What Do Trade Agreements Really Do?
As trade agreements have evolved and gone beyond import tariffs and quotas into regulatory rules and harmonization, they have become more difficult to fit into received economic theory. Nevertheless, most economists continue to regard trade agreements such as the Trans Pacific Partnership (TPP) favorably. The default view seems to be that these arrangements get us closer to free trade by reducing transaction costs associated with regulatory differences or explicit protectionism. An alternative perspective is that trade agreements are the result of rent-seeking, self-interested behavior on the part of politically well-connected firms – international banks, pharmaceutical companies, multinational firms. They may result in freer, mutually beneficial trade, through exchange of market access. But they are as likely to produce purely redistributive outcomes under the guise of “freer trade.”
I am grateful to Robert Lawrence, Gene Grossman, and the editors of the Journal of Economic Perspectives for helpful comments that improved the paper, and to Vedant Bahl for research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.