ECONOMICS AND EUROPEAN BUSINESS MBA Beijing IUBE IAE November 2015 September Promotion Documents are allowed. No PC or other electronic devices 3 hours After reading the texts, you will answer all the following questions. Please refer to the classes or cases presented during classes when this is possible. Do not stick to the texts. Questions: 1. Looking at text number 1 (Michael Boskin), list and explain what are the main advantages of the TPP. (6 points) 2. Even if Virtually all economists agree that this shift toward freer trade greatly benefited the world s citizens and enhanced global growth what are the main drawbacks associated with TPP that are pointed out by M. Boskin? Explain and give examples. (7 points) 3. Looking at text number 2 (Paul Krugman), list and explain what are the main disadvantages of the TPP. Why Paul Krugman believes that TPP is not a free trade agreement and why this means from his point of view that this is a bad agreement? (7 points) 1
BUSINESS & FINANCE MICHAEL J. BOSKIN Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H. W. Bush s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates. OCT 29, 2015 The Case for the TPP STANFORD Following the conclusion of the Trans-Pacific Partnership by 12 Pacific Rim countries, debates about the costs and benefits of trade liberalization are intensifying. The early leaders in the United States presidential campaign, both the Republican Donald Trump and the Democrat Hillary Clinton, have expressed opposition to the TPP, though as Secretary of State, Clinton called it the the gold standard of trade deals. The right level of trade openness is not a new debate. Historically, trade systems have ranged from rather open to severely restricted by rules, tariffs, or non-tariff barriers, driven by shifts in the relative strength of liberalizing or protectionist economic and political forces. But even in closed systems, however severe the penalties they impose on trade, black markets usually develop, owing to the gains from trade generated by natural economic forces. The desire to trade arises whenever the domestic benefits of importing a good (whether a finished product or component) exceed the price paid for example, if the imported good cannot be produced domestically, or only at a higher cost. As the British economist David Ricardo demonstrated two centuries ago, it can even be better for a country to import goods that it can produce more cheaply, if doing so enables the production of other goods that are still cheaper to produce. Additional gains from trade include increased variety and the economies of scale implied by producing for global markets. Of course, there are potential downsides to trade. Alexander Hamilton, the first US treasury secretary, argued that allowing lower-cost imports would impede the development of domestic infant industry, which needed time to scale up enough to reduce costs to a competitive level. In recent decades, the anti-trade argument has focused largely on unfair competition and economic dislocation. But the reality is that, if two sides willingly trade, it can be assumed that both are better off; otherwise, one of them would refuse to trade. So, while trade liberalization may entail some (smaller) losses for certain groups, these can and should be addressed through domestic relocation and assistance schemes, such as America s Trade Adjustment Assistance program, and transition rules for affected industries, firms, and workers.
Past experience reinforces the view that, ultimately, voluntary trade is a good thing. Extreme protectionism in the early 1930s, following an era of relatively free international trade, had devastating consequences, ultimately setting the stage for World War II. As the MIT economist Charles Kindleberger showed, America s Smoot-Hawley Tariff, in particular, helped to turn a deep recession into a global depression. Even before the war was over, major powers convened in Bretton Woods, New Hampshire, to establish a new international trade and finance regime, including the General Agreement on Tariffs and Trade. Through a succession of lengthy and difficult global negotiations the so-called GATT rounds tariffs were steadily lowered for an increasing variety of goods. As a result, global trade grew faster than world GDP for most of the post-war period. Virtually all economists agree that this shift toward freer trade greatly benefited the world s citizens and enhanced global growth. The economists Jeffrey Frankel and David Romer estimate that, in general, trade has a sizeable positive effect on growth. At a time when growth is failing to meet expectations almost everywhere, the TPP thus seems like a good move. To be sure, because tariffs in the TPP member countries are already low (with some exceptions, such as Canada s tariffs on dairy products and Japan s on beef), the net benefit of eliminating them would be modest (except for a few items that are very sensitive to small price changes). But the TPP is also expected to reduce non-tariff barriers (such as red tape and protection of state enterprises); harmonize policies and procedures; and include dispute-settlement mechanisms. Though the TPP s precise provisions have not been made public, political leaders in the member countries predict that the deal, once ratified and implemented, will add hundreds of billions of dollars to their economies and bolster employment. Smaller and developing economies will probably gain the most, relative to size, but everyone will benefit overall. Other important outcomes are not included in these calculations. The alternative to liberalizing trade is not the status quo; it is a consistent move away from openness. This can occur in a number of ways, such as the erection of non-tariff barriers that favor domestic incumbents at the expense of lower-priced potential imports that would benefit consumers. Moreover, it is much easier to build mutually beneficial trade relationships than it is to resolve military and geopolitical issues, such as combating the Islamic State or resolving tensions in the South China Sea. But strong trade relationships have the potential to encourage cooperation or, at least, discourage escalation of conflict in other, more contentious areas. Still, there are some legitimate concerns about the TPP. Some worry that it could divert trade from non-member countries or undermine the moribund Doha round of multilateral trade negotiations (though 20 years ago, the North American Free Trade Agreement had the opposite effect, kick-starting the Uruguay round). Given all of this not to mention renewed attention to national borders, owing to contentious immigration issues, such as the influx of Middle Eastern refugees in Europe the TPP s ratification is far from certain, especially in the US. The concentrated interests that oppose the agreement may turn out to be more influential than the diffuse interests of all consumers. That would be a major loss. Allowing existing protectionist trade barriers to remain in place
