Was the Trans-Pacific Partnership Bad for the U.S.? Experts Take Sides
Are you down with TPP? Or do you say, “Down with TPP”? Odds are you’re not quite sure, as 71% of Americans polled by Harvard and Politico just a couple of months before the 2016 election hadn’t even heard of it. For those who still don’t know, this controversial trio of letters stands for the Trans-Pacific Partnership, a doomed international trade agreement that was established among 12 nations bordering the Pacific Ocean, including the United States.
As binding as this pact would have been for the economies of its member states, it's been equally divisive within U.S. borders. Halting it in the name of love for the American worker was a centerpiece of President Trump’s populist t path to the White House. “The Trans-Pacific Partnership is another disaster done and pushed by special interests who want to rape our country,” he proclaimed on the campaign trail.
And he succeeded shortly after reaching his destination, pulling us out of the pact on January 23. Many, including progressive Democrat Bernie Sanders, praised the move. But the numerous groups that had endorsed the deal – from the U.S. Chamber of Commerce to the National Association of Manufacturers to the National Small Business Administration –weren’t so pleased.
We may never know who was on the right side of this politically charged economic debate. But for our wallets' sake, it's certainly worth asking. And that we did. WalletHub posed one simple question – “Was the Trans-Pacific Partnership Bad for the U.S.?” – to a panel of leading experts in the fields of economics, public policy and international relations.
Below, you can find the final vote counts as well as the experts' bios and complete responses. If you have something to add, feel free to share your thoughts in the comments section.
Summary: Was TPP Bad for the U.S.?
|NO||YES||YES & NO|
|Featured Opinion||“When it comes to shaping global trade rules, if you’re not at the table, you’re on the menu.”
- Jake Colvin // National Foreign Trade Council
|No expert took this stance.||"The relevant question is not whether the TPP was a 'bad deal,' as alleged by the Trump Administration, but whether it was a worse deal than a Chinese-led TPP."
- Kenneth A. Reinert // George Mason University
Yes, TPP Was Bad for the U.S.
Believe it or not, none of the experts we reached out to chose to take this stance. If you think the TPP would have been a bad deal for America, let us know why in the comments section at the end of the page.
No, TPP Was Good for the U.S.
- “Following the withdrawal of the United States from TPP, our trading partners are looking to move ahead on their own and, potentially, with countries like China to deepen their trading relationships in ways that could exclude the United States. When it comes to shaping global trade rules, if you’re not at the table, you’re on the menu. With TPP in the freezer, the United States must seek new pathways to shape the rules that govern the global marketplace or risk being on the outside of a new network of arrangements where Beijing or Brussels are in the drivers’ seat.”
Jake Colvin, Executive Director of the Global Innovation Forum at the National Foreign Trade Council
- “Given the United States’ strength in knowledge intensive industries and services, which benefit from a broad market, the TPP is particularly important for Americans. It increases American access to markets in which American firms currently face significant hurdles. … The Peterson Institute calculates that the benefits of the TPP would result in larger proportional gains for labor than for capital in the U.S.; furthermore, “The percentage real gains to poor and middle-class households are actually slightly larger than the gains to those at the top. Thus, the TPP will also slightly reduce income inequality.” No respected model finds that TPP hurts the U.S.”
Edward Tower – Professor of Economics at Duke University
- “Mark Twain supposedly said, with his usual irony, “I’m all for progress; it’s change I don’t like.” President Trump’s knee-jerk nativism has blocked progress due to fear of change. Nations that turn inward and reject trade harm themselves and the world. On the other hand, globalization since World War II shows that nations that open markets and embrace agreements such as the TPP strengthen their economies and spread wealth and liberty to more people around the world.”
Scott Bradford – Associate Professor of Economics, Brigham Young University
The Trans-Pacific Partnership has often been portrayed first and foremost as a trade agreement, which is certainly accurate. TPP would have liberalized trade in services and in agriculture, for example, two areas in which the U.S. has great competitive advantage.
Equally important, however, would have been the impact that ratification of TPP could have had on flows of foreign direct investment (FDI).
On the one hand, TPP would have facilitated greater foreign direct investments in the United States by partner country firms. Inward FDI brings jobs, capital, spending on research and development (R&D), technology, and productivity improvements to the U.S. economy.
In 2012 (the most recent year for which data are available), firms headquartered in TPP countries employed more than 1.4 million workers in the United States. These firms paid average wages and benefits of more than $74,000 per worker, which is well above the average for all U.S. firms. The most careful estimates show that TPP would have injected $47 billion in additional foreign investments into the U.S. economy.
At the same time, TPP would have provided greater market access for US firms in partner countries, allowing them to expand their overseas operations and capture more of the global market share, benefiting workers, strengthening R&D, and expanding investment back home in the United States.
