Trade Liberalization: The Regional Approach

The Most Favored Nation (MFN) rule of no discrimination between sources of imports has two exceptions: customs unions and free trade areas (FTA). Much of the current trade liberalization takes place on a regional basis by creating customs unions and FTAs. The United States, for example, is involved in two sets of negotiations establishing mega regional agreements, the first being the Pacific Trade and Investment Partnership (PTIP). With 13 countries bordering the Pacific Ocean, including countries like Canada and Australia and countries in Asia, Latin America as well as Japan, it is designed to counter a global bank sponsored by China. In part, it reflects the U.S. “pivot” to the Pacific. It received much unwarranted criticism from the 2016 Presidential candidates. The second negotiation is an Atlantic Trade and Investment Partnership (ATIP) to include the U.S. and the European Union (EU).

While non-discriminatory global trade liberalization under the World Trade Organization (WTO) definitely improves world economic welfare, liberalization under regional arrangements may or may not have such a positive result because of the discriminatory element against outsiders. Such discrimination has a negative impact on global economic welfare, while the internal trade liberalization has a positive effect. The net result varies from case to case and depends on which of the two conflicting effects is stronger.

The issue of regional integration has penetrated the 2016 Presidential campaign with all candidates opposing regional agreements, especially the PTIP.

It should be noted at the outset that partly because of their size, both mega regions are likely to improve U.S. economic welfare. But the opposition to the PTIP was based on the grounds of its effect on domestic employment. It was argued that as a result, imports that displace jobs will increase more than exports that create jobs so that the net effect will be job losses, when in fact, the likely effect is quite the opposite.

Since U.S. tariffs on most affected goods are already at zero or close to zero (our Pacific trading partners are higher), bringing all tariffs to zero will result in greater reduction abroad than in the U.S., therefore, our exports will rise more than imports. Recalling that jobs in the export industries are probably the best in terms of quality and pay, we can expect a positive rather than a negative effect on the job market.

To that, one must add liberalization of transactions in the service sector that follows from the PTIP, where the U.S. traditionally had a sizeable positive balance, and it’s easy to see that the political view indicated above is mistaken. The same argument applies to the proposed Atlantic Partnership.

While we are on the subject of the 2016 campaign, it might be mentioned that the U.S. is not Greece nor is it a private company; there is no need to offer 50 cents on the dollar of U.S. debt. U.S. government bonds are the safest asset in the world; its debt is not too high relative to GDP and it is denominated in U.S. dollars. Its uses are many and varied and demand for it is high. Hence, the U.S. government can market its debt at close to zero interest. This is not to suggest that public debt of our size is a favorable phenomenon. If possible, it should be reduced, but the cost of reducing it should be carefully weighed against the cost if having it (such as the interest to be paid on it).

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Mordechai E. Kreinin

Mordechai E. Kreinin

Mordechai Kreinin is a University Distinguished Professor of Economics, emeritus at Michigan State University and past President of the International Trade and Finance Association. He is the author of about 200 articles and books about economics, including the widely used text, International Economics. He can be reached at kreinin@msu.edu or by cell phone at (517) 488-4837

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