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The Trade Numbers Game

Author(s): Dani Rodrik

The Trans-Pacific Partnership – a mega trade deal covering 12 countries that together account for more than one-third of global GDP and a quarter of world exports – is the latest battleground in the decades-long confrontation between proponents and opponents of trade agreements. Unfortunately, neither side is offering good evidence.

From Project Syndicate:

The Trans-Pacific Partnership (TPP) – a mega trade deal covering 12 countries that together account for more than one-third of global GDP and a quarter of world exports – is the latest battleground in the decades-long confrontation between proponents and opponents of trade agreements.

As usual, the pact’s advocates have marshaled quantitative models that make the agreement look like a no-brainer. Their favorite model predicts increases in real incomes after 15 years that range from 0.5% for the United States to 8% in Vietnam. Moreover, this model – developed by Peter Petri and Michael Plummer, from Brandeis and Johns Hopkins Universities, respectively, building on a long line of similar frameworks by them and others – foresees relatively insignificant cost to employment in affected industries.

The TPP’s opponents have latched on to a competing model, which generates very different projections. Produced by Jeronim Capaldo of Tufts University and Alex Izurieta of the United Nations Conference on Trade and Development (along with Jomo Kwame Sundaram, a former UN Assistant Secretary-General), this model predicts lower wages and higher unemployment all around, as well as income declines in two key countries, the US and Japan.

There is no disagreement between the models on the trade effects. In fact, Capaldo and his collaborators take as their starting point the trade predictions from an earlier version of the Petri-Plummer study. The differences arise largely from contrasting assumptions about how economies respond to changes in trade volumes sparked by liberalization.

Petri and Plummer assume that labor markets are sufficiently flexible that job losses in adversely affected parts of the economy are necessarily offset by job gains elsewhere. Unemployment is ruled out from the start – a built-in outcome of the model that TPP proponents often fudge.

The Peterson Institute for International Economics, which published the pro-TPP study, inexplicably states in its brief: “The agreement will raise US wages but is not projected to change US employment levels…” The result on wages is a conclusion of the study, whereas the employment “projection” could have been made before the computer crunched a single number.

 Capaldo and his collaborators offer a starkly different outlook: a competitive race to the bottom in labor markets, with a decline in wages and government spending keeping a lid on aggregate demand and employment. Unfortunately, however, their paper does a poor job of explaining how their model works, and the particulars of their simulation are somewhat murky.

The Petri-Plummer model is squarely rooted in decades of academic trade modeling, which makes a sharp distinction between microeconomic effects (shaping resource allocation across sectors) and macroeconomic effects (related to overall levels of demand and employment). In this tradition, trade liberalization is a microeconomic “shock” that affects the composition of employment, but not its overall level.

Economists tend to analyze trade agreements in such terms, rendering the Petri-Plummer model more congenial to them. By contrast, the Capaldo framework lacks sectoral and country detail; its behavioral assumptions remain opaque; and its extreme Keynesian assumptions sit uneasily with its medium-term perspective.

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