What Is the Trans-Pacific Partnership (TPP) Really All About?

By Simon Johnson

The Trans-Pacific Partnership (TPP) is a proposed free trade agreement (FTA) between the United States and 11 other countries.  It is comprised of two main parts: reductions in tariffs (and related non-tariff barriers), of the kind typically seen in trade agreements; and new rules for foreign direct investment and intellectual property rights, which have not previously been prominent in FTAs.

The new rules part has become controversial.  The case for introducing an investor-state dispute settlement seems less than compelling – this would favor foreign investors over domestic investors, not an idea that sits well with the standard idea of equality before the law (going back at least 800 years) and a direct contradiction to the usual principles of FTAs (emphasizing non-discrimination across types of investors).  As currently formulated, it would also be open to considerable abuse.  And the precise rules under consideration for patent protection appear likely to reduce access to affordable medicines in both our trading partners and potentially also in the United States.

As a result, advocates of TPP are now emphasizing the benefits of tariff reductions in terms of boosting US exports.  But the administration’s claims in this regard are greatly exaggerated and the United States Trade Representative (USTR) is unfortunately refusing to fully discuss the broader trade impact, including the precise impact of higher imports into the United States.

In an interview with Politico this week, Ambassador Michael Froman, listed some examples of high tariffs on American goods in other countries – and emphasized that these might come down as part of TPP.

There are two main problems with Mr. Froman’s list.  First, he naturally picked the relatively few goods that have such tariffs.  We have free trade agreements already with many of the countries in TPP (details here), so most tariffs are already quite low.

There are some high tariffs on some US agricultural goods, including going into Japan.  But when the US Department of Agriculture looked at the entire trade impact (i.e., exports from and imports into the U.S.) – with a focus on food and related commodities – they found a total likely effect on US GDP of precisely zero.

The USDA is presumably expert on the agricultural side of trade and their measures of tariffs match up in detail with what Mr. Froman talks about.  Mr. Froman and his colleagues should explain exactly why specialists within the Obama administration do not agree with the USTR assessment of the likely TPP impact.

We should, of course, also look at all other dimensions of trade – including manufacturing and services.  Here also Mr. Froman makes some claims about the great benefits of reducing tariffs and non-tariff barriers.

The best independent research on this topic is by Peter A. Petri, Michael G. Plummer, and Fan Zhai, and – as a model of transparency – the details of their relevant work are available on-line.

Included in these very helpful materials is a page with the details of their results specifically on trade.  (Some of this work is available through the Peterson Institute for International Economics, where I am a senior fellow; I’ve not been involved in this project in any way.)

To understand the precise size and nature of potential GDP gains from TPP in this framework, you should look at the Excel spreadsheet posted under “Adding Japan and Korea to the TPP” (the fourth set of links).  The spreadsheet name is “Macro-TPP-7-Mar-13”.

There are two scenarios worth considering – what the authors call TPP11 (which is the TPP without Japan) and TPP12 (including Japan).  Some version of TPP12 is now likely, although we don’t know the full extent of trade liberalization in any country that will be in the final agreement, and well informed observers express skepticism about the extent to which Japan will really open to US agriculture or to autos and auto parts (where we have long-standing difficulties selling in Japan due to profound non-tariff barriers).

In 2025, according to this model, the baseline Gross Domestic Product for the US is $20,273bn.  Under TPP11, this falls (very slightly) to $20,268.0bn.  Perhaps this is a rounding error, but the fact that the increase in trade could lower US GDP should give us pause.  (The authors themselves prefer to emphasize “income gains” in the spreadsheet, which attempt to adjust for changing relative prices between 2007 and 2025 – a sensible but difficult exercise.  The income gains measured this way are $23 billion under TPP11, a tiny increase precisely because we have extensive FTAs with these countries already.)

All the GDP gains to the US from TPP (via trade) come from adding Japan to the agreement, to get TPP12 GDP of $20,312.9 billion in 2025.  (Looking at “income gains”, 69 percent of the headline improvement of $76.6 billion for the US is due to Japan.  Most of this is not due to trade but actually due to increased US foreign direct investment in Japan, including in the service sector.)

No matter how you look at it, the positive impact on GDP (measured at 2007 relative prices) is miniscule: roughly $40 billion in a total economy of $20 trillion, i.e., 0.2 percent.  And all of this positive impact comes from the details of what Japan allows in (and what we give in return, including with tariff reductions on light trucks/sports utility vehicles.)  The devil really is in these details, as Representative Sander Levin (D., MI) has emphasized.

