Everyone trades. I don’t wake up and bake bread, milk my cow, fix my car or try to make a cell phone. Why? First, I don’t know how. More importantly, I specialize in doing one thing that I am comparatively better at doing. I trade what I produce in order to buy goods or services produced by others. This is a far better outcome than if I tried to do everything myself.
Adam Smith wrote in 1776, “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.”
Trade is a mutually beneficial exchange for the parties involved. This is true whether it occurs domestically or internationally. This second fact is frequently forgotten.
The concept of productivity gains from trade and specialization is hundreds of years old, but more recent work has shown that international trade benefits us in several additional ways.
▪ It allows for a greater variety of good choices, like having hundreds of car models from which to choose, rather than the smaller number that would be produced if car manufacturers were selling only to their domestic market.
▪ It provides access to more markets and consumers, thus increasing incentives for domestic innovation and positively affecting our country’s economic growth and well-being.
▪ It improves productivity within domestic industries, through competition with – and for – international markets. Better performing firms become larger, hire more workers, start exporting or export more and, on average, pay higher wages. The U.S. Trade Representative Office reports that jobs in the export sector on average pay up to 18 percent more than other jobs. Less productive firms shrink and often close, sometimes leaving unemployed or underemployed workers. But it is exactly this shift of workers and capital to the more efficient domestic firms that allows overall domestic productivity to increase. Andrew Bernard and J. Bradford Jensen calculated that more than 40 percent of U.S. export growth from 1987 to 1992 came from firms that were new exporters.
The Senate recently passed a bill to renew the president’s Trade Promotion Authority, often referred to as fast-track authority. Fast-track authority gives the president the right to negotiate trade agreements with foreign countries. Congress then votes to accept the resulting agreement or not as presented, without being able to introduce amendments. This allows trade agreements to occur much more quickly and in a less politicized fashion.
The TPA bill is heading to the House of Representatives. This is coming at a crucial time given the current negotiations to create the Trans-Pacific Partnership trade deal, which involves 11 countries in the Pacific Rim including Australia, Canada, Chile, Peru, Malaysia and Singapore.
Some House members are pushing for binding rules on currency manipulation
to be included in the language of the TPA. Specifically, they argue that if there is evidence that a country is trying to artificially lower the value of its currency to increase its exports, our trade agreements should have an enforcement mechanism to either stop the country from doing this or to penalize the country through trade sanctions. But who gets to determine when, and by how much, a currency is being “manipulated”? Moreover, sovereign countries have the right to choose their own monetary policies.
As a case in point, over the last few years we have heard outcries that China was keeping its currency artificially low. At the same time, however, the U.S. has been undertaking expansionary monetary policies. This was based on concerns about recovering from the Great Recession of 2008-2011. However, this also made the U.S. dollar less valuable than it would otherwise have been. Couldn’t a foreign country claim that the U.S. had been manipulating its currency?
Representatives of countries involved in the Trans-Pacific Partnership, including Janet Yellen, the current chairwoman of the U.S. Federal Reserve System, do not want currency sanctions to be included in the TPA. Doing so would involve not only creating some arbitrary means by which to identify the exact amount of “currency manipulation” occurring, but also would attempt to dictate how sovereign countries, including the U.S., should determine their monetary policy moving forward.
At best the desire to introduce such a currency condition is misguided. At worst, it might have been suggested to intentionally poison the Trans-Pacific Partnership and future trade agreements.
Michelle Connolly is a professor of the practice in economics at Duke University and former chief economist of the Federal Communications Commission.
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