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.