In addition, it is entirely possible that any such increase in GDP or income may be associated with widening inequality or a fall in median wages – we know that the distributional impact of such trade agreements is typically much larger than the total GDP effect.  We really need to see what is in TPP in order to assess this dimension of the impact, but the relevant details are a closely held state secret.  Labor standards are a particular worry here, particularly with respect to Mexico.  Will there be sufficient prior actions, before TPP goes into effect?  Relying on vague promises of enforceable labor standards simply will not work.

Mr. Froman’s rhetoric implies effects that are far beyond what is in the numbers.  In terms of any claims about a net positive impact on US GDP, TPP is mostly a free trade agreement with Japan, and it is much more about potentially liberalizing FDI into Japan than it is about increasing trade.

Seen in this context, it is ironic – and disturbing – that Mr. Froman refuses to include language in TPP that would discourage currency manipulation , i.e., central bank intervention in the foreign exchange markets that causes a country’s currency to depreciate, boosting exports and reducing imports.  The Petri, Plummer, Fan work assumes no manipulation of this kind takes place.  But if Japan were to manipulate its currency in the future as it has in the past, this would more than wipe out any US gains from TPP.

When you strip out the distractions, TPP comes down to essentially three things:

  • A free trade agreement with Japan. We need to see the details of that, including the FDI dimension, to understand if there will be GDP gains for the US or not.  The impact on US inequality and median wages also remains at best unclear.
  • Investor State Dispute Settlement. This is of very dubious value to residents of the United States, at least unless the administration agrees to introduce greater safeguards against abuse.
  • Greater protection for pharmaceutical patents. This will almost certainly reduce access to affordable medicines, both in the US and in our trading partners.

There are also vague claims about improving labor and environmental standards.  But, as far as outsiders can discern, any agreement along these dimensions will not require actions before TPP goes into effect.  Enforceability of such clauses after the fact is typically weak or nonexistent.

TPP is a very important potential trade agreement, primarily because it will establish the rules that can be included in this kind of deal going forward, including with other countries such as China.  But in this kind of arrangement, it is essential to examine and understand the details in order to comprehend the full nature of the commitments (as well as the gains or losses).

Just saying “tariffs will fall greatly, so exports will increase” – and implying big gains from this for the US economy – is not convincing and not even remotely accurate.

Instead of thinking hard about these details, Congress is poised to pass the Trade Promotion Authority – with the goal of making it easier to pass TPP irrespective of the crucial details.  This is not likely to lead to a good set of rules in TPP.

18 responses to “What Is the Trans-Pacific Partnership (TPP) Really All About?

  1. The devil’s in the details. Can it stand the scrutiny of the public?
    Leslie

  2. what TPP, TISA & TTIP are really about is allowing corporations unrestrained ability to operatie globally irrespective of national laws in different nations…

  3. http://en.wikipedia.org/wiki/Radicalization

    A global impact “trade” deal that is keeping the details of the deal “secret” from the globe?

    Talk about being radicalized….

  4. Presidential candidate Hillary Clinton doesn’t have much an opinion one way or the other regarding TPP? While serving as Secretary of State, did she not help craft some of the Agreement’s general precepts? Presidential candidate Hillary Clinton suggests that she herself would need to see more of the TPP Agreement language before taking a position. I don’t know how MSNBC can continually support Hillary Clinton’s candidacy with a straight face; or, perhaps it has come more to light to say that MSNBC is a part of the corporatist structure that provides Hillary, in part, her free, low-cost campaigning advantage. Hopefully, Hillary Clinton will implode, then forcing MSNBC to scrabble and then, continuing to cheer-lead an alternative to Bernie Sanders.

    It’s truly sickening to watch the president and the lamestream media trash first Senator Elizabeth Warren, and now presidential candidate Bernie Sanders because they know they do not just speak in words, but in their actions (http://www.nytimes.com/2015/06/01/us/politics/challenging-hillary-clinton-bernie-sanders-gains-momentum-in-iowa.html?_r=0 ). Hillary Clinton is trying to catch up to the rhetorical skill of the president but hasn’t found her voice because her truer policy positions are more moderate and counter to the base of the political party she says she wants to champion.

