Reports from the Economic Front

a blog by Marty Hart-Landsberg

Stop the TPP

Members of the Obama administration continue to promote the Transpacific Partnership (TPP) agreement as a boon to the US economy.  Freeing trade, they claim, will boost economic activity which means more investment, production, and employment.  And, when challenged, they point to the work of prominent economists whose research is said to substantiate their claim.

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A January 2016 study of the economic consequences of the TPP by the Peterson Institute for International Economics is an example.  This study, which calls the agreement “a notable accomplishment” and “a substantial positive response to slowing world trade growth”, has been touted by the US government and received positive media coverage.

The Washington Post says:

The Peterson Institute study is the most thorough independent assessment of the economic impact of the TPP, the largest regional trade accord in history. The Obama administration hopes the findings will help persuade Republican leaders in Congress to schedule a vote on the deal before the November presidential vote.

However, a careful look at its projections and even more importantly its assumptions, makes clear that we are not being told the truth about the real aims or intended beneficiaries of the agreement.

The authors of the Peterson Institute study find that approval of the agreement will bring the following benefits to the US:

Economic modeling can show . . . the effects of the scheduled liberalization elements of the TPP, provided it is ratified by its members. The estimates reported here suggest that the TPP will increase annual real incomes in the United States by $131 billion or 0.5 percent of GDP, and annual exports by $357 billion, or 9.1 percent of exports, over baseline projections by 2030, when the agreement is nearly fully implemented. Incomes after 2030 will remain above baseline results by a similar margin. Both labor and capital will benefit, but labor will get a somewhat more than proportionate share of the gains in total.

It is worth emphasizing that this study has been the most positive in terms of estimated gains so far published.  For example, an earlier study by the Department of Agriculture concluded, “Eliminating intraregional tariffs and TRQs [tariff rate quotas] will have zero or small positive effects on [TPP] members’ real gross domestic product (GDP). There are no measurable effects on U.S. real GDP in 2025 relative to the baseline scenario.”

Despite its positive assessment of the agreement, the Peterson study’s projected gains are strikingly small.  While an income boost of $131 billion by 2030 may sound like a lot, it is basically a rounding error in an economy with a current GDP of approximately $18 trillion.

Dean Baker makes the same point this way:

it is important to put the projected gain of 0.5 percent of GDP as of 2030 in some context.  [A Washington] Post article told readers:

“If those projections [from the Peterson Institute study] are correct, that additional growth would help a domestic economy that has struggled to regain the growth rates of previous decades in the wake of the Great Recession.”

The study’s projection of a cumulative gain to GDP of 0.5 percent by 2030 implies an increase in the annual growth rate of 0.036 percentage points. This means that if the economy was projected to grow by 2.2 percent a year in a baseline scenario, it will instead grow at a 2.236 percent rate with the TPP, assuming the Peterson Institute projections prove correct.

The claim that the agreement will boost exports by $357 billion also gets positive media attention.  It makes for a nice headline, but if reporters had only read the study itself they would find, on page 7, the following statement about the model used for the study:

The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries. This “macroeconomic closure” assumption allows modern trade models to focus on the goals of trade policy—namely sustained productivity and wage increases through changes in trade patterns and industry output levels.

Almost all mainstream economists use computable general equilibrium models to estimate the effects of trade agreements.  These models require researchers to assume, as a condition of the model, that the tariff changes under study will have no effect on employment or trade balances, both of which are assumed to be in equilibrium.  So, while the Peterson Institute study projects a boost in exports of $357 billion, it also must project a boost of imports of $357 billion.

In other words, when economists use computable general equilibrium models to estimate the consequences of trade agreements they are, by assumption, ruling out the possibility of any increase in unemployment, capital flight, or trade deficits.  Isn’t that reassuring?  No wonder that these studies all tend to sing the praises of free trade agreements.

Of course, there are other ways to model free trade agreements, and economists that use them come to very different conclusions.  But of course their studies get little attention.

A case in point: In January 2016, economists with the Global Development And Environment Institute at Tufts University published a study of the TPP that uses the United Nations Global Policy Model.  This model allows changes in tariffs to change employment and inequality and incorporates the impact of such changes on aggregate demand and economic growth as well as trade balances.

The authors of this study conclude:

The TPP would generate net GDP losses in the USA and Japan. For the USA, GDP would be 0.54 percent lower than it would be without the TPP, ten years after the treaty enters into force. We also project that Japan’s GDP would decrease by 0.12 percent as a consequence.

Economic gains would be negligible for other participating countries – less than one percent over ten years for developed countries, and less than three percent for developing countries. These projections are similar to the Peterson Institute’s finding that TPP gains would be small for many countries.

The TPP would lead to employment losses in all countries, totaling 771,000 lost jobs. The USA would be the hardest hit, with a loss of 448,000 jobs. Participating developing economies would also suffer employment losses, as greater competitive pressures force them to limit labor incomes and increase production for export.

All of these studies are concerned only with trade, narrowly defined.  They don’t take up the likely consequences of the many other chapters of the TPP that are designed to boost corporate power and profitability.  For example, as Dean Baker explains:

It is also worth noting that the [Peterson Institute] study does not appear to factor in the losses associated with higher prices for the items that will be subject to stronger and longer patent and copyright protection. Stronger intellectual property protections were quite explicitly one of the main goals of the deal and were one of the last major issues to be resolved. As a result of the TPP, the countries that are party to the agreement will be paying more for prescription drugs and other protected products. The effect of longer and stronger IP rules is the same as a tariff, except we are talking about raising the price of protected items by many times above their free market price. This is equivalent to a tariff of several thousand percent on the protected items.

And then there is the investment chapter, with its investor state dispute settlement mechanism, which empowers transnational corporations to sue governments in a special tribunal if public policy reduces their “distinct, reasonable investment-backed [profit] expectations.  No doubt about who gains from this power.

The takeaway: the TPP is bad for working people, in the US as well as in the other member countries.  And, the US government, US transnational corporations, and the US media are engaged in a deceitful sell job.  The TPP, as well as other similarly structured trade agreements currently being negotiated, such as the European-US Transatlantic Trade and Investment Partnership (TTIP), must be opposed.

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