TPP required Vietnam to improve protection of intellectual property rights, for example, which would have benefitted American investors and exporters to Vietnam. Export jobs in the United States pay 18 percent higher wages and benefits than other similar jobs.
The U.S. withdrawal from TP terminates these opportunities for superior job creation in the United States.
President Obama joined the TPP talks because it was a way to demonstrate to the countries of East and Southeast Asia our commitment to the region and our determination to be a continuing constructive presence there. Our policy since the end of World War II has been, essentially, to make sure that no single Asian power is able to dominate the region. That didn’t turn out very well for us in the 1930s and 40s, and we wanted to make sure it didn’t happen again. Initially, that meant Japan; now it means China. It also initially meant a military presence, which we continue to maintain. In the 21st century, however, it increasingly means an economic presence as well.
Withdrawal from TPP has been interpreted in the region as a sign of declining U.S. interest and commitment, and it has called into question our willingness to support both Japan and Korea, as well as the smaller nations of Southeast Asia against bullying from China, both strategically in the East and South China Seas and economically in the trade sphere. The result, which you can already see developing, will be movement toward architectures that are dominated by China, such as RCEP, or are composed largely of former TPP members trying to continue without U.S. participation. Our likely response to that will be an effort to negotiate bilateral agreements, which will be more difficult than we anticipate and which in any event cannot replace the TPP architecture in its impact on the region as a whole.
Economically for the United States, TPP was less about market access -- though we made some important inroads there -- and more about rules. Our great strength lies in innovation and advanced technologies, particularly in the ICT sector, which means that rules protecting intellectual property, regularizing digital trade, and providing disciplines over state-owned enterprises in other countries can be very advantageous to us. We have always been a rule of law country, and to the extent, we can encourage the development of rule of law elsewhere -- it benefits our companies and our workers, particularly if they are our rules. Bilateral negotiations cannot replicate the advantages that TPP provided. At best, they will produce a hodge podge of conflicting rules that will drive U.S. companies crazy as they try to comply with them.
More important for the longer term is understanding that TPP was really about constructing global value chains, which is the key story of 21st century trade. If TPP had been implemented and had grown as other countries like Korea, Thailand, Indonesia and the Philippines came in, China would ultimately have come in as well in order to preserve their value chains, which would have meant they adopting our rules. Instead, we will have a fragmented region dominated by China, which will encourage rules that advantage them and disadvantage us. In light of President Trump’s concerns about China, that will be the ultimate irony -- he is playing into their hands.
- According to the OECD, Asia will be home to two-thirds of the world’s middle class consumers by 2030, and they are hungry for made-in-America goods and services.
- However, many Asian markets impose tariffs that are five times higher than the U.S. average while their duties on U.S. agricultural products often soar into the triple digits. A web of nontariff and regulatory barriers adds insult to injury.
- As a result, U.S. market share is declining in the world’s most rapidly growing economies, falling by more than 50% since the turn of the century.
- Meanwhile, we’re losing ground just by standing still: Asian countries have signed 140 bilateral or regional trade agreements, and more are on the way. Those pacts give preference to Asia-based manufacturers, farmers and service providers over their U.S. competitors.
In many ways, the TPP was building on the accomplishments of past U.S. trade agreements. Despite much misinformation, their record of success is impressive:
- Though the 20 countries that have entered into such agreements with the U.S. represent just 6% of the world’s population, they buy nearly half our exports.
- U.S. exports to new trade agreement partner countries have grown roughly three times as rapidly on average in the five-year period following the agreement’s entry-into-force as the global rate of growth for U.S. exports.
- While the trade balance is a poor gauge of the success of any set of trade policies, the U.S. has maintained a trade surplus with its 20 trade agreement partners as a group over the past four years.
One thing is certain: If we stand still, we’ll fall even further behind. To spur economic growth and job creation here at home, we need to heighten our engagement with the Asia-Pacific region.
American businesses, innovators and workers would benefit from a region-wide commitment to open new markets to American products and set common standards around issues including intellectual property frameworks, government-owned enterprises, and labor and environmental standards.
The commitments that were negotiated would have fostered e-commerce by eliminating tariffs and improving access to payments, logistics and telecom services in the region, which would have brought online new customers for American startups and small businesses.
As Kavita Shukla, founder of innovative Maryland-based startup Fenugreen, told Members of Congress last year, the U.S. Government can help entrepreneurs by “utilizing trade agreements and other platforms to reduce tariffs on the products we make and to simplify customs procedures.” The kinds of provisions reflected in the agreement stand to enable the global journeys of entrepreneurs like her.