    After Congress outsourced manufacturing to China, China now owns about 7.5% of U.S. assets, so the remedy seems to be the TPP to act as global leverage. Even if the TPA passes by one vote, the TPP WILL NOT PASS. The president continues to bribe and twist arms in the House of Representatives but he’s not going to get enough votes because there are enough Republicans labeling it as Obama-trade and not enough corporate Democrats to be corrupted into voting for a Trojan horse of an Agreement (https://wikileaks.org/pledge/).

  5. perhaps it is all about a future on wall street

  6. Most disturbing is that a decision this big is being sold under such disingenuous terms. Secret or not secret? Imports but not exports. Labor and environmental standards when this administration has refused to enforce existing rules. This makes the snake oil industry look good.

  7. Polls continue to show Americans favor increasing taxes on the One Percenters, campaign finance reform, reigning in Wall Street, wanting Congress to vote “No” on XL Pipeline and “No” on the TPP, wanting gun control, etc… but what does Congress do instead…… vote against the interest of the majority. The solution: how about “outsourcing” Congress and make them work on contract, for $7.85 an hour with one-week paid vacation as their only benefit.

    The worst offenders, you ask….the Democratic Party. At least the Republicans are coming around to the notion that they don’t need to continue to pretend they’re bidding on behalf of “hard-working Americans,” rather instead, for the wealthy as noted by the 2012 presidential candidate, Mitt Romney.

    If you want to see the day of light after Nov 2016, it may be best to get behind a presidential candidate like Bernie Sanders — the best and full-proof reason to do so is here: http://huff.to/1FClVPf, and in particular, this paragraph from the article:

    “But, as I have noted elsewhere, Hillary Clinton honors her deals with the billionaires who hire her, however indirectly, even if her very public and heralded words that are spoken to adoring crowds at her political events are of no higher value than whatever is imposed upon all the toilet paper that gets discreetly flushed away unheralded to regions unknown and unnoticed. See, for examples, this, and this, and this, and this, and this, and this, and this, and this.”

    I found Thom Hardmann’s “enthusiastic” support for Hillary Clinton/partner-in-crime, in these hyperlinks indicated in the above, last sentence “this….and this, and this, and this…….”:

    http://www.theguardian.com/world/2014/apr/19/wall-street-deregulation-clinton-advisers-obama ,\ ;

    http://www.politico.com/story/2014/04/wall-street-republicans-hillary-clinton-2016-106070.html ;

    http://www.huffingtonpost.com/nomi-prins/the-clintons-and-their-banker_b_7232636.html ;

    http://www.huffingtonpost.com/eric-zuesse/more-about-hillary-clinto_b_4907395.html ;

    However, I would guess that Thom (like MSNBC) would (still) rather have a phony Liberal than a phony Conservative in the White House, thinking instead, that a Hillary Clinton presidency would probably do less damage to the economy, less erosion on civil rights/liberties–the Constitution, and project less hubris on other high-minded intellectual and economic privileges of the political class.

  8. Thank you so much for this enlightening posting, Mr. Simon Johnson. I wonder why Fareed Zakaria does not invite you to discuss TPP on his GPS program.

  9. Nice article… good written.. i would like to share this in my another blog… Thumbs Up….

  10. ….why, yes, repetitive but worth repeating, albeit paraphrasing the above notes:

    Why is the New York Times dismissing Sanders, O’Malley, and Chafee by giving them a few lines on the front page, and then pivots immediately back to Hillary’s campaigning within a day, if not, within hours.

    Polls continue to show Americans favor increasing taxes on the One Percenters, campaign finance reform, reigning in Wall Street, wanting Congress to vote “No” on XL Pipeline and “No” on the TPP, wanting gun control, etc… but what does Congress do instead…… votes against the interest of the majority. And the johnny-come-lately media like the NYT then wonders why voter participation is so low in this country. The above-mentioned issues are not Left/Right issues, rather, views shared by a majority of citizens reflected across many polling platforms.

    The worst offender, I would argue is with the Democratic Party. At least the Republicans are coming around to the notion that they don’t need to continue to pretend they’re bidding on behalf of “hard-working Americans,” rather instead, bidding on behalf of billionaires.

    Hillary equals more of the same, status quo, corporate stooge, trying to sound “Black” in South Carolina ’cause she thinks they’re not very bright nor White nor ivy-league material like herself; otherwise, why, the fake souuuthern talk, Hillary?

    Why isn’t the New York Times hitting harder on Hillary’s silence on the TPP, XL Pipeline, foreign governments that benefited from their contributions to the Clinton Foundation ($2 billion +) while Hillary was serving as Secretary of State?

    Desperate times require desperate blogggging.

