Jan 20, 2015 - 11:00am

Krugman Gets It Wrong; Trade Agreements Will Grow the Economic Pie

Senior Vice President for International Policy


Economist Paul Krugman addresses the World Business Forum at Radio City Music Hall in New York on Oct. 7, 2009. Photo Credit: Craig Ruttle/Bloomberg.
Economist Paul Krugman addresses the World Business Forum at Radio City Music Hall in New York on Oct. 7, 2009. Photo Credit: Craig Ruttle/Bloomberg.

In a recent blog, New York Times columnist Paul Krugman criticizes the U.S. Chamber’s advocacy in support of the trans-Pacific and trans-Atlantic trade agreements now under negotiation by the Obama administration.

Our position is simple: If American businesses large and small can fill their order books with sales to new customers, they will need to hire more workers, increase working hours, and expand their businesses to fill those orders. That is what these trade deals are all about — making it easier to reach the 95% of the world’s consumers living outside the United States.

And Krugman? How to grow the economic pie and how to divide it up are two of the great questions facing economists. Krugman would be the first to admit that over the years he has become much more concerned with the latter.

In his blog, he says new trade pacts just won’t do the former: They won’t boost economic growth, he says: “Cutting average effective tariffs (including the effects of quantitative restrictions) from, say, 40 percent to 10 percent can be a fairly big deal. But cutting from effective protection of only a few percent, which is where most of the world is now, isn’t going to give you a boost that you’ll be able to tell from statistical noise.”

We in the business community respectfully disagree. In today’s highly competitive global markets, margins are often razor thin. Tariffs don’t have to soar into the double digits to effectively shut out American exports of goods and services and tip the advantage to producers elsewhere.

U.S. goods arriving in foreign markets face an average tariff of 5.9%, according to the World Economic Forum’s Global Enabling Trade Report 2014. That’s more than four times the U.S. level, but tariffs often average in the double digits in emerging markets, particularly for key U.S. manufactured goods and agricultural exports.

One of the report’s rankings gauges the level of tariffs that a country’s exporters face. While the report found the United States did well in a number of areas, the United States ranked a disastrous 130th out of 138 economies in terms of the “tariffs faced” by our exports overseas.

In other words, American exporters face higher tariffs abroad than nearly all our trade competitors. It’s also worth noting that tariffs are just part of the problem, as they are often found alongside a spiderweb of non-tariff barriers that shut U.S. goods and services out of foreign markets.

No one wants to go into a basketball game down by a dozen points from the tip-off—but that’s exactly what American exporters do every day.

If businesses seek trade agreements primarily to eliminate the barriers that shut their goods and services out of foreign markets, economists most often welcome them due to the benefits of eliminating barriers to imports. Cutting import costs boosts the real income of consumers, enhances competition in the marketplace, and can make domestic producers more competitive by lowering the cost of inputs.

With regard to Krugman’s concerns about income inequality, further trade liberalization is likely to be particularly beneficial to low-income Americans. As Ed Gresser of Progressive Economy explains in a recent paper:

Because U.S. tariffs are concentrated in taxation of cheap clothes, shoes, and other home goods rarely made in the United States, they are mostly ineffective as import limits and regressive as taxation. The main effect of reducing these tariffs through trade agreements would be to raise living standards for lower-income households and thus ease inequality.

Krugman’s views have drifted outside the mainstream of the economics profession in recent years. In a November survey of more than 40 leading economists conducted by the University of Chicago’s Initiative on Global Markets, 83% agreed that “past major trade deals have benefited most Americans,” and not one disagreed. This result echoes those of many other surveys of economists over the years.

Further, 88% agreed—and none disagreed—with this statement: “By lowering bargaining costs, fast-track negotiating authority for the president makes it more likely that the U.S. can conclude major trade deals.”

While he’s criticizing the Chamber, Krugman could just as well be taking on President Obama, who as long ago as 2010 said in his State of the Union address: “We have to seek new markets aggressively, just as our competitors are. If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores.”

In the decades before he became a pundit, Krugman made major contributions to economics. When he won the Nobel Prize in Economics, it was in large part in recognition of his groundbreaking work explaining why countries with similar industries and resource endowments—such as America and Europe—have so much intra-industry trade.[1]

But when Krugman throws out a parade of straw men (who exactly introduced Stalin into this debate?) or laments obscurely that “Sauron was gathering his forces in Mordor” as the economic debates of the past two decades unfolded, it’s becomes harder to take him seriously.

[1] It has to do with producers seeking economies of scale and consumers preferring a diversity of product choices. The abstract of his 1981 paper on these matters sounds like an endorsement of trade agreements: “If intraindustry trade is sufficiently dominant [as it is for U.S. trade with, say, the EU and Japan], the advantages of extending the market will outweigh the distributional effects, and the owners of scarce as well as abundant factors will be better off.”)

About the Author

About the Author

Senior Vice President for International Policy

Murphy directs the U.S. Chamber’s advocacy relating to international trade and investment policy.