This effort was the latest in a long series of negotiations led by the United States to open international markets and create shared rules of the road to promote rule-of-law, transparency and fair and nondiscriminatory treatment of American businesses and workers. The United States has benefited tremendously from the open, rules-based trading system that Presidents from Eisenhower to Reagan to Obama aggressively shaped.
Following the withdrawal of the United States from TPP, our trading partners are looking to move ahead on their own and, potentially, with countries like China to deepen their trading relationships in ways that could exclude the United States.
When it comes to shaping global trade rules, if you’re not at the table, you’re on the menu. With TPP in the freezer, the United States must seek new pathways to shape the rules that govern the global marketplace or risk being on the outside of a new network of arrangements where Beijing or Brussels are in the drivers’ seat.
Today, manufacturing only employs 9% of the labor force. From 1970 to 2014, manufacturing output tripled, despite the 25% decline in manufacturing employment. The decline of labor’s share in manufacturing output means any protection to manufacturing is likely to benefit manufacturing capital far more than labor. Thus, jobs are used as a shield by capital concerned with its own benefits.
We need to focus on the whole American economy, making sure that American firms have market access and protection in the world economy.
U.S. tariffs average only around 2%. Consequently, tariff reductions agreed to in the TPP would have little impact on our current tariffs. On the other hand, both tariffs and non-tariff barriers in other TPP countries would be substantially reduced.
Given the United States’ strength in knowledge intensive industries and services, which benefit from a broad market, the TPP is particularly important for Americans. It increases American access to markets in which American firms currently face significant hurdles.
Robert Z. Lawrence reports from The Peterson Institute model that once the TPP, whose members make up nearly 40% of the global economy, is fully operational, the gain would average to nearly $1000 per American household every year. But even this understates the importance of the TPP to America. If the other member countries sign the TPP and America opts out, the new members would import more from their new partners and less from the U.S. America needs to be part of the larger world economy, and it needs to help shape the conditions that will define world trade. Otherwise, others will determine these conditions.
The Peterson Institute calculates that the benefits of the TPP would result in larger proportional gains for labor than for capital in the U.S.; furthermore, “The percentage real gains to poor and middle-class households are actually slightly larger than the gains to those at the top. Thus, the TPP will also slightly reduce income inequality.” No respected model finds that TPP hurts the U.S.
Since World War II, the U.S. has championed freer trade as a way to raise the American standard of living and as a way to forge closer relationships with other countries. The TPP is a further step in that direction.
At an aggregate level, free markets and trade benefit all involved parties by allocating scarce resources to a more efficient use. The ability to acquire a share of larger economic pie allows both exporting and importing countries to become better off with trade. Although at aggregate level trade creates a win-win situation for all participating countries, it has asymmetric impact on different individuals in the countries. Whether one emerges as winner or loser from free trade between countries depends on the direction of flow of goods -- exports or imports and ones role in the market -- producer or consumer. For instance, by eliminating the tariffs on large number of agricultural and farming products, TPP would have opened the doors of Asia Pacific region for the U.S. farming industry. This extended access to newer markets would have meant more jobs and higher wages in this industry.
According to a report issued by Farm Bureau, TPP would have resulted in the creation of more than 40,000 jobs and increased the yearly net farm income by $4.4 billion. However, farmers’ access to a foreign market would also have meant some reduction in their supply in domestic markets, thereby implying that domestic consumers pay higher prices for agricultural products. Simultaneously, these reduced trade barriers would have hurt the automotive industry by exposing it to fiercer competition from Japanese manufacturing industry. The Center for Automotive Research projected that automotive industry would have lost 26,500 jobs due to TPP. On the flipside, this would have meant that U.S. consumers would have to shell out less money for their cars. Hence, TPP would have benefited people in certain capacities and hurt them in others.
While creating individual winners and losers, the aggregate economic gains from TPP would have certainly exceeded the losses. In order to reap the gains from specialization and trade, some losses are inevitable. The existence of these losses should not come as a surprise to anyone who is familiar with the economic adage that “there is no such thing as free lunch”. For the sake of social equality, some attempts could be made to redistribute these gains more evenly across industries via a carefully drafted governmental policy. For example, governmental subsidies and technological assistance can be provided to industries exposed to fiercer competition from foreign producers. TPP itself granted some protection to U.S. industries by imposing environmental regulations on its members and calling for a stringent enforcement of intellectual property rights.
Overall, the deal guarded the U.S. interests at a multitude of levels. The economic gains from this partnership would have amplified as more and more countries joined this consortium in future. In addition to the above-mentioned direct economic benefits, the closer ties with countries in Pacific Rim would have also generated some strategic benefits for U.S. by limiting the influence of China on the global economies.
The views expressed in this article are those of the author in her private capacity and do not in any way represent the views of her employing institution.