  11. Since 911, the hysteria and excuse for every criminal assault on the individual in USA by the REVOLUTIONARY CABAL (Foreign “Firsters”) has been “national security”….they PROTECT themselves – everyone else was raped and looted by these HOOLIGAN predators who had unfettered access to the individual’s LIFE thanks to The Patriot Act – they proceeded to steal JOBS, property, savings, even social clubs like Amateur Astronomy and, the most iniquitous, the infiltration of CHURCH!

    Every time one of the CRIMINALS embedded in D.C. as a “representative” of the people speaks about MY “security”, I yell back at the screen – “where were you when my JOB, HOME, AND SAVINGS were stolen”?!

    I have no government in my corner as a USA born and bred citizen.

    The evidence for that FACT is overwhelming.

    And there is no force of law that will allow us to DIVORCE ourselves of the Hooligan Cabal of fortune telling and STEALING CLOWNS that are begging to be the Joker sycophant in the White House.

    7 billion and counting and the CLOWNS have bent their knees to GLOBAL War, Drug and Slave Lords for MY “security”….??!!

  12. Anonymouse

    It was more for their security disguised as “yours”. Works for them every time too.

  13. They will be learning what “get the fck OUT” means.

    JUST WAR

    DEBATE has been FORBIDDEN about the TPP – did you all know that?

    They LIED us into war, same cabal making deals with the vein of the human species who takes the biologic-roach approach to power – overpopulation.

    from wiki – “Thomas Aquinas[edit]

    Nine hundred years later, Thomas Aquinas — an immensely influential philosopher and theologian in the tradition of scholasticism — used the authority of Augustine’s arguments as he laid out the conditions under which a war could be just:[14]
    First, just war must be waged by a properly instituted authority such as the state. (Proper Authority is first: represents the common good: which is peace for the sake of man’s true end—God.)
    Second, war must occur for a good and just purpose rather than for self-gain (for example, “in the nation’s interest” is not just) or as an exercise of power. (Just Cause: for the sake of restoring some good that has been denied. i.e., lost territory, lost goods, punishment for an evil perpetrated by a government, army, or even the civilian populace.)
    Third, peace must be a central motive even in the midst of violence.[15] (Right Intention: an authority must fight for the just reasons it has expressly claimed for declaring war in the first place. Soldiers must also fight for this intention.)”

    If Everything is about “making money”, that is a RADICALIZED and nihilistic policy…..totalitarian NIHILISM.

  14. http://www.huffingtonpost.com/hrh-the-prince-of-wales/a-magna-carta-for-the-earth_b_7504234.html

    Can’t trust the future of humanity to those who loath humanity – “for the money”….

  15. Infograph poll results, June 2015:

    The top, middle, and bottom questions:
    79% want “Allow Government to Negotiate Drug Prices” / 12% oppose
    58% want “Break Up e Big Banks (Message A)” / 23% oppose
    44% want “Ban For-Prot Prisons” / 37% oppose

    https://s3.amazonaws.com/s3.boldprogressives.org/images/Big_Ideas-Polling_PDF-1.pdf

  16. Wonder what % of the USA born and bred population is “Deliverance Boyz” squeal-like-a-pig “radicalized”? Who (genetics/demographics) considers that “works every time” is GENIUS – banging down the door (internet security ala NSA) to rape and pillage the HOME of fellow citizens? THEY PASSED A “LAW” in D.C. saying that it is for the HOME OWNER’S SECURITY, dontchaknow…

    JUST WAR

    Cretins and hooligans feeling JUSTIFIED in taking out “feminazis”….

    Seriously, so far, the mercy being shown OUR version of ISIL – the radicalized – is throwing pearls to swine….

    get the fck OUT

  17. Forgot to mention this but as of yesterday, Ready for Warren officially disbanded. Hanging their hopes for Senator Warren to run for POTUS for so long, became futile.

    Wonder if Senator Warren is going to back Senator Bernie Sanders. Thom is all giddy that Sanders has pulled in within nine points of Hillary in the Wisconsin straw poll. But he continues to let his ideological and political leanings cloud his better judgment by coming out with continued nonsense about not knowing where Hillary may stand on the TPP and other issues. If Hillary didn’t have a “D” after her name along with name recognition, and instead had an “R” for Republican after her name, Thom would be all over that phony opportunist before you could spell out the word liar.

    They stormed Capitol Hill…waving their pitchforks with U.S. Constitution in hand. #No-To-TPP