Richard Spady's account of economic growth reminds us of the tensions between domestic growth and development abroad, but the path forward isn't clear.
Vice President Joe Biden signaled by his comments last Friday at a House Democrat retreat that the administration is not going to push hard for fast track trade authority to conclude a deal with other Pacific Ocean nations or the EU. If President Obama fails to press for this authority, it will prove a loss for freedom, economic growth, and national security and become one of his most harmful second term mistakes. Already it demonstrates that he is a very different kind of Democrat from Bill Clinton, who worked relentlessly to conclude NAFTA even against the wishes of most of his party, because he saw its obvious economic and geopolitical advantages.
There is no proposition about which more economists agree than that free trade creates wealth among nations— advanced industrial nations, emerging markets, and the least developed nations all alike. And this is hardly surprising: reducing trade barriers empowers liberty, allowing people to sell their goods and services to the people who most want them, regardless of whether a national border separates buyer and seller. The arguments for free trade today are as strong as those made by Adam Smith and David Ricardo. Perhaps they are even stronger given the unparalleled opportunities for innovation in our age of technological acceleration. The broader the geographical area for sales, the greater the incentives to innovate.
Although unilateral efforts to lift barriers to trade would promote freedom and create wealth, multilateral free trade agreements, in which nations put down their barriers together, are a political necessity. As I have discussed at length in an article with my friend Mark Movsesian, free trade and democratic government face a common obstacle – the influence of concentrated interest groups.
Some industries within a nation suffer because of free trade, and owners and workers in those industries will agitate for measures that restrict imports. Such protectionist interest groups command disproportionate leverage in domestic politics, and their lobbies are often able to secure import restrictions, even though the overall citizenry suffers. Free trade agreements, however, create incentives for exporters, who benefit from lower foreign tariffs, to lobby their governments for free trade policies, because they create reciprocal reduction of trade barriers in foreign nations. This mobilization of exporter interest groups serves to counteract the efforts of protectionist groups.
Fast track trade authority is needed for similar reasons. They deprive protectionist groups of the procedural mechanisms by which they can pick apart complex agreements among many nations. While fast track has been criticized for shortening deliberations and removing legislative roadblocks, this change is fully justified. Free trade agreements on the whole enlarge freedom. They should require less consensus than legislation that diminishes freedom. And it is particularly necessary that United States have such procedures. Because of its economic heft, the U.S. is necessarily the lynchpin of any free trade pacts of which it is a part. If its participation can be easily blocked even after an agreement is reached, foreign nations have less reason to engage in serious negotiation in the first place.
In the next post, I will discuss the geopolitical advantages of these particular agreements.