Let us consider each of these benefits in turn. First, the TPP would have lowered prices on thousands of products, making all of us richer. Getting the chance to buy things at lower prices is just like getting a raise, since one has more money left over after the purchases. Also, lower prices benefit the poor proportionately more than the rich. Thus, like all steps to open trade in the past, the TPP would have reduced economic inequality, not increased it. Second, the TPP would have expanded exports in such sectors as auto parts and beef, resulting in new jobs and higher wages. Third, greater competition from abroad and greater chances to service foreign markets would have stimulated innovation, thereby boosting productivity and living standards.
On top of these economic gains, the TPP would have brought even more benefits by unifying a diverse set of nations around a common set of high labor and environmental standards. The TPP would have helped many workers in other nations to enjoy better working conditions, by reducing child labor and worker exploitation. The TPP’s environmental standards would have been the highest of any trade deal ever. As an added bonus, the TPP would have reduced customs red tape, which helps small business more than large corporations.
So, opposing the TPP amounts to opposing wealth creation; innovation; higher standards for worker and the environment; and freer rein for small business. Yes, the TPP would have hurt firms and workers who would have faced stiffer import competition -- such as in the fruits, nuts and cotton industries -- but the gains described above would have swamped the losses of this subset of our nation.
Politically, rejecting the TPP meant rejecting more robust partnerships with key nations around the Pacific Rim. In particular, the TPP would have strengthened U.S. ties with Japan, our most important ally in Asia, and with Vietnam, a reforming communist economy. For years, the U.S. has been trying to get Japan to step up to freer trade in agriculture and higher environmental standards. The TPP would finally have brought progress in these areas. The TPP also would have brought Vietnam closer to the West, but now Vietnam will likely move toward China.
Mark Twain supposedly said, with his usual irony, “I’m all for progress; it’s change I don’t like.” President Trump’s knee-jerk nativism has blocked progress due to fear of change. Nations that turn inward and reject trade harm themselves and the world. On the other hand, globalization since World War II shows that nations that open markets and embrace agreements such as the TPP strengthen their economies and spread wealth and liberty to more people around the world.
TPP created a free trade bloc of 40% of world economy and one third of world trade, by implementing rigorous standards that are missing in the World Trade Organization (WTO) rules. It eliminated tariffs on all U.S. manufactured and most U.S. farm products. It included several provisions to protect the environment, workers and harmonizes regulations. Some of these regulations already triggered cooperation in agricultural products beyond that is implemented by the WTO.
TPP imposed measures to protect the environment by preventing overfishing, protects natural areas and wetlands, marine environment, endangered species, and brought prohibitions against wildlife trafficking and illegal logging.
It imposed more safeguards for workers’ rights than any other free trade agreements entered by the United States. It enforced binding obligations to safeguard the freedom to form unions and collective bargaining, prohibiting child labor, forced labor, employment discrimination and human trafficking.
TPP also protected intellectual property in the form of trademarks, copyright and patents. These measures bring the international standards on copyright protections to the same level as required under the U.S. law, which is the life of the author plus 70 years.
It required the signatories to follow good governance by implementing anti-corruption laws and eliminating bribery among government officials.
One of its most criticized provisions, the investor-state dispute settlement (ISDS) mechanism provided various levels of protections to investors and gave them the right to sue the government for treaty violations. It protected investors against uncompensated seizure of property, denial of justice, discrimination vis-à-vis a local business and gave them the right to transfer capital under normal conditions. These protections, however, would not be valid and the governments preserved the right to regulate the economy when public interest was directly involved in such cases of public health, safety and environment or when the economy was prone to economic crisis or faces instability in the financial system. Some industries such as tobacco were excluded outright from this mechanism. The ISDS component of TPP is argued to be an improvement over the ISDS provisions that are already present in the existing free trade agreements.
The most plausible estimates indicate that real wages would rise in all member countries, albeit relatively less in the most industrialized ones such as the United States. It would benefit the U.S. exporting sectors, such as in knowledge-intensive services, where the economy has a comparative advantage with an estimated increase of 9% annually. As is the case for NAFTA, eliminating TPP would not bring back the traditional manufacturing sector jobs which have been displaced by technological innovation.
A major advantage of the TPP was the geopolitical advantage it gave the United States over its main competitor, China. Without TPP, the Regional Comprehensive Economic Partnership (RCEP) covering the Asia-Pacific region promoted by China now sets the provisions ruling the environmental and labor standards and stimulates China’s exports at the expense of the U.S.
In addition to these economic effects, on which I am best qualified to comment, there also would have been significant political benefits for the U.S. in its relations with the countries of the Pacific rim. The TPP was intended as a strong signal to these economies of our shift of attention to that dynamic part of the world, as well as a continuation of U.S. leadership more globally in the institutions of the globalizing economy. Our withdrawal from the TPP says clearly to those countries that we no longer wish to lead and are willing to cede that role to others, most notably China. This message will be understood, not only among the countries that would have been part of the TPP, but in the world as a whole.
