Global Trade Theory Needs an Upgrade

WASHINGTON – (January 26, 2015) With the emergence of a new set of trade policy issues in the cue this year (TPP, TPA, TTIP and others), we are seeing a rerun of the stale yet bitterly fought trade debates we have suffered through for at least two decades.

Pure free traders believe in unrestricted U.S. trade, even if it is one-sided (e.g., free trade from the United States, protectionism from competitors), because whatever is lost from ceding a U.S. industry’s production to other countries is more than made up for by benefits from lower import prices. Protectionists distrust globalization and see it as a race to the bottom that only hurts workers, preferring that the United States not enter into additional trade agreements and roll back existing ones.

In The Intellectual Basis of Trade Policy Trench Warfare, the Information Technology and Innovation Foundation (ITIF) argues that these differences are grounded in differences over economic doctrine—deeply held views about how economies and trade work and the ideal form of trade policy. Unfortunately, neither protectionist or free trade doctrine reflect the reality of the new global economy where nations compete for competitive advantage and where the goal is not to have comparative advantage revealed, but to create it.

Rather, a trade theory grounded in Innovation Economics holds that trade can bring gains, principally through scale economies, competition and learning. However, as opposed to free traders, followers of an innovation economics approach to trade argue that mercantilists hurt more than themselves and that trade only benefits America if it significantly rules-based.

“Free traders reject the notion that America competes with any nation and in their view any result from trade, even decimation of a significant share of U.S. manufacturing from trade, is by definition welfare maximizing, especially for U.S. consumers,” says Michelle Wein, Trade Policy Analyst with ITIF and co-author of the report. “Protectionists, with their overarching interest in worker welfare deem virtually any trade deal as harmful to American interests and argue interconnectivity with other nations should be minimal at best, even if that leads to lower growth.”

Both sides are whole-heartedly committed to their doctrinal views; neither willing to give an inch for fear of total victory for the other side. Innovation economics, on the other hand, balances the need to protect American interests while taking advantage of the benefits of global trade networks and economies of scale.

Based on these principles, trade agreements such as the Trans Pacific Partnership (TTP) and the Trans-Atlantic Trade and Investment Partnership (T-TIP) could be positive for the economy if they are “gold standard” agreements that hold other nations to high standards and include effective enforcement mechanisms.

“To address the challenge of trade and globalization the U.S. debate must move past stale, black-and-white doctrines that do not represent the modern global economy,” adds Dr. Robert Atkinson, President of ITIF and co-author of the report. “Washington needs to embrace a deeper and fresh rethinking of U.S. trade policy overall, grounded in innovation economics.”