On Trade, Trump Puts Corporate America First

By DANI RODRIK NOV. 28, 2017

The latest round of North American Free Trade Agreement negotiations came to an end last week without a deal. It’s not clear whether a compromise will be reached or President Trump will make good on his threat of pulling out. But we have seen enough of his approach to trade to know it is fundamentally mistaken and counterproductive.

Mr. Trump is not wrong to think that trade agreements have shortchanged America as a whole while enriching corporate and financial interests. He was right to walk away from the Trans-Pacific Partnership, an agreement that was less about free trade and more about special privileges for investors, large companies and pharmaceutical businesses.

But Mr. Trump made a mistake by prioritizing a Nafta renegotiation. The jobs lost to Mexico will almost certainly never come back. Automation ensures that manufacturing employment will continue to be a small percentage of the labor force. Moreover, trade barriers would be disruptive to employment in their own right: United States auto production now relies on extensive North American supply chains in auto parts.

Mr. Trump’s focus on the bilateral trade deficit with Mexico is also a red herring. The overall trade deficit of the United States is determined primarily by macroeconomic factors — American consumers’ saving propensities, domestic corporations’ investment behavior and the federal government’s fiscal and monetary policies. Trade policies with Mexico can do very little to alter this picture.

But the biggest flaw of this administration’s trade policy is that it falls squarely within the pervasive established mercantilist tradition. For mercantilists, the purpose of trade agreements is to open up other countries’ economies to our companies to the maximum extent possible while minimizing how much we open up ours. Everybody else must adjust how their economy works, while we maintain our own ways. Under the guise of fairness to workers as a whole, this approach equates national interest with the profit-seeking behavior of United States corporations or protectionist groups.

When trade agreements focused mostly on tariff and non-tariff barriers at the border, mercantilism produced some salutary consequences. Reaching agreement would require the United States to reduce its tariffs in return for other countries reducing theirs. International trade would be freer as a result.

But today’s trade deals are largely about domestic regulations and standards — the behind-the-border rules that purportedly stifle international commerce and investment. Mercantilism no longer has much of a silver lining. It now translates simply into investors and corporations getting their wish list fulfilled with the removal of any and all impediments to their cross-border activities.

Of all the special interests that have shaped recent trade agreements, none has been as energetic in its lobbying, or more successful, than the pharmaceutical sector. A result has been the inclusion of ever stringent patent rules in trade agreements since the 1990s. Historically, patent laws have been enacted as an inducement to innovation, yet economists are increasingly skeptical that strong patents are necessary for that purpose. Euphemistically called “trade-related intellectual property rights,” these protections serve mainly to transfer monopoly profits from global consumers to patent holders in the United States.

Mr. Trump has fully aligned himself with big pharma’s trade agenda, seeking to raise intellectual property protection in other nations to levels similar to that in the United States. In high-tech and financial services, two other areas where American firms have traditionally lobbied heavily, his objectives mimic those of previous administrations. He wants the reduction or elimination of barriers to United States investment abroad, while domestic restrictions on foreign investment — in shipping, for example, and many other areas ostensibly related to national security — naturally remain untouched.

Mr. Trump does pay lip service to upholding labor and environmental standards, which were shifted to side agreements in the original Nafta negotiations. But he has little interest in domestic policies that would really help those hurt by trade.

A truly fairer globalization would start at home, with a reconstruction of the social compact that binds the corporate elite and the wealthy to labor and the middle class. Every society that opens itself up to the world economy needs social transfers, labor-training programs and regional policies that take care of the adversely affected workers and communities. Our domestic approach, over-reliant on underfunded and ineffective trade-adjustment assistance policies, has not worked and needs to be replaced by more extensive safety nets.

These must be complemented with more progressive income taxation, employment-generating policies such as infrastructure investment and political reforms that reduce the role of money in politics. Mr. Trump and the Republicans want to take us in exactly the opposite direction, with a tax reform that will benefit the wealthy first and foremost.

The problem with Mr. Trump’s economic nationalism is not his avowed belief that trade should serve the national interest. When we economists teach the theory of trade, we emphasize that free trade is desirable because it expands the domestic economic pie — not because it confers gains to other nations. The problem is that he is deeply averse to the domestic policies that would allow American workers a piece of the added pie.

International fairness in turn would require us to recognize that all countries have legitimate reasons to value their national sovereignty. Rules for finance or intellectual property that, for good or ill, prevail in the United States will frequently be unsuited to other countries. Our trade policy should not be driven by big banks and pharma companies that show very little concern for such considerations.

Mr. Trump’s failure to distance himself from special-interest globalization is perhaps not surprising. But it exposes the vacuity of his brand of populism. Despite all his talk about fairness and the need to stand up for ordinary working people, he has little to offer his core constituency. He will exacerbate, rather than mend, the grievances that made his presidency possible.

Dani Rodrik is a professor of international political economy at the Harvard Kennedy School and the author of “Straight Talk on Trade: Ideas for a Sane World Economy.”

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