- More trade benefits for people. Yes, the American clothing industry will be hurt more than it is already hurt, but our airplane, car, agriculture, chemical, and petroleum industries will be helped. Also, the prices of most products will go down due to more competition.
- Increased transparency. The TPP document says there will be increased transparency in customs processes, intellectual property rights, financial services, etc. This means that our companies trying to compete in developing countries will find it easier to compete. Since our practices are generally more transparent than other countries, it will not help other firms competing in the U.S.
- Intellectual property. Countries will have to make it easier to navigate intellectual property laws and enforcement is increased. This helps our entertainment industry and firms which do a lot of scientific research.
- Environment. The “Sanitary and Phytosanitary (SPS) Measures,” as the document agrees that countries have the rights to restrict imports which will cause damage and can enforce their own environmental laws.
- Business travel. TPP requires that business travel is made easier.
- Consumer protection. Countries are expected to provide consumer protection against electronic scammers.
- Financial services. The countries are allowed to regulate their financial services as before and any company from a TPP country entering another country must obey that country’s financial services, regulations.
- Supply chain. To prevent a non-member country from getting the benefits of membership, there are rules in place which will determine the country of origin. For example, if all the parts are made in China, but the final assembly is in the U.S., it is not counted as being made in the U.S.
Historically, the formation of regional trade agreements is often a combination of both economic and political arguments. In addition to eliminating barriers to trade, regional economic integration can serve to increase regional security, promote bargaining power, and create a “commitment mechanism” for domestic policy reform. In fact, a primary reason for the formation of the European Coal and Steel Community (ECSC) in 1951, which paved the way for the European Union, was to enhance regional security. By interlocking key resources such as coal and steel, member countries made future conflict prohibitively expensive and regular political contact build trust and facilitated other forms of cross-border cooperation.
From the perspective of the U.S., the TPP is in the nature of what the ECSC was for the European Union. By all accounts, the economic benefits of the agreement for the U.S. (in terms of increased trade and growth) would have been modest. In a way, the low-lying fruit has already been picked: average tariffs are low and issues that remain (like agricultural tariffs and subsidies) are difficult to reach (multilateral) agreement on as the Doha round of negotiations illustrated. For the U.S. to have sizeable gains from a multilateral trade agreement, it is necessary for there to exist other large countries with which we previously had limited trade and, in reality, there are few countries that meet that threshold. So what is there left in terms of benefit?
The TPP offered a real potential to build a strategic partnership with the remaining 11 members, where the U.S. had a major role to play in establishing the standards by which modern trade operates, securing a geopolitical influence in Asia, and binding less developed countries to modernize their commercial laws in the areas of intellectual property (IP) rights, labor protection and the environment. Critics of the TPP maintained that it went too far on IP protection and not far enough on labor and environment protection. By comparison, the Regional Comprehensive Economic Partnership (RCEP) which includes China and is comparable in size to the TPP, does not even try to address these issues. In its present form, RCEP’s main goal is to reduce tariffs between member countries which would mainly benefit the manufacturing sector in these countries.
So what’s next? Countries in the Asia-Pacific region are encouraging the U.S. to reconsider its position on the TPP but are also exploring ways to move forward without the U.S. and inviting additional Asian economies to join. A future agreement without the U.S. will not immediately have an impact on the U.S. economy because the TPP never went into effect and so there are no benefits to be lost. But what we have given up is a seat at the table where modern trade standards are written and geopolitical influence is determined. Leadership needs to be earned and withdrawing from the TPP is one less chance for the U.S. to have a voice in how the “rules of the road” are written.
The U.S. currently has relatively low levels of protection to shield domestic production from import competition and already has preferential trade agreements with six TPP countries, including two of our largest trading partners, Canada and Mexico, but has no agreement in place with Japan, our fourth largest trading partner. The potential gains from unprecedented market access in Japan would have benefited a number of industries, most notably, U.S. agriculture.
Freer trade through the TPP would have provided overall economic gains; yet it is important to recognize that there would have been both winners and losers. Increased competition among partner countries would have put pressure on domestic firms supplying competing products; yet consumers had the potential to gain from relatively lower priced imports. Export oriented industries had an opportunity to gain from increased market access in the Asia-Pacific region.
The manufacturing sector voiced opposition to the agreement due to fears of increased competition and potential job losses to countries with relatively lower wages, and this largely overshadowed the discussion of the potential gains for other U.S. industries, including agriculture. Agricultural productivity has grown faster than U.S. domestic food and fiber demand and export markets sustain prices and revenues for U.S. agricultural producers. Given the relatively low trade barriers between the U.S. and other key trade partners, the opportunity to facilitate trade with Japan would have been the largest source of potential gains for the agricultural sector.