or worsen would not only deprive citizens in TPP countries of higher incomes; it would also deal a damaging blow to international cooperation. https://www.project-syndicate.org/commentary/tpp-trade-growth-international-cooperation-by-michaelboskin-2015-10 1995-2015 Project Syndicate
http://nyti.ms/1kodx3n The Opinion Pages OP-ED COLUMNIST Trade and Trust MAY 22, 2015 Paul Krugman One of the Obama administration s underrated virtues is its intellectual honesty. Yes, Republicans see deception and sinister ulterior motives everywhere, but they re just projecting. The truth is that, in the policy areas I follow, this White House has been remarkably clear and straightforward about what it s doing and why. Every area, that is, except one: international trade and investment. I don t know why the president has chosen to make the proposed Trans-Pacific Partnership such a policy priority. Still, there is an argument to be made for such a deal, and some reasonable, well-intentioned people are supporting the initiative. But other reasonable, well-intentioned people have serious questions about what s going on. And I would have expected a good-faith effort to answer those questions. Unfortunately, that s not at all what has been happening. Instead, the selling of the 12-nation Pacific Rim pact has the feel of a snow job. Officials have evaded the main concerns about the content of a potential deal; they ve belittled and dismissed the critics; and they ve made blithe assurances that turn out not to be true. The administration s main analytical defense of the trade deal came earlier this month, in a report from the Council of Economic Advisers. Strangely, however, the report didn t actually analyze the Pacific trade pact. Instead, it was a paean to the virtues of free trade, which was irrelevant to the question at hand. First of all, whatever you may say about the benefits of free trade, most of those benefits have already been realized. A series of past trade agreements, going back almost 70 years, has brought tariffs and other barriers to trade very low to the point where any effect they may have on U.S. trade is swamped by other factors, like changes in currency values. In any case, the Pacific trade deal isn t really about trade. Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights things like drug patents and movie copyrights and changing the way companies and countries settle disputes. And it s by no means clear that either of those changes is good for America. On intellectual property: patents and copyrights are how we reward innovation. But do we need to increase those rewards at consumers expense? Big Pharma and Hollywood think so, but you can also see why, for example, Doctors Without Borders is worried that the deal would make medicines unaffordable in
developing countries. That s a serious concern, and it s one that the pact s supporters haven t addressed in any satisfying way. On dispute settlement: a leaked draft chapter shows that the deal would create a system under which multinational corporations could sue governments over alleged violations of the agreement, and have the cases judged by partially privatized tribunals. Critics like Senator Elizabeth Warren warn that this could compromise the independence of U.S. domestic policy that these tribunals could, for example, be used to attack and undermine financial reform. Not so, says the Obama administration, with the president declaring that Senator Warren is absolutely wrong. But she isn t. The Pacific trade pact could force the United States to change policies or face big fines, and financial regulation is one policy that might be in the line of fire. As if to illustrate the point, Canada s finance minister recently declared that the Volcker Rule, a key provision of the 2010 U.S. financial reform, violates the existing North American Free Trade Agreement. Even if he can t make that claim stick, his remarks demonstrate that there s nothing foolish about worrying that trade and investment pacts can threaten bank regulation. As I see it, the big problem here is one of trust. International economic agreements are, inevitably, complex, and you don t want to find out at the last minute just before an up-or-down, all-or-nothing vote that a lot of bad stuff has been incorporated into the text. So you want reassurance that the people negotiating the deal are listening to valid concerns, that they are serving the national interest rather than the interests of well-connected corporations. Instead of addressing real concerns, however, the Obama administration has been dismissive, trying to portray skeptics as uninformed hacks who don t understand the virtues of trade. But they re not: the skeptics have on balance been more right than wrong about issues like dispute settlement, and the only really hackish economics I ve seen in this debate is coming from supporters of the trade pact. It s really disappointing and disheartening to see this kind of thing from a White House that has, as I said, been quite forthright on other issues. And the fact that the administration evidently doesn t feel that it can make an honest case for the Trans-Pacific Partnership suggests that this isn t a deal we should support. Follow The New York Times Opinion section on Facebook and Twitter, and sign up for the Opinion Today newsletter. A version of this op-ed appears in print on May 22, 2015, on page A27 of the New York edition with the headline: Trade and Trust. 2015 The New York Times Company