China may have to bite TPP bullet and open up to the world

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Let's be frank, trade is a bit nerdy. It's a topic that excites people with obsessions: tariffs on textiles, phytosanitary arrangements, banana quotas. Talk for too long about this stuff and you will find yourself drinking on your own. How then do we explain why trade has become political dynamite – a trigger for explosive arguments about jobs in the U.S. presidential election.

In Canada, trade was always about the United States and the row was always about tariffs on Canadian lumber. Americans still buy three-quarters of what Canada exports but the proportion is gradually shrinking as a result of to the rise of Asia, in particular China. Hence, Canadian fascination with the Trans-Pacific Partnership, a barnstormer of a trade agreement comprising 12 nations, promoted by the United States and including Canada, Australia, Japan, New Zealand, Malaysia, Singapore, Brunei, Mexico, Chile and Peru. The deal (which the Harper administration promoted as the greatest trade deal ever and Canada's opportunity into Asia) is signed but not yet ratified in each state. U.S. President Barack Obama is desperate to get it through Congress before he quits the White House (it's a presidential legacy thing) but the omens are not good.

The effect of TPP in Canada is probably mixed – gains in meat exports and services, losses in car manufacturing and dairy farming. But trade has become the issue of the American presidential campaign with Donald Trump promising to force U.S. corporations to bring back jobs exported to Mexico and China. Bernie Sanders says free trade kills jobs and even Hillary Clinton has slipped the proverbial knife into the back of her former boss. While secretary of state, she called TPP the "gold standard." But now, on the stump, facing blue-collar voters, she reckons it doesn't do enough to protect American living standards.

You might wonder if Mrs. Clinton will change her tune for a second time, should she find herself back in the White House in January. But the more important question is whether trade kills or creates jobs and wealth and how you get more of the latter and less of the former. The answer is very complicated and, as you might expect, it is a "yes" to both questions. Trade creates wealth and jobs but not for everyone and where importers do displace weaker indigenous producers, the lost employment is not recovered easily or at all.

The conventional wisdom used to be that in a free-trading world, all would produce to their comparative advantage. In other words, an arid country such as Spain, blessed with warm sunshine, would sell tomatoes, olives and fruit to the rain-soaked British who would sell the meat and dairy produce of their green fields to the Spanish. Faced with the challenge of cheap British beef, the Spanish would stop feeding precious grain to cattle while the British would stop burning fuel to heat greenhouses and, instead, buy cheap tomatoes from Spain.

That was the theory, but the sudden rise of China is upsetting the balance of trade, confounding those who believed that a free-trading United States would quickly move up the value chain. David Autor, a Massachusetts Institute of Technology professor of labour economics, is the co-author of a paper, The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade, that concludes the U.S. labour market is not adjusting in textbook fashion to Chinese import competition. You might have expected, the authors say, that the Chinese manufacturing challenge would lead to a big shift in the American work force from, for example, making furniture and clothing to pharmaceuticals and aircraft. Instead, "adjustment to trade shocks is stunningly slow," the authors write, "with local labour force participation rates remaining depressed and local unemployment rates remaining elevated for a full decade or more after the shock commences." While employment has fallen in those industries subject to import competition, "off-setting employment gains in export-oriented tradables, or in non-tradables, have, for the most part, not materialized."

In plain English, this means that Americans over all gained from the astonishingly cheap frocks and fridges when China joined the World Trade Organization in 2000. Membership lifted hundreds of millions of Chinese out of grinding poverty. However, a very sizable minority of Americans suffered a dramatic loss of earning power and many never made it back into the workplace. Behind Mr Autor's dispassionate data, you can see the angry faces that fill the stadiums listening to Mr Trump's harangues and threats to impose huge tariffs on China. The industries affected by the Chinese trading juggernaut were concentrated in rust belt manufacturing hubs and, without the skills or the opportunity to move to a more advantageous trading position, millions of workers got left behind.

Ironically, China was not included in TPP; its provisions on intellectual property and government procurement are seen as American flag-waving in China's backyard. Open up to the world or stay out of our world, the TPP promoters seem to be saying to China. But India, too, is not part of the deal; the country that is sometimes touted as home to the next manufacturing giant has also failed after years of talks to agree to a trade pact with the European Union. The obstacles are many but protecting India's generic pharmaceutical industry from foreign patent law is one of the roadblocks. The exclusion of two emerging-market colossi, accounting for almost a third of the world's population, from America's big trade idea makes it hard to see how this can become a model trade agreement for the rest of the world.

Yet U.S. President Barack Obama's TPP gambit may be timed better than it first seems. China's big trade push is over. The steel mills are shutting and China's labour cost advantage is diminishing fast. As Mr. Autor notes, China's future comparative advantage will depend less on labour costs and more on the Chinese government's ability to respond to a changing world economy.

So far, Beijing's response to economic shocks, such as bailing out the Shanghai stock market, has not been impressive. If China is to go beyond its workshops and build a high-value-added economy, it has no choice but to bite the TPP bullet and open its economy further. Likewise, India will not succeed in building a competitive global pharmaceutical sector without fully embracing the ownership of intellectual property.

It's no comfort to the angry crowds shouting "Trump" but the trade shoe may be about to move to the other foot.

Carl Mortished is a Canadian financial journalist based in London.