Although President Obama supports the Trans-Pacific Partnership (TPP) trade agreement, he's running into resistance from many progressives. Why are they opposed to a deal that negotiators have worked on for years, includes the U.S. and 11 Pacific Rim nations (but not yet China) and accounts for 40 percent of the global economy?
One reason for their opposition is that the deal is more about protecting patents and copyrights than about opening up markets for trade. Patents and copyrights create monopolies for a fixed period of time to encourage innovation and creativity. The idea is to protect some firms from both domestic and international competition, the opposite of free trade.
How could this protection be beneficial for those holding copyrights and patents in the U.S.? If the people who invent and create cannot make a profit from their work because others can use their ideas freely, then the incentive to spend time creating new products and services is diminished. Thus, copyrights and patents encourage innovative activity that benefits everyone.
But a cost is also associated with this benefit. Monopoly prices are generally higher and production lower than in competitive markets, so the cost of the monopoly must be balanced against the benefit or against how much it encourages more innovation.
The progressive opposition to the TPP asks a simple question: Do we really think that inadequate incentive to create new drugs or new movies is a major problem right now? Stated another way, opponents believe the costs of increasing monopoly power are higher than the benefit of increased innovation, so it's a bad deal for U.S. citizens.
That's not the only objection to the TPP. Others worry that it's likely to increase wage inequality, it won't live up to supporters' job creation claims and that it doesn't include provisions to stop countries from manipulating their currency to obtain favorable trade terms that result in lost jobs for U.S. workers.
But even if the TPP were primarily a deal about free trade and included provisions on currency manipulation and so on, support for it still wouldn't necessarily be a slam dunk.
Economists generally agree on the benefits of free trade with other nations. In the long-run, everyone is better off with specialization and trade. To see why, imagine a painter and a plumber who live next door to each other. The painter needs to have some plumbing done, and the plumber needs to have her house painted.
If they do the jobs themselves, i.e. the plumber paints and the painter plumbs, it will take each of them, say, four days to complete the job. But if they specialize in what they do best and trade the work -- if the plumber does the plumbing on the painter's house and vice-versa -- each job can be completed in, say, two days. Thus, specialization and trade can make both households better off.
It's no different when trade is between countries rather than households.
Interestingly, this still works when one of the two people is better at both jobs. Imagine a lawyer who's also an excellent typist. The lawyer can make $400 per hour as an attorney and can type 4,000 words an hour. The law office typist, however, who is paid $15 per hour, can type only 2,000 words per hour. Should the lawyer do his own typing?
No. Although it takes the typist two hours to produce the same amount of output as the lawyer can produce in one hour, the lawyer can make $400 if that hour is used on legal work for clients, and he has to pay only $30 for the typing services. Thus, the lawyer is better off by a considerable margin, and the typist has an income-producing job.
Again, everyone is better off under this arrangement where people specialize in what they do best and then trade.
The exact same principles apply to international trade. As each nation specializes in what it does relatively best and then trades, the residents of both nations are made better off. That's why there' such strong support for free trade among economists.
Why, then, is support among the general public so much weaker? For example, according to a recent Gallup poll, 33 percent of Americans see trade as a threat. One reason may be that we left an important element out of the two stories above. While it's true that trade generally makes us all better off in the long run, other important short-run impacts can make some households worse off.
If a U.S.-based industry suddenly moves to another nation, the workers in that industry are left without a job. They are not better off, at least not initially. In theory, they may find better jobs later on, and hence be better off in the long run, but in reality they may end up in worse jobs.
In this case, it's a matter of how the gains from trade are redistributed. Trade increases the total income available to U.S. citizens, and it's theoretically possible to make everyone better off through tax and transfer programs that distribute the gains from trade to displaced workers. But this doesn't happen, and many households are made worse off from opening our borders to trade with other nations.
That's why it's not surprising so many households are worried that international trade might hurt them economically.
To obtain broader public support for trade agreements with other nations, the country must do a much better job of providing social insurance for households that are hurt when production and jobs move from the U.S. to other nations. Unfortunately, political opposition to redistribution makes broad-based public support unlikely. That's true even when redistribution takes some -- but far from all -- of the gains from trade away from those who benefited and passes them to those who are hurt by increased globalization.