THE Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the rebranded TPPA, was finally signed by 11 countries on March 8.
The pact had earlier raised anxiety among certain parties that it would jeopardise Malaysia’s sovereignty and undermine the well-being of its citizens. But if we look at the bigger picture, the pact will benefit the country in the long run because our economy depends largely on trade activities.
According to Moody’s last week, Malaysia would be the biggest winner from the deal as the CPTPP covers a market of nearly 500 million despite the absence of the United States.
This fact was reinforced by the Peterson Institute for International Economics’ (PIIE) research, which showed that the CPTPP would benefit palm oil, rubber and electronics exporters like Malaysia with export access to new markets including Canada, Peru and Mexico.
Looking at current data by the Malaysia External Trade Development Corporation (Matrade), Malaysia’s dependence on trade is undeniable, recording RM935.39bil in exports last year and RM838.14bil in imports. Malaysia enjoyed a trade surplus of RM97.28bil.
The electrical and electronics sector remains the top exporter accounting for 36.7% while palm oil products stood at 5.8%. Malaysia is also currently the largest producer of gloves, controlling almost 65% of the world market.
In view of this, the CPTPP will encourage existing manufacturers to expand as it provides access to new or untapped markets. It will indirectly reduce our reliance on the US market as well.
The tussle over tariffs is the most significant political battle taking place in America right now – much broader than a dispute over steel and aluminum imports. It is the Republican Party’s last stand against a total takeover by Donald Trump. Having ceded ground to the President on everything from personal character to immigration to entitlement reform, Republican leaders have chosen to draw the line at free trade. If they get rolled on this, Trump will have completed the transformation of the party.
“From Adam Smith to Milton Friedman, every great theorist of capitalism has recognized that free trade is at the heart of what makes capitalism work. And they have all pointed out that tariffs are precisely the kind of government intervention – with the state choosing which industries to favor, which companies to reward – that produces inefficiency and corruption. But Republicans are now comfortable with government intervention, as long as it’s for the right people”.–Dr. Fareed Zakaria
In recent weeks, Trump seems to have remembered that he is a populist or at least is playing one on TV. After campaigning as the tribune of the forgotten working class, he handed over his presidency to the establishment wing of the Republican Party, which proceeded to attack Obamacare, roll back regulations and pass a huge tax cut for companies and wealthy Americans. But perhaps to shore up his base before the midterm elections, or because he does actually believe some of his own rhetoric, he is now moving hard on tariffs – and also immigration.
As is often the case, Trump is more in line with his party’s base than most of its leaders. A recent Quinnipiac University poll finds that voters, like the Republican establishment, overwhelmingly oppose Trump’s tariffs. But most Republican voters support them. In fact, over the last decade, Republican support for free trade has dropped a staggering 20 points (while Democratic support has risen by 15). This is one of the sharpest reversals on major public policy recorded in recent history.
The new Republican Party is coming into view. It is a party skeptical about free markets. It is important to remember that it is not really possible to be in favor of capitalism and against free trade. From Adam Smith to Milton Friedman, every great theorist of capitalism has recognized that free trade is at the heart of what makes capitalism work. And they have all pointed out that tariffs are precisely the kind of government intervention – with the state choosing which industries to favor, which companies to reward – that produces inefficiency and corruption. But Republicans are now comfortable with government intervention, as long as it’s for the right people.
It is also now a party that has developed a contempt for experts and expert analysis. In 1980, with liberalism ideologically smug and dominant, Democratic Sen. Daniel Patrick Moynihan remarked that all the new and interesting policy ideas were coming from people like William F. Buckley and Irving Kristol on the right. Today, the Republican Party is led intellectually by the likes of Sean Hannity and Rush Limbaugh.
Consider that Trump’s tariffs are opposed by a remarkable array of scholars across the political spectrum, from the conservative Heritage Foundation to the libertarian Cato Institute to the center-left Brookings Institution to the left-wing Center for Economic and Policy Research. The White House barely offers serious arguments, instead providing a bogus justification for the tariffs, national security, even though China and Russia supply only a small portion of these goods to the U.S.
Despite research showing that previous protectionist policies have failed, that the steel industry has lost more jobs due to efficiency and automation than to trade, and that preserving one job in the steel or automobile industries through tariffs costs consumers a whopping $1.5 million, administration supporters no longer even offer a response. The data is simply dismissed as partisan spin or fake news.
