CEA Chairman Jason Furman on Trade, Innovation, and Economic Growth

May 1, 2015 10:45 AM

What a fabulous show! The fight over Trade Promotion Authority (TPA) and the Trans-Pacific Partnership (TPP) has become a trade wonk’s three-ring circus. In the first ring, we see a lively battle between President Obama and Senator Elizabeth Warren; in the second ring, we hear extravagant denunciations from the AFL-CIO, Public Citizen, and Senator Charles Schumer matched by forceful advocacy from the Business Roundtable and Japanese Prime Minister Abe; and in the third ring, we read a stream of media commentary reporting ever-fluid congressional machinations.

Somewhat ignored in the spectacle are calmer accounts of the gains and losses from trade agreements, including the TPP. Earlier in April, the chairman of Council of Economic Advisers (CEA), Jason Furman, delivered an excellent summary at the Brookings Institution. Furman not only summarized the traditional case for freer trade, found in the textbooks of a generation ago, but he also laid out the new case, which emphasizes competition, innovation, and economic growth. These views are expounded upon in a new CEA report, The Economic Benefits of U.S. Trade, released today.

As Furman reports, by applying the mathematical armory of a computable general equilibrium (CGE) model to the traditional case, Peter Petri, Michael Plummer, and Fan Zhai calculate that TPP, when fully implemented, will deliver annual gains to the US economy, in perpetuity, of $77 billion in 2007 dollars. Discounting this annual figure by the current long-term real interest rate, which is below 2 percent, indicates a capitalized value of nearly $4 trillion. That payoff should appeal even to the most hardened trade skeptics.

The new case for trade and investment, outlined by Furman, emphasizes the stimulus that a global market provides to innovation—especially in advanced countries like the United States—and the faster flow of ideas between all countries. Empirical models have not yet been devised to scale these gains, but they are enormous. It is no coincidence that the 65 years since the Second World War, the best in human history, have coincided with a massive expansion of trade and investment. Globalization has not only lifted hundreds of millions of people out of poverty, but also it has sharply boosted per capita incomes even in the richest advanced nations.

TPA and TPP represent critical steps along a very long policy road that stretches back to the founding of the Bretton Woods system in the late 1940s, multiple GATT and WTO negotiating rounds between the 1950s and the 1990s, and scores of important free trade agreements over the past two decades. To be sure, not everyone benefits from increased globalization, and the United States should do a far better job of compensating and retraining the losers. But as Furman concludes, “trade is an important driver of long-run economic growth.” Without faster growth, all Americans will be deprived of benefits to which they rightly aspire.

Add new comment