As the TPP slowly progressed through the negotiation process, member countries continued to move forward with additional trade agreements to facilitate economic activity in the region. One key example is the Japan Australia Economic Partnership (JAEPA) that went into force in 2015. The JAEPA grants Australia more favorable market access in the Japanese market than the U.S., in the absence of the TPP.
The beef sector marks a clear example of how U.S. products will be less competitive in the Japanese market. The TPP successfully negotiated the average beef import tariff in Japan to decrease from 38% to 9% for all member nations. Australia will now enjoy reduced tariff rates as a result of the JAEPA, while a failed TPP leads to a continued 38% tariff on U.S. beef supplied to Japan. This illustrates how U.S. beef will become relatively more expensive in Japan, as will be the case for U.S. products beyond the agricultural sector. Without the TPP, additional U.S. trade and economic partnership agreements will be essential for U.S. sourced products to remain competitive in the Asia-Pacific region moving forward.
TPP Was Good for Some & Bad for Others
- “The U.S. is a relatively closed economy which would benefit more from a trade agreement with distant countries such as TPP, but such benefits are counteracted by drawbacks due to increasing inequality across countries after the Great Recession of 2007-2009. Therefore, the answer to the question of "Was the Trans-Pacific Partnership bad for the U.S?" depends on which of these factors dominate in real life.”
Hakan Yilmazkuday – Associate Professor of Economics at Florida International University, Steven J. Green School of International and Public Affairs
- “Weighing the strategic and multilateral considerations, however, and taking a long-term view, the TPP project was probably ill-considered to begin with. Only a strong multilateral trading system, containing China within the robust WTO dispute settlement process, can support the U.S. economy in the long run. Now more than ever, the U.S. needs to remember this.”
Kenneth A. Reinert – Professor of Public Policy, Director, International Commerce and Policy Program, Schar School of Policy and Government, George Mason University
Multinational agreements allow large multinational entities to exploit differences among poor and rich countries in labor costs, worker safety and environmental regulations, among other issues. The result is an erosion in worker compensation and immense political pressure to weaken or even eliminate safety and environmental regulations as business argues that fair wages, worker safety and protection of the environment are inefficient and anti-competitive. Essentially, multinational agreements prohibit signatory countries from imposing tariffs or similar charges to ensure that multinational corporations actually bear the full costs associated with their business activities, rather than shifting them to vulnerable populations. In effect, unregulated global trade has had the adverse effect of reversing many of the economic, social and environmental gains we have made in the U.S. over the past century.
A related concern is the increasing presence of "investor-state arbitration" clauses in trade agreements, including the TPP. These clauses allow multinational corporations to directly challenge nation states if a multinational feels that certain aspects of a country's regulatory framework do not comply with a particular provision of the trade agreement. Dispute resolution is, of course, a necessary feature of an international agreement -- there must be some ways for countries to enforce the terms of the treaty. However, allowing multinational corporations to directly challenge national governments, and even sue for damages, is not the proper way to enforce compliance. In my opinion, charges that a country is violating a treaty provision should be resolved through negotiation between nation states, rather than between multinational corporations and the governments of participating nation states. Multinationals already have disproportionate economic power -- elevating them to the level of nation states is a foolish, and dangerous, development.
In general, I worry that those who negotiate our trade deals do not consider the long-run importance of maintaining a healthy middle class in the U.S. Over time, as we damage our middle class, we reduce the consumption capacity of the U.S. market. As a result, access to the U.S. market becomes less valuable to other countries, and our power at the negotiating table is diminished, with the result that the deals we enter are likely to be even more damaging to the American worker. "Fair trade" deals, if they existed, would allow governments to ensure that companies must bear at least some portion of the costs of "externalities." Free trade deals, in contrast, may actually increase these costs; they certainly increase the ability of multinationals to shift these costs to society, where they tend to be borne disproportionally by the most vulnerable.
A cost-benefit analysis by the U.S. International Trade Commission projected that U.S. food and agriculture would have gained the most as TPP markets for beef and other products would open to U.S. exports. Meanwhile, U.S. manufacturing would have contracted due to increased competition with producers in other TPP countries. Aggregated, the gains would have surpassed the losses for an economy-wide gain of just around 0.18% of GDP by 2032. A small gain, as the largest TPP countries, especially the U.S., have already reduced most of their import tariffs. Only in some sensitive products, mostly in agriculture, trade barriers remain high, explaining the greater benefits accruing to U.S. agricultural and food producers.