Finally, the GOP is being transformed into a party that is hostile to foreigners and foreign countries. Under Ronald Reagan, the Republicans were the party of a generous immigration policy, strong alliances and faith in the advancement of democracy around the world.
Today, the party’s base doesn’t like foreigners or foreign countries. Even traditional allies like the Europeans are increasingly viewed with suspicion. It is bizarre to have chosen tariffs that mostly threaten American allies like Canada, the E.U., South Korea and Mexico. Trade does produce disruptions, especially severe ones in recent decades. The most sensible, cost-effective way to deal with them would be to provide subsidies to workers who lose their jobs because of trade, and invest in large scale retraining efforts. But that doesn’t quite have the bite that attacking foreigners and stoking trade conflict does.
Having transformed the party’s views on issues as diverse as immigration, fiscal discipline, foreign policy and law enforcement, if Trump wins the battle over trade with his party, he will have won the war. The Republican Party will be history. And given his long-demonstrated preferences in this regard, who knows, he will probably want to rename it the Trump Party.
Fareed Zakaria is published weekly by THE DAILY STAR.
A version of this article appeared in the print edition of The Daily Star on March 12, 2018, on page 7.
Universities pride themselves on producing creative ideas that disrupt the rest of society, yet higher-education teaching techniques continue to evolve at a glacial pace. Given education’s centrality to raising productivity, shouldn’t efforts to reinvigorate today’s sclerotic Western economies focus on how to reinvent higher education?
CAMBRIDGE – In the early 1990s, at the dawn of the Internet era, an explosion in academic productivity seemed to be around the corner. But the corner never appeared. Instead, teaching techniques at colleges and universities, which pride themselves on spewing out creative ideas that disrupt the rest of society, have continued to evolve at a glacial pace.
Sure, PowerPoint presentations have displaced chalkboards, enrollments in “massive open online courses” often exceed 100,000 (though the number of engaged students tends to be much smaller), and “flipped classrooms” replace homework with watching taped lectures, while class time is spent discussing homework exercises. But, given education’s centrality to raising productivity, shouldn’t efforts to reinvigorate today’s sclerotic Western economies focus on how to reinvent higher education?
One can understand why change is slow to take root at the primary and secondary school level, where the social and political obstacles are massive. But colleges and universities have far more capacity to experiment; indeed, in many ways, that is their raison d’être.
For example, what sense does it make for each college in the United States to offer its own highly idiosyncratic lectures on core topics like freshman calculus, economics, and US history, often with classes of 500 students or more? Sometimes these giant classes are great, but anyone who has gone to college can tell you that is not the norm.
At least for large-scale introductory courses, why not let students everywhere watch highly produced recordings by the world’s best professors and lecturers, much as we do with music, sports, and entertainment? This does not mean a one-size-fits-all scenario: there could be a competitive market, as there already is for textbooks, with perhaps a dozen people dominating much of the market.
And videos could be used in modules, so a school could choose to use, say, one package to teach the first part of a course, and a completely different package to teach the second part. Professors could still mix in live lectures on their favorite topics, but as a treat, not as a boring routine.
A shift to recorded lectures is only one example. The potential for developing specialized software and apps to advance higher education is endless. There is already some experimentation with using software to help understand individual students’ challenges and deficiencies in ways that guide teachers on how to give the most constructive feedback. But so far, such initiatives are very limited.
Perhaps change in tertiary education is so glacial because the learning is deeply interpersonal, making human teachers essential. But wouldn’t it make more sense for the bulk of faculty teaching time to be devoted to helping students engage in active learning through discussion and exercises, rather than to sometimes hundredth-best lecture performances?3
Yes, outside of traditional brick-and-mortar universities, there has been some remarkable innovation. The Khan Academy has produced a treasure trove of lectures on a variety of topics, and it is particularly strong in teaching basic mathematics. Although the main target audience is advanced high school students, there is a lot of material that college students (or anyone) would find useful.
Moreover, there are some great websites, including Crash Course and Ted-Ed, that contain short general education videos on a huge variety of subjects, from philosophy to biology to history. But while a small number of innovative professors are using such methods to reinvent their courses, the tremendous resistance they face from other faculty holds down the size of the market and makes it hard to justify the investments needed to produce more rapid change.
Let’s face it, college faculty are no keener to see technology cut into their jobs than any other group. And, unlike most factory workers, university faculty members have enormous power over the administration. Any university president that tries to run roughshod over them will usually lose her job long before any faculty member does.
