The Federal Reserve’s recent decision to forestall interest rate increases should give Congress the impetus to pass the Trans-Pacific Partnership on behalf of the U.S. economy. This clear sign by the Fed that U.S. economic growth continues to underimpress should have our representatives in Washington looking for ways to spur consumer activity. Free trade agreements do just that.

It is perhaps odd that Russia provides a timely demonstration of the consumer benefits of free trade. Russian cheese producers received a windfall, to the detriment of consumers, when the government there banned the import of European cheese. This Russian microeconomy validates the consumer benefits of a substantial new free trade agreement covering 40 percent of U.S. imports.

An article by Andrew E. Kramer, first published in the New York Times on May 6th, depicts a robust cheese market in Russia prior to the imposition of Western sanctions in response to Ukraine. Russia retaliated in late 2014 by banning the import of cheese and other agricultural products. Those trade sanctions were renewed by both sides last month in the continuing dispute.

A sudden loss of cheese varieties from around the world forced consumers in Russia to reconsider their domestic sources. Russia has always had an assemblage of domestic cheese producers, however, consumer preference valued imported varieties, especially those of Western Europe.

With their foreign cheese options eliminated, Russian consumers were left with the choice of going without, or satisfying their taste for cheese with the subset of varieties at higher prices and in the reduced quantities produced domestically. From this reaction we can see that barriers to trade distort consumer preference. In the case of the Russian sanctions, consumer choices were completely eliminated.

This may help explain why U.S. consumers have not expressed a strong desire for the reduction in trade barriers.

It is easy to imagine, however, that price would have a similar effect. Therefore lowering tariffs through the TPP could not only reduce prices but may also alter consumer preference by enabling new choices.

Is this a benefit to consumers? Just ask a Swiss cheese aficionado in Russia.

Retail establishments in Russia also suffered when they suddenly lost 100 percent of their business related to cheese imports. Some of this volume was likely replaced by domestic supply, however there was surely a period of time when dislocation occurred as resources had to be moved from import supply lines to domestic ones.

A dramatic change in the availability of imports through the Trans-Pacific Partnership is likely to have a similar dislocation effect on resources in the United States. It may or may not be as abrupt as the change needed in the Russian cheese market, and it may be difficult to predict the exact nature of those changes, if the reduction in price also create changes in consumer preference. Thus, consumers may not purchase an import version of a good instead of a domestic version, they may choose a completely different variety instead, as was seen after the significant changes to the Russian cheese market.

The average duty rate on merchandise imported into the United States last year was approximately 1.5 percent, hardly enough to cause major changes in consumer behavior. However, included in that mix are items such as commercial dinnerware with a 28 percent duty and overcoats at 14.9 percent or more. Such rates are clearly high enough to impact consumer buying patterns and the elimination of duty on such items would spur consumption, consumer confidence, and US GDP.

This wide range of tax rates makes it difficult for economists and politicians to predict the exact magnitude and location of the impact to employment, but the overall benefit to consumers is clear. Happy consumers are spending consumers, and spending consumers can drive the consistent U.S. economic growth that has been elusive since the 2008 recession.

In The Spotlight

Clearly the biggest beneficiary of the embargo of European cheeses are the Russian farmers who produce competing goods. No doubt those farmers, having invested in both their animals and new cheese production facilities, will protest when it comes time to lift those sanctions and import cheese from Europe once again.

On the one hand it would be hard to argue that Russian farmers had not done more than their fair share to satisfy the cheese needs of their countrymen. On the other hand this perceived need for additional Russian cheese is merely a distortion of the international marketplace created by government barriers to free trade.

Based on their behavior immediately prior to the embargo, consumers will be desirous of having their choices restored despite the impact to domestic production. U.S. consumers do not have the advantage of a view to the market post-TPP implementation. This may help explain why U.S. consumers have not expressed a strong desire for the reduction in trade barriers, even though they are likely the largest beneficiaries of free trade. If we draw a parallel to Russian cheese consumers though, we can say that U.S. consumers will be loath to part with their new choices and lower prices once they have them.

Looking ahead, one must wonder what Russia will do with their excess capacity for domestic cheese when trade relations normalize with Europe. While the Kramer article notes the positive impact the embargo has had on the quality and variety of cheeses produced within Russia, one would certainly expect foreign varieties to regain popularity at the expense of their Russian counterparts, and hence at the expense of Russian employment in the domestic production of cheese.

Congress has restored a form of Trade Adjustment Assistance (TAA) as a way to assuage the dislocation of U.S. employment ensuing from the implementation of TPP and other U.S. free trade agreements. At the same time, Congress should carefully remove any other international trade distortions the U.S. and its FTA partners might be responsible for, before suddenly eliminating barriers to foreign production for 40 percent of the imports brought into this country. Making such improvements in step with implementation of this dramatic new free trade agreement would create a permanent benefit for the U.S. economy and its consumers.

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Sean F. Lydon
About The Author Sean F. Lydon
Sean F. Lydon is President of ISCM, a consulting firm specializing in the unique challenges of organizations with international supply chains. The practice includes import/export compliance, operations competitiveness, and the startup and operation of U.S. Foreign-Trade Zones.




www.iscm.com


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