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The free trade agreement benefits Trump (and Shorten) ignore

"America first" (Donald Trump), "Australia first" (Scott Morrison), "winning in Asia on our terms" (Bill Shorten) – populist nationalism is all the rage on the political trade stage.

And the one thing you can be sure about populism is that its goals are short-term and short-sighted, that it is disastrously myopic when faced with the big picture, that it champions the simple and simplistic because it's not capable of anything more.

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President Trump signs three executive orders

President Donald Trump has signed memorandums to pull the US out of the proposed TPP, freezing most federal government hiring and reinstating a ban on providing federal money to international groups that perform abortions.

That's on display with President Trump abandoning the Trans-Pacific Partnership (TPP) and attacking NAFTA (the North American Free Trade Agreement) – he repeatedly called it "the worst deal ever", at least until he told Malcolm Turnbull what he thought of the Nauru/Manus refugee deal.

It's also on display in Labor's hedging on the TPP's worth and in the comments of the many local TPP critics who are glad to be rid of it, assuming it has no future without the US.

The common refrain by Australian TPP knockers is that there was "nothing in it for us" while we bowed to US demands on copyright and patents. Trump also claimed there was nothing in for the US, that it would cost more American jobs, just as NAFTA helped Mexico "steal" American jobs.

The critics like to selectively quote a World Bank study that did indeed model that Australia and the US would achieve the smallest GDP lift from the TPP by 2030. The graph tells the story – on a very simple level.

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World Bank forecast impact of TPP on GDP growth by 2030. Credit: World Bank 

That smudge on the line above Australia is 0.7 per cent. That sort of GDP gain for the US and Australia over a dozen years is, to use a technical term, pretty much stuff-all.

Local TPP critics claim the small gain would come at a high cost in acceding to US demands on copyright, intellectual property and investor-state dispute settlement.

But that's "Australia first" talking. It fails to credit the benefits that come from other countries doing well.

To keep it simple for those focused on the simple, you're generally better off if your neighbours are better off. Trade is not the zero-sum game mercantilists like Trump think. The other team winning doesn't mean your team must lose. Vietnam gaining 10 per cent is a good thing. In the longer term, Vietnam doing well is good for Australia and everyone else.

NAFTA is an easier example to use because there are only three players and it turns 23 this year so the impact can be measured, not just modelled with all the usual likelihood of being wrong. And it's the one Trump campaigned so hard and misleadingly against.

The University of Pennsylvania's Wharton School ran the tape measure over NAFTA to mark its 20th anniversary in 2014. Yes, NAFTA helped Mexico subsequently "take" hundreds of thousands of American manufacturing jobs.

The automobile industry is the most obvious example.

Mexico has become the biggest exporter of cars to the US. Pre-Trump, it was estimated that by 2020, nearly 25 per cent of North American vehicle production would take place in Mexico, compared with 10 per cent in Canada and 65 per cent in the US. The job impact is greater, given that the more labour-intensive parts of the supply chain are more likely to turn Mexican.

But that's the simple stuff. NAFTA has helped change the nature of the North American car industry, making it internationally competitive again by becoming a single supply chain. And as for the broader question of overall manufacturing jobs lost, Wharton management professor Mauru Guillen reckons most would have been lost to other countries anyway.

And it's not a matter of simple import versus export figures: "Walter Kemmsies, chief economist at Moffatt Nichol, an international infrastructure consultancy, notes that close to 40 per cent of what the US imports from Mexico is derived from US sources. This is the symbol of the success of NAFTA. Twenty years ago, he estimates, that percentage was less than 5 per cent."

Mexico is the United States' third-biggest trade partner. Yes, the US runs a trade deficit with Mexico - Wharton's Guillen quotes $US54 billion in 2013. But the deficit with China was $US318 billion. (Australia ran a goods and services trade deficit with the US last financial year of more than $25 billion.) 

While many jobs were lost to Mexico, many were created in the US because of NAFTA, and not just directly by Mexican trade. As colleague Peter Martin has very nicely explained in another context, consumers gain from lower trade barriers. The money Americans saved by being able to buy cheaper stuff from Mexico, they spent elsewhere in their economy, creating jobs.

But even that is not the point I've been working towards.

The Wharton article again: "Now think of where Mexico would be today without NAFTA," Guillen writes. "Today, Mexican migration to the US has come to a halt. There are Central Americans coming to the US – but virtually no Mexicans. That's because Mexico is doing well. So just imagine, without NAFTA and with Mexico not doing that well, we would have had the additional problem of an unstable Mexico with lots of people wanting to come to the United States."

That's the really big point Trump doesn't see, the big picture that matters much more in the long run than a relative handful of specific jobs: neighbours doing better, becoming comfortable, make much better neighbours than those in dire straits.

Less obviously and dramatically, something similar applies with the TPP. We are much better off being in a region where the poorest nations are becoming better off.

There's much, much more in the World Bank study than is normally quoted.

For a start, the study warns that those growth figures for the period to 2030 don't really tell the story as the agreement takes quite a while to really work and would only be hitting its straps around 2030.

Furthermore, there's the potential that the TPP would grow or in effect grow as other nations were granted similar status.

The introduction sums up the big picture within the 2030 limitation: "If ratified by all, the agreement could raise GDP in member countries by an average of 1.1 per cent by 2030. It could also increase member countries' trade by 11 per cent by 2030, and represent a boost to regional trade growth, which had slowed to about 5 per cent, on average, during 2010-14 from about 10 per cent during 1990-07. To the extent that the benefits of reforms have positive spillovers for the rest of the world, the detrimental effects of the agreement due to trade diversion and preference erosion on non-members, would be limited. The global significance of the agreement depends on whether it gains broader international traction."

You hear about the very real IP and dispute-settling challenges, but critics overlook this: "The TPP seeks to incorporate International Labor Organization (ILO) obligations, require domestic laws to be consistent with international standards, and provides for enforcement. Environmental standards introduced in the agreement address illegal wildlife trafficking, logging and fishing. They also include provisions on conservation, biodiversity, protecting the ozone layer and environmental goods and services."

Vietnam and Malaysia were forecast to do well out of the TPP because of lower tariff and non-tariff mechanisms both abroad and at home (my emphasis) and by becoming more integrated into the regional supply chain.

Yes, there tends to be a loss of lower-skilled, lower-paid jobs in advanced countries to the less-advanced, but there also tends to be a gain in higher-paid, higher-skilled jobs in the advanced nations.

That's no comfort to a low-skilled worker who loses his or her job. It's part of the broader inequality problem that requires broader solutions involving education and income redistribution and support. There's no point blaming the TPP for something that, like the NAFTA example, would happen anyway.

Multi-lateral and bi-lateral trade agreements are very poor substitutes for global agreements. With that acknowledgement, the World Bank concluded: "Against the background of slowing trade growth, rising non-tariff impediments to trade, and insufficient progress in global negotiations, the TPP represents an important milestone. The TPP stands out among FTAs for its size, diversity and rulemaking. Its ultimate implications, however, remain unclear. Much will depend on whether the TPP is quickly adopted and effectively implemented, and whether it triggers productive reforms in developing and developed countries. Broader systemic effects, in turn, will require expanding such reforms to global trade, whether through TPP enlargement, competitive effects on other trade agreements, or new global rules."

It's not simple. It requires leadership to look for the bigger, long-term picture, to avoid the siren call of quick populist points, to explain that it's not a matter of which country comes first but how all countries can gain.

Trump doesn't get it, apparently is incapable of getting it. His cheap political success is being copied, to a greater or lesser extent, across Australian politics, as Jacqueline Maley has nailed. That's a tragedy.

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