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A weighting game

Posted by New Leaders Council 4 Admin on May 30, 2015 at 3:19 PM

Originally published in The Economist on May 30, 2015.

Pacific trade talks expose the limits of economic modelling

THE Trans-Pacific Partnership (TPP), a putative trade agreement, would ease commerce between America, Japan and ten other countries that between them account for two-fifths of global GDP. But how beneficial would it be to these economies? Advocates claim it would boost their output by nearly $300 billion in a decade. Critics say it would make little or no difference.

The disagreement reflects the difficulty of gauging the impact of free-trade agreements. Almost all economists accept the benefits of free trade as laid out in the early 1800s by David Ricardo. Countries do well when they focus on what they are relatively good at producing. But Ricardo looked at only two countries making two products, at a time when few non-tariff barriers such as safety standards existed. This renders his elegant model about as useful for analysing contemporary free-trade deals as a horse and carriage are for predicting the trajectory of an aircraft.

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