimum wage, regulating how corporations treat their employees, or using taxes for income redistribution; second, measures that alter a company’s economic analysis like tax penalties to discourage companies from moving offshore or incentives to encourage them to stay here, using government purchasing power to help companies that are doing what it wants and penalize those that are not, or subsidies to promote specific activities.

These jobs are important in their own right and are necessary to create public support for trade. But they are not the responsibility of trade agreements. If we hold future agreements hostage to them, we postpone or give up entirely the benefits of trade and the economic growth that ensues.

To read the original commentary from CSIS, please click here

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.