Of course, change will eventually come, and when it does, the potential effect on economic growth and social welfare will be enormous. It is difficult to suggest an exact monetary figure, because, like many things in the modern tech world, money spent on education does not capture the full social impact. But even the most conservative estimates suggest the vast potential. In the US, tertiary education accounts for over 2.5% of GDP (roughly $500 billion), and yet much of this is spent quite inefficiently. The real cost, though, is not the squandered tax money, but the fact that today’s youth could be learning so much more than they do.
Universities and colleges are pivotal to the future of our societies. But, given impressive and ongoing advances in technology and artificial intelligence, it is hard to see how they can continue playing this role without reinventing themselves over the next two decades. Education innovation will disrupt academic employment, but the benefits to jobs everywhere else could be enormous. If there were more disruption within the ivory tower, economies just might become more resilient to disruption outside it.
We are living in worrisome economic times. One year ago, I observed that US President Donald Trump’s bullying of companies and individuals who get in his way is reminiscent of Benito Mussolini in the 1920s. Like Mussolini, Trump poses a clear danger to the rule of law.–Edmund S. Phelps
For decades, America has suffered from a long-run productivity slowdown that has sapped the economy of its former dynamism, and left median wages stagnant. Will the tax legislation recently enacted by congressional republicans and the Trump administration finally reverse this trend, or will it make a bad situation worse?
PHILADELPHIA – We are living in worrisome economic times. One year ago, I observed that US President Donald Trump’s bullying of companies and individuals who get in his way is reminiscent of Benito Mussolini in the 1920s. Like Mussolini, Trump poses a clear danger to the rule of law.
My subject here, however, is the tax legislation that Trump signed into law in December, on the promise that reducing the rate at which corporate profits are taxed will help an ailing US economy.
Political Responses to the Malaise
For several decades, the US economy has exhibited various symptoms of economic malaise. Now, we have a political upheaval on our hands. While real (inflation-adjusted) median wages have been nearly stagnant for decades, private saving from profits and enormous capital gains have continued apace. As asset prices – to say nothing of the wealth-wage ratio – have climbed to vertiginous levels, established wealth has grown more powerful, and wealth managers have done well.
Worse still, in industries hit hard by foreign trade or automation, many jobs have been eliminated, and real wages have actually declined. As these new developments continued over the past few decades, they placed increasing pressure on society as a whole. Ultimately, there was an electoral realignment, marked by a shift in voting patterns among key economic constituencies.
Remarkably, neither Democrats nor Republicans seemed to register these economic and social ailments, or the consequences they could have. When Hillary Clinton launched her 2016 presidential campaign with a speech on Roosevelt Island, she focused heavily on achieving social justice for marginalized groups. She did not address the fact that, some six decades ago, the US economy lost the sustained growth it had been generating since the 1820s, despite depressions and inflationary cycles.
While Democrats became increasingly fixated on notions of “fairness” and what academics call the “just economy,” they apparently didn’t notice that the country had been operating for decades without a good economy. Countless people have had little or no chance of feeling fully included in economic life. They have been deprived of jobs that are actually engaging, and of opportunities to feel that they have succeeded at something.
As the renowned Columbia University philosopher David Sidorsky recently pointed out to me, ancient philosophers spoke of “the good and the just” (boni et aequi), not “the just and the good.” Clearly, the Democrats put the cart before the horse. First, we need a good economy. Only then can we devise a just way to reward participants for contributions that the economy empowers them to make.
An Attempt at a Cure
After securing the presidency – in addition to both houses of Congress – in 2016, Republicans have tried to run the ball through the opening left by the Democrats. Throughout 2017, they pursued a range of reforms to address weak investment and stagnant wages, and ended the year with the newly enacted tax legislation, which cuts the tax rate on corporate profits from 35% to 21%.
Economists who support the Republicans’ tax legislation have relied on a textbook growth model to claim that it will boost investment activity. According to their model, investment will drive up the capital stock until it reaches the steady-state level where the after-tax rate of return falls to the level of the real interest rate. The real interest rate is exogenous, and reflects investors’ time preferences, world interest rates, and other factors. The point where the rate of return intersects with the real interest rate is shown in Figure 1. (A more classical case, in which the rate of return is pulled down by capital accumulation, is shown in Figure 2.)
Supporters of the tax legislation reason that if the tax cut pushes up the after-tax rate of return, investment activity will increase, and the capital stock will expand, boosting productivity until the capital stock reaches a new steady state, which they calculate will happen in around ten years.
But, as is always the case with supply-side economics and more radical forms of Keynesianism, this approach is profoundly short-sighted. After ten years, there is no reason to think the faster growth will continue.