If the gains of the TPP are so modest why bother with a new trade agreement? The TPP is about more than trade. The TPP sought to establish a framework that would make different regulations in TPP, more compatible among the members. Some of these regulations are directly about trade. Acceptance of U.S. food safety practices abroad, even if these differ from local practices, will likely increase U.S. food exports. More broadly, the TPP agreement sought to protect property rights and reduce the transaction costs for U.S. and non-U.S. investments in the TPP region. The agreement also includes chapters on labor and the environment that sought to level the regional competition field. For instance, labor issues go as far as bilateral agreements where the U.S. requires Malaysia, Brunei and Vietnam to undertake labor reforms before the agreement enters into effect.
Changes in the investment environment and in labor conditions are difficult to incorporate in the trade models as the one used by the USITC. Yet, there is a useful message on the estimated costs and benefits of TPP. The analysis of trade agreements is guided by the notion of comparative advantage. When given the opportunity to trade, countries use their relative advantages on certain technology or natural endowment to specialize in what they do best. In the process, some industries expand and others shrink. No matter the size of the losses, trade always results in a net gain. What is not in the model, is that for individuals that see their incomes deteriorate due to increased competition, knowing that society as a whole is better off, is of little comfort. The fundamental argument to make trade openness a desirable policy is that the gains from trade should be used to compensate the individuals that see their real income reduced by the effects of international competition.
Recent evidence on the destruction of U.S. manufacturing jobs and persistently lower wages directly linked to export growth in China, which is not in the TPP, suggests that the compensation leg that sustains the argument for opener trade lags behind the impetus for opening markets up. Therefore, whether the TPP was bad for the U.S. would have critically depended on the policies implemented to compensate workers displaced by foreign competition.
The overall economic effects of TPP were likely to be quite modest. After all, the United States already has free-trade agreements with six of the 12 TPP countries -- Australia, Canada, Chile, Mexico, Peru, and Singapore. Trade with those countries, involving well over $600 billion per year of American exports and a similar amount of imports, would have been essentially unaffected by TPP.
Of the five TPP countries with which the U.S. did not already have free trade, only Japan is a large player in the world economy. The combined economies of the other four (Brunei, Malaysia, New Zealand, and Vietnam) are only about one-seventh as large as that of Japan. In a sense, TPP would have been a Japan-U.S. free-trade agreement, with some extras thrown in.
In short, TPP could not possibly bring about the fabulous benefits that some of its proponents suggested, but neither could it create the catastrophe conjured up by some of its detractors.
Of course, even though the effects of TPP would have been modest in the aggregate, they would not have been zero. TPP would have brought benefits for American agriculture, by boosting exports to Japan. And it would have put pressure on American manufacturing through import competition.
When all of the winners and losers are included, expansion of trade as a result of TPP probably would have had a small net positive effect. However, TPP also would have given corporations too much power in disputes with governments. Whether that downside would have been enough to offset the modest benefits from increased trade is hard to know.
I have given a lukewarm description of the economics of TPP. However, the thing that causes the greatest concern for me isn’t an economic issue at all, or at least not a narrowly economic issue. The thing that concerns me most is that withdrawal from TPP could signal a broader abdication of American leadership in the world.
The 72 years since the end of World War II have seen unprecedented global peace and prosperity, which could not have occurred without American leadership. It’s too early to tell whether withdrawal from TPP is the beginning of a long-term process of relinquishing leadership in the Pacific Rim, creating a vacuum that will most likely be filled by China. But it does cause very real concern for me, just as I am concerned about President Trump’s lack of support for NATO, which could create a vacuum that Vladimir Putin would be only too happy to fill.
By itself, withdrawal from TPP won’t have a huge effect on the economy. But if it heralds a long-term period of isolationism and diminished American leadership, it will be a bad omen indeed.
In addition, the U.S. companies would have greater potential to invest in more profitable countries among the TPP partners, with the relaxation of investment rules. As for the U.S. citizens at large, they would have benefited from increased employment and income opportunities from the export expansion. Further, cheaper goods and services imported from the TPP partners would also have benefited the consumers. Overall, the U.S. would have grown more rapidly than it would grow now without the TPP. Several studies have supported these arguments.
The negatives of TPP include the following. Firstly, greater import competition may harm domestic production in some sectors -- while this is a standard mercantilist argument against free trade in general, the net effect on U.S. economy and employment would have been positive due to the greater opening up in TPP partners.
Second, more stringent IP rules in medicines may have affected the sale of cheaper generics, thereby harming the access to medicines by poorer and more vulnerable sections of the U.S. society; this is a genuine issue, which may have been further addressed while finalizing the TPP, based on consultations with the public health community and pharma industry together.
Third, there is an arguable loss of sovereignty arising from the appellate of dispute settlements that would have been established under the auspices of TPP countries. As long as the U.S. would have played by the rules and it had jointly set up with TPP partners, this is a non-issue, as we can learn from our past experience from the WTO Dispute Settlement Body.
