May 10, 2015
The NYT appeared to be pushing for approval of the Trans-Pacific Partnership (TPP) in a news article that massively misrepresented the pact’s importance as a mechanism for reducing trade barriers and completely ignored the ways in which it would increase trade barriers. It also failed to mention the issue of currency rules or the extra-judicial system of investor-state dispute settlement mechanisms, both of which are main reasons given for opposition to the TPP.
The first paragraph describes the TPP as:
“a massive trade accord with 11 nations across the Pacific Rim.”
Later it refers to it as:
“an accord that would reach 40 percent of the global economy.”
It continues:
“The accord would reduce tariffs on a vast array of goods and services, and would affect about 40 percent of America’s exports and imports.”
In fact, the vast majority of “40 percent of the global economy” and the “40 percent of America’s exports and imports” are already covered by trade agreements with the United States. Of the eleven countries other than the United States in the TPP, six (Australia, Canada, Chile, Mexico, Peru, and Singapore) already have trade deals with the United States. That leaves Brunei, Japan, Malaysia, New Zealand, and Vietnam as countries being brought into a deal for the first time.
While the TPP will modify the terms of the trade deals with the first six countries also, there will be very little in the way of tariff reduction with these countries since tariffs are already close to zero. These six countries account for most of the “40 percent of the global economy” and the “40 percent of America’s exports and imports.”
This the reason serious estimates of the gains from the TPP show them to be relatively small, roughly two months worth of growth in a normal economy by the time the full effects are felt a dozen years out. And these estimates do not take account of the losses from higher prices for prescription drugs and other patent and copyright protected items.
A major thrust of the TPP is to strengthen and lengthen patent and copyright protections, making the affected items more expensive. Since these protections can raise prices by 1000 percent, 10,000 percent or more above the free market price, the resulting distortions from this subset of items can easily swamp the gains from reducing already low tariff barriers on other items. (The distortions from a trade barrier are proportional to the square of the size of the barrier. This means if a patent raises the price of a good by 100 percent, the resulting distortions would be expected to around 100 times larger than the distortions created by a tariff of 10 percent.)
It is understandable that President Obama would want to exaggerate the extent to which the TPP reduces trade barriers to promote the pact. It is less easy to see why a neutral media outlet would engage in the same sort of exaggerations.
The piece also implies that Obama’s trade officials are clueless about Washington politics, telling readers:
“But even senior members of the administration seem astonished at the difficulty the president is having in selling the deal.
“‘I’ve never participated in something like this,’ said Penny Pritzker, the secretary of commerce, who has helped lead the lobbying campaign with other cabinet members and White House officials.”
It’s inconceivable that anyone who has followed Washington politics over the last two decades would be surprised by opposition to this sort of trade pact. As is widely recognized by economists, trade has been a major factor in the upward redistribution of income over the last three decades. In a context where people are concerned about inequality, how could it be surprising that they would not want to see more of the same sort of policies?
Also, the trade deficit has been a major drain on demand in the economy ever since the bailout from the East Asian financial crisis sent the dollar soaring in 1997. It currently is over $500 billion a year (@ percent of GDP) and rising. The Obama administration has no remotely plausible mechanism for filling the gap in demand created by this trade deficit and bringing the economy back to full employment.
Many economists had advocated including currency rules in the TPP so the dollar could be made more competitive and the trade deficit could be reduced. However the Obama administration refused to take this issue seriously. As a result, many oppose the deal since it is likely to make it even more difficult to address the trade deficit in the future. If the gap in demand is not filled, and the economy remains well below full employment, it is unlikely that workers will have enough bargaining power to share in the gains from growth.
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