Without the same level of indigenous innovation that was achieved during the golden era of high growth rates, from the 1820s to around 1970, the Republican tax law will amount to nothing more than a stop-gap measure. And even over the next decade, it will not deliver truly rapid growth.
The Problem with Models
More fundamentally, we ought to ask whether it is right to expect tax cuts to translate into higher productivity growth. I would argue that, because the tax package will add to the annual fiscal deficit and the public debt, it might actually block investment, and thus derail a productivity pickup.
When I was a young economist working on my 1965 monograph, Fiscal Neutrality Toward Economic Growth, I would have looked at today’s favorable short-term conditions and actually called for a tax increase across the board, in order to stanch the federal government’s fiscal hemorrhaging. A tax hike might push down bond yields, and thus bring about higher share prices and a considerable drop in interest rates over the entire yield curve, provided the US Federal Reserve didn’t offset the move by unwinding its bond holdings.
Thinking back even further, to when I was a young student, I can remember congressional Republicans voicing their opposition to fiscal deficits, and President Harry Truman, a Democrat, enacting a run of fiscal surpluses aimed at mopping up the federal debt. These policies, helped by inflation (which lowered the real value of the debt), did not lead to a depression. There was only the 1949-1950 recession.
Nowadays, a crude form of Keynesianism is so deeply ingrained in voters’ minds that any program aimed at achieving a fiscal surplus, or even balance, has become unthinkable. Yet one wonders if the new tax law will arouse worries about the sustainability of the growing federal debt, which is already high after the presidencies of George W. Bush, a supply-sider, and Barack Obama, a Keynesian. If so, such concerns would push up interest-rate risk premia in anticipation of a depreciating dollar. Yes, the Republican plan does include some provisions to raise revenue or cut spending, but that is not entirely reassuring.
Of course, those who support the law would argue that the supposed increase in investment activity will immediately push up the dollar’s exchange rate, and that the dollar’s real value would then depreciate gradually to where it had been. Otherwise, no one would want to continue holding foreign capital. This points to a paradox in the law. Trump ran on the promise of boosting American exports, but in standard models, an appreciating dollar will depress export demand.
On the other hand, a stronger dollar will prompt domestic firms in import-competing industries to cut their markups so that potential foreign rivals will be less inclined to invade the US market. As a result, wage rates might be pulled up along with the amount of labor supplied. These particular industries, then, would experience an expansion of output and employment.
An Uncertain Prognosis
But for those who do not share the perspective of the law’s supporters, this scenario is hardly a sure thing. After all, who’s to say if the tax package will drive up business investment until the marginal productivity of capital has fallen enough to raise substantially the marginal productivity of labor? That scenario might be possible; but it is in no way assured. As New York University’s Roman Frydman and I argued in a commentary last month, the real-life US economy is not a “mechanical system in which changes in tax parameters and other inputs explain exactly why and how investment occurs and the economy grows.”
Unfortunately, the economics profession has ignored the potential implications of human agency. If far more people were to start conceiving and creating innovations, investment and wage rates might rise well beyond what the textbook model would have predicted. By the same token, if fewer people engage in innovation, investment and wages rates may rise less than expected, or even fall.
In other words, the innovation factor could very well dwarf the effect of the cut in the corporate-tax rate over the next ten years. By that point, we might not have enough evidence to determine if the tax cut was effective, or merely an inconsequential drop in the bucket.
And the uncertainty goes deeper than that. The problem is not just that the traditional model’s disturbance terms may be so large that they overshadow the effects of the tax cut, but also that the coefficients for measuring the tax law’s effect on investment or wages might not even be knowable. The innovators driving (or failing to drive) gains in productivity cannot be certain ahead of time what form their new products or methods will take, or whether they will be adopted at all. How, then, could economists ever foretell precise changes in investment patterns as a result of a tax cut, or what effects new investments will have on the marginal productivity of labor?
As I suggested in November, what we call the “natural” unemployment rate can be affected by insecurity and fear. Similarly, if an unfunded tax cut conjures visions of insolvency, corporate executives might be wary of making new investments. Or they might decide to invest predominantly in labor-saving technologies, which could actually reduce wages and eliminate jobs in some industries. Given that possibility, one cannot be sure whether the tax law will have a positive or negative effect on wages, employment, or productivity.
None of this is to say that we should avoid new departures. Certainly, we must keep trying in the hopes of making progress. Or, as Candide (in the musical) tells Cunégonde after they have both endured many difficulties, “We’ll do the best we know.”