The TPP was part of the Obama Administration’s strategic “pivot to Asia.” While the attempts to sell it to the U.S. public might have been expressed primarily in economic terms, it was never a purely economic endeavor. The reality of this strategic endeavor has been evidenced by China’s reaction to the Trump Administration’s recent withdrawal from the TPP, namely its attempt to build its own TPP (potentially plus Indonesia) with China replacing the U.S. For this reason, the relevant question is not whether the TPP was a “bad deal” as alleged by the Trump Administration, but whether it was a worse deal than a Chinese-led TPP. Given China’s strategic designs on Asia (and Africa), the answer to this question is probably “no.”
That said, the TPP drew attention and U.S. trade policy staff away from the multilateral trade of trade negotiations. Multilateral trade agreements are inherently difficult and frustrating. But they have the benefits of including the entire membership of the World Trade Organization (WTO). This is important because preferential agreements tend to focus on commercially or strategically “hot” countries or regions -- Mexico, the Pacific -- rather than the world trading system as a whole. While it is an unpopular position to take at the present time, the U.S. has benefited enormously from the multilateral trading system that was largely built to U.S. specification. To take one example, the intellectual property protections of the WTO were largely designed by the U.S. to its own benefit. Turning its back on this system will be something that the U.S. will regret in the long run. So in this sense, the answer to whether the TPP was bad for the U.S. is probably “yes.”
In an ideal world, the U.S. would not have to worry about the strategic designs of China and could continue to pursue its place in the multilateral trading system. We don’t live in that ideal world. Weighing the strategic and multilateral considerations, however, and taking a long-term view, the TPP project was probably ill-considered to begin with. Only a strong multilateral trading system, containing China within the robust WTO dispute settlement process, can support the U.S. economy in the long run. Now more than ever, the U.S. needs to remember this.
First, the U.S. is a relatively closed economy in terms of trade openness. For instance, while countries such as Belgium and Ireland have imports as 81 and 92 percent of their GDPs, respectively, the U.S. has imports as only 15 percent of its GDP. Based on these openness measures, recent research shows that about 90 percent of the welfare gains from trade within the U.S. is due to interstate trade, while only the remaining 10 percent of welfare gains are due to international trade. Therefore, the welfare of an average person in the U.S. is affected by a typical international trade agreement (including TPP) by only about 10 percent.
Second, globalization is associated with certain distance-reducing effects across countries due to advances in transportation technology and the spillover of information. However, since the U.S. is a relatively closed economy, it has relatively lower benefits from distance-reducing effects of globalization. In fact, the recent research shows that almost all countries around the world have higher benefits in comparison to the U.S. from distance-reducing effects of globalization. On top of its relative trade closeness, the North American Free Trade Agreement of the U.S. with neighbor (rather than distant) countries of Canada and Mexico also pushes the U.S. toward to bottom of the list of countries that benefit more from distance-reducing effects of globalization. Hence, if the U.S. would like to benefit more from globalization, it should better trade more with distant countries. Within this picture, TPP was an opportunity for the U.S. to benefit more from globalization, since TPP involved distant countries to the U.S. such as Australia, Brunei, Chile, Japan, Malaysia, New Zealand, Peru, Singapore and Vietnam.
Third, whenever inequality across countries goes up, mostly after periods of global recession such as the Great Recession of 2007-2009, recent research shows that countries benefit less from any multilateral trade agreement with distant countries, such as TPP. In other words, during such recessionary periods, it is more beneficial for the U.S. to have bilateral/regional trade agreements (such as with Canada or Mexico) rather than multilateral trade agreements with distant countries (such as TPP).
To sum up, the U.S. is a relatively closed economy which would benefit more from a trade agreement with distant countries such as TPP, but such benefits are counteracted by drawbacks due to increasing inequality across countries after the Great Recession of 2007-2009. Therefore, the answer to the question of "Was the Trans-Pacific Partnership bad for the U.S?" depends on which of these factors dominate in real life.
Then, the next question is "how can we measure these real-life implications?" The answer highly depends on short-run versus long-run policies, because although the effects of inequality due to the Great Recession will mostly disappear in short-run, benefits of the U.S. from being more open to international trade and having multilateral trade agreements with distant countries will always dominate in the long-run.
Thus, TPP might have been bad for the U.S. in the short-run, but the U.S. would definitely benefit from TPP in the long run. A corresponding final question follows on policy making: should we leave the decision of having trade agreements to politicians who decide on a short-run basis or leave it to independent government agencies that would decide on a long-run basis (such as the Federal Reserve System taking care of monetary policy in the U.S. in an independent way)?
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