The Case for the TPP

STANFORD – Following the conclusion of the Trans-Pacific Partnership by 12 Pacific Rim countries, debates about the costs and benefits of trade liberalization are intensifying. The early leaders in the United States’ presidential campaign, both the Republican Donald Trump and the Democrat Hillary Clinton, have expressed opposition to the TPP, though as Secretary of State, Clinton called it the “the gold standard of trade deals.”

The right level of trade openness is not a new debate. Historically, trade systems have ranged from rather open to severely restricted by rules, tariffs, or non-tariff barriers, driven by shifts in the relative strength of liberalizing or protectionist economic and political forces. But even in closed systems, however severe the penalties they impose on trade, black markets usually develop, owing to the “gains from trade” generated by natural economic forces.

The desire to trade arises whenever the domestic benefits of importing a good (whether a finished product or component) exceed the price paid – for example, if the imported good cannot be produced domestically, or only at a higher cost. As the British economist David Ricardo demonstrated two centuries ago, it can even be better for a country to import goods that it can produce more cheaply, if doing so enables the production of other goods that are still cheaper to produce. Additional gains from trade include increased variety and the economies of scale implied by producing for global markets.

Of course, there are potential downsides to trade. Alexander Hamilton, the first US treasury secretary, argued that allowing lower-cost imports would impede the development of domestic “infant” industry, which needed time to scale up enough to reduce costs to a competitive level. In recent decades, the anti-trade argument has focused largely on “unfair” competition and economic dislocation.