Is the TPP good for America?

The Trans-Pacific Partnership, the far-reaching trade and investment agreement that the United States has negotiated with 11 other countries, including Canada, Mexico, Japan, Malaysia, Australia, and Vietnam, is now up for debate. In order to enter into effect, the US Congress must approve the TPP, which is not likely until enough members make up their minds about the merits of the case. So, what does the TPP mean for US voters now and in the future?

For starters, while the TPP would most likely generate some overall gain for the US economy, measured in terms of GDP and people’s incomes, that gain is very small and comes mostly from providing greater opportunities for US exports – by reducing tariff and non-tariff barriers in other countries. Some imports would become cheaper as well, benefiting American consumers.

In analytical work favored by President Barack Obama’s administration, the projections suggest that approval of the TPP could cause the total size of the US economy to be 0.5% higher in 2030 than it would be otherwise. Note that this estimate is of the TPP’s effect on the level of aggregate income after 15 years, not of its impact on the annual growth rate.

Given that this assessment is advanced by TPP supporters, it seems reasonable to suppose that it represents the higher end of what they regard as plausible. (I am a senior fellow at the Peterson Institute for International Economics, under whose auspices the study was published, but I had no part in its preparation.) Unfortunately, the models used in this field do not generate error bands or confidence intervals. In fact, given the complexity of the trade agreement – including the emphasis on hard-to-quantify non-tariff barriers – these estimates are likely to be highly imprecise.

Second, such models ignore key issues that belong in any quantitative analysis. For example, when imports surge, there are significant negative effects on employment. Compelling evidence on this point comes from outstanding research by Daron Acemoglu, David Autor, David Dorn, Gordon Hanson, and Brendan Price, who found that “total job losses from rising Chinese import competition over 1999-2011” were in the range of 2-2.4 million.

People who lose high-paying jobs in manufacturing can find alternative work – but typically at a much lower wage in a low-productivity part of the service sector. In principle, they could be compensated for this loss of lifetime income; but such compensation is very limited in the US. In reality, there are long-lasting or even permanent effects on some communities – and particularly on people with less education in places where prosperity was based on manufacturing that is now exposed to more competition from imports.

In addition, the pro-TPP model assumes that wages rise with productivity. This used to be the case in the US; but the relationship has been greatly weakened in recent decades – precisely as globalization has deepened. As a result, the model’s estimates regarding how unskilled workers will benefit from the TPP thus seem like a stretch.

Third, basing any policy decision on models alone is fraught with danger. The TPP will change many other dimensions of public policy, including the protections afforded to foreign investors (making it easier for them to sue governments) and access to affordable medicines (for low-income countries but also potentially for Americans).

And it is striking that the TPP currently does essentially nothing to discourage currency manipulation – sustained one-way intervention in the foreign-exchange market, aimed at devaluing a currency and gaining a competitive advantage. In the 1980s, imports of goods and services into the US were about 10% of GDP; now that figure is about 17%, and the TPP would presumably push it higher (so the models say). But as the US trades more with the world, it becomes more vulnerable to job loss caused by currency manipulation.

Based on available evidence, it seems fair to conclude the following about the TPP: It would result in a very small increase in total GDP; it would increase at least some measures of inequality; and it would increase the number of jobs at risk, without providing a commensurate safeguard against currency manipulation.

The International Trade Commission is conducting an in-depth assessment of the TPP, which should be ready in a few months. One hopes that the ITC will provide a more complete and granular analysis – including of potential downsides for various sectors – than is currently available.

An objective assessment will find that the TPP is no “slam dunk” that should be approved automatically. Much greater scrutiny and discussion of the agreement’s details is warranted. The good news is that this process of careful assessment is now underway.