David Ignatius and the Washington Post Flunk Trade Arithmetic Again

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Thursday, 06 December 2012 07:35

The Washington Post is notorious for getting numbers terribly wrong when it comes to trade. It once ran a lead editorial touting the wonders of NAFTA that claimed Mexico's GDP had quadrupled from 1987 to 2007. According to the IMF the number was 83 percent. But the Post is willing to toss numbers, logic, and arithmetic to the wind when it comes to pushing the trade agreements that have been on the political agenda in recent years.

Hence we have Post columnist David Ignatius telling us this morning that:

"What’s appealing in particular about the trans-Atlantic initiative [a Europe-U.S. trade agreement] is that it could be a big job creator for economies on both continents that are still recovering from the effects of the recession. ...

"I like the idea of an “economic NATO” because it addresses fiscal problems through growth and expansion. The alternative “austerity pill” advocated by conservative Germans (and some American budget-cutters) is doomed to fail. Big, new spending initiatives are not a realistic growth strategy, either, given debt worries on both continents. To many economists, it’s a no-brainer: Expanded trade offers the best path to new jobs, markets and investment opportunities."

There we go, we can cut the deficit and still produce jobs because of the wonders of increased trade.

Sounds great, let's check the numbers.

Later in the piece Ignatius tells us about a study that projects that a 50 percent reduction in non-tariff barriers (an ambitious target) would produce gains for the U.S. of $53 billion annually. Abolishing all tariffs would increase annual GDP by $82 billion. This gives us a total gain in GDP of $135 billion, a bit less than 0.9 percent of GDP. Note that this is likely an overstatement of actual gains because we will probably not reach these targets. Also the spending on adjustment measures, which accompany almost every trade agreement, would subtract from these projected gains.

But let's just take Igantius' gain of 0.9 percent of GDP at face value. If there is good progress and a deal is concluded relatively quickly, the changes will likely be phased in over a period of time, with the projected gains lagging the reduction in tariff and non-tariff barriers as the economy takes time to respond. Let's assume the whole process takes ten years. This means that Ignatius' trade deal will increase growth over the next decade by an average of 0.09 percent a year.

While it would be nice to see this boost to growth, that is not really important enough to change anyone's forecasts. In fact, even in retrospect we can't even estimate GDP growth to this degree of accuracy. By comparison, the Congressional Budget Office's projections show that the tax increases and spending cuts associated with the end of year fiscal dispute will reduce GDP by close to 4.0 percent, or roughly 40 times the impact of Ignatius's trade deal.

In short, the potential gains from these sorts of trade deals are swamped by the macroeconomic impact of the budget. It is unfortunate that Ignatius and his friends at the Post may not like budget deficits as a way of boosting demand, but they are not even in the right ballpark when they are talking about their latest trade deal.

Of course this does not mean that a Europe-U.S. trade deal would be a bad idea. If trade could bring the pay of U.S. doctors down to European levels (@$100,000 a year as opposed to $250,000 a year) it would save us close to $100 billion annually on our health care bill. The gains might be 2 or 3 times as large if lawyers, dentists and other highly paid professionals were also subjected to international competition. Unfortunately, our trade policy is so dominated by protectionists that it is unlikely that reducing protection for these professionals will even be on the agenda. 

Anyhow, if the editors at the Post had any knowledge of arithmetic they would not allow a column that suggested that the modest potential gains from a trade agreement were a substitute for macroeconomic stimulus. But hey, it's the Post.