About the Author:
Edmund S. Phelps, the 2006 Nobel laureate in Economics, is Director of the Center on Capitalism and Society at Columbia University and the author of Mass Flourishing.
As a candidate, Donald Trump talked incessantly about international trade and how he was going to make America great again by renegotiating trade agreements, forcing foreigners to stop taking away our jobs. But during his first year in office, he did almost nothing on that front — possibly because corporate America managed to inform him that it has invested a lot of money based on the assumption that we would continue to honor Nafta and other trade agreements, and would lose bigly if he broke them.
This week, however, Trump finally did impose tariffs on washing machines and solar panels. The former tariff was, I think, more about looking tough than about any kind of strategic objective. The latter, however, fits in with an important part of this administration’s general vision. For this is very much an administration of dirty old men.
About washing machines: The legal basis of the new tariff is a finding by the United States International Trade Commission that the industry has been injured by rising imports. The definition of “injury” is a bit peculiar: The commission admitted that the domestic industry “did not suffer a significant idling of productive facilities,” and that “there has been no significant unemployment or underemployment.” Nonetheless, the commission argued that production and employment should have expanded more than it did given the economy’s growth between 2012 and 2016 (you know, the Obama-era boom Trump insisted was fake).
If this seems like a flimsy justification for an action that will significantly raise consumer prices, that’s because it is. But Trump decided to do it anyway.
The solar panel tariff is more interesting, and more disturbing, because it will surely destroy many more jobs than it will create.
The fact is that the U.S. is largely out of the solar panel-producing business, and whatever the reasons for that absence, this policy won’t change it. Like the washing-machine tariff, the solar-panel tariff was imposed using what’s known in trade policy circles as the “escape clause” — rules that allow temporary protection of industries suffering sudden disruption. The operative word here is “temporary”; since we’re not talking about sustained protection, this tariff won’t induce any long-term investments, and therefore won’t bring the U.S. solar panel industry back.
What it will do, however, is put a crimp in one of the U.S. economy’s big success stories, the rapid growth of renewable energy. And here’s the thing: Everything we know about the Trump administration suggests that hurting renewables is actually a good thing from its point of view. As I said, this is an administration of dirty old men.
House Speaker Paul Ryan
Over the past decade or so there has been a remarkable technological revolution in energy production. Part of that revolution has involved the rise of fracking, which has made natural gas cheap and abundant. But there have also been stunning reductions in the cost of solar and wind power.
Some people still think of these alternative energy sources as hippy-dippy stuff that can’t survive without big government subsidies, but the reality is that they’ve become cost-competitive with conventional energy, and their cost is still falling fast. And they also employ a lot of people: Over all, there are around five times as many people working, in one way or another, for the solar energy sector as there are coal miners.
But solar gets no love from Trump officials, who desperately want the country to stay with dirty old power sources, especially coal. (Wait — when I called them dirty old men, did you think I was talking about payoffs to porn stars? Shame on you.) They’ve even rewritten Energy Department reports in an attempt to make renewable energy look bad.
They’ve tried to turn their preference for dirty energy into concrete policy, too. Last fall, Rick Perry, the energy secretary, tried to impose a rule that would in effect have forced electricity grids to subsidize coal and nuclear plants. The rule was shot down, but it showed what these guys want. From their point of view, destroying solar jobs is probably a good thing.
Why do Trump and company love dirty energy? Partly it’s about the money: what’s good for the Koch brothers may not be good for America (or the world), but it’s good for G.O.P. campaign finance. Partly it’s about blue-collar voters, who still imagine that Trump can bring back coal jobs. (In 2017 the coal industry added 500, that’s right, 500 jobs. That’s 0.0003 percent of total U.S. employment.)
It’s also partly about cultural nostalgia: Trump and others recall the heyday of fossil fuels as a golden age, forgetting how ghastly air and water pollution used to be. But I suspect that it’s also about a kind of machismo, a sense that real men don’t soak up solar energy; they burn stuff instead.
Whatever the specific motivations, the administration’s first significant trade policy move is stunningly boneheaded. You shouldn’t even call it protectionism, since its direct effect will be to destroy far more jobs than it creates. Plus it’s bad for the environment. So much winning!
Nobel Laureate in Economics–Paul Krugman
A version of this op-ed appears in print on January 26, 2018, on Page A23 of the New York edition with the headline: The Economics Of Dirty Old Men. Today’s Paper|Subscribe