Free-trade pact could work if U.S. lays a solid foundation

There has been more coverage of the politics surrounding the proposed Trans-Pacific Partnership trade pact than of how the agreement might actually work. We have evidence from the past about what might transpire — transformation, opportunity, business expansions and shrinkages, dislocations, regional impoverishment and localized wealth.

It all depends on where you are.

It is hard to argue against the economic theories that traditionally favor free trade. David Ricardo developed the classical theory of comparative advantage in 1817, observing that if two countries operating in a free market are capable of producing similar commodities, then each country will be better off by exporting the good where a larger comparative advantage in cost exists, while importing the goods where there is less of a cost advantage.

Over the decades, economists and government officials have leaned heavily on the principle of comparative advantage to justify extending the reach of free trade. U.S. exports and imports have both risen, but imports have grown faster, resulting in a $505 billion trade deficit in 2014. Perhaps more important, the U.S. share of industrial high-value-added exports in strategic materials, machinery, and instruments appears to be shrinking.

There is nothing wrong with either the theory of comparative advantage or the intent to promote world trade. But there is more to the story. We also need to understand how comparative advantage is created — and destroyed.

Comparative advantage is created by educated workers, sound investments, smoothly operating support systems, and efficient health care, government, education, finance, and law.

Comparative advantage is destroyed by poorly trained workers, mismanaged companies, destructive financial mechanisms, dishonesty and rampant inefficiencies throughout the economic system.

Almost all exporting countries have longer school years than the United States — not only in more school days, but longer days with more homework. These more rigorous education systems show up in test results, where U.S. students commonly rank well below most of our industrial competitors in both science and mathematics — and quite probably languages as well.

We might wonder, also, if the caliber of U.S. management has been up to the task of intense international competition. Some are, of course. But for every Caterpillar or 3M, we may have a Bethlehem Steel, an Enron or a Global Crossing.

Is our financial system adequate to handle complex international transactions? In 2011, the internationally involved U.S.-based firm, MF Global, then 228 years old, was run by a former governor, U.S. senator and CEO of one of the nation's most prominent investment houses, Goldman Sachs. Yet MF Global suffered a financial meltdown and ultimate bankruptcy, directly caused by improper transfers of over $891 million from customer accounts to an MF broker-dealer account to cover trading losses.

Several hundred people went to jail for illegalities in the late 1980s savings and loan scandal, which was minor compared with the havoc wreaked from the financial meltdown of the past decade. Yet how many people have gone to jail this time? What does this say about the importance we place on orderly and proper financial markets?

On several measures, the United States does come off better than many other countries, so it's not that we cannot compete. But if we are going to greatly expand our trading networks, there may be a few things we should put in place first — better preparation of our workers, solid investments, well-maintained infrastructure and effective enforcement of the laws. We will need to strengthen our waning education system; improve the integrity of our financial systems; beef up the efficiency and cost-effectiveness of industry and our governments; foster better work habits among our people; and amend our outdated and underfunded retirement systems. And shepherd more carefully the precious resources we will need in order to compete.