January 26, 2016
A new study published by the Peterson Institute projects that the TPP will lead to an increase of $357 billion in annual imports when its effects are fully felt in 2030. This increase in imports will be equal to 1.4 percent of projected GDP in that year.
You probably didn’t see this projection in the write-ups of the analysis in the Washington Post, NYT, or elsewhere. That is likely because the study’s authors chose not to highlight it. Instead, in their abstract they told readers that they projected the TPP would increase exports by $357 billion. If you were curious about what happened to imports you had to go to page 7 to find:
“The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.”
In other words, by design the model assumes that trade balance for the United States is not changed as a result of the TPP. This means that whatever changes we see in exports, according to the model, will be matched by an equal change in imports. Unfortunately the implied projection for imports is never mentioned in the study, so some reporters may have missed this implication of the model.
There are several other important issues that may have been missed. First, the model is quite explicitly a full employment model. This means that, by assumption, the model rules out the possibility of the TPP leading to a larger trade deficit that reduces output and increases unemployment.
In prior decades most economists were comfortable with this sort of full employment assumption since it was widely believed that economies quickly bounced back from recessions or periods of less than full employment. In this view, if a trade agreement led to a larger trade deficit it would soon be offset by lower interest rates, which would provide a boost to investment and consumption.
Alternatively, a trade deficit would lead to a lower value of the dollar. A lower valued dollar would make our exports cheaper to people in other countries, leading them to buy more of them. At the same time, it would make imports more expensive for people in the United States, leading us to buy fewer imports. The net effect would be to lower the size of the trade deficit, bringing us back towards full employment.
Unfortunately, in the wake of the 2008 crash, fewer economists now believe that the economy has a natural tendency back to full employment. Many of the world’s most prominent economists (e.g. Larry Summers, Paul Krugman, Olivier Blanchard) now accept the idea of “secular stagnation.” This means that economies really can suffer from long periods of inadequate demand.
From the perspective of secular stagnation, if the TPP does lead to a larger trade deficit, then there is no automatic mechanism that will offset the lost demand and jobs. In this respect it is important to note that the TPP does nothing to address issues of currency management. This would mean that if one or more of the countries in the TPP began running larger trade surpluses with the United States, and then bought up large amounts of dollars to prevent an adjustment of their currency, there is nothing the United States could do within the terms of the agreement.
Unfortunately, the Peterson Institute’s model tells us nothing about whether the TPP is likely to lead to a growing trade deficit for the United States. It has ruled this possibility out by assumption.
There are some other items that are worth noting about the models assumptions. It assumes that 75 percent of the non-tariff barriers that are eliminated through the TPP will be protectionist in nature rather than welfare enhancing consumer, safety, or environmental regulation. That may prove to be to be correct, but it is very big assumption. This means that we will not see many cases where the investor-state dispute settlement (ISDS) mechanism is used to overturn (or more correctly impose penalties) for laws that allow consumers to purchase products they consider safe, such as country of origin labeling for meat. It means that the ISDS will not be used to overturn state or local bans on fracking, even if the purpose is to ensure safe drinking water. And, it means that the TPP will not make it more difficult to impose rules that prevent predatory lending by large financial institutions that happen to be based in other countries.
It is important to note that the bulk of the gains rest on this assumption about the nature of the non-tariff barriers that are overturned. Less than 12 percent of the projected gains are attributable to the reduction in tariff barriers in the TPP (page 15).
It is also worth noting that the study does not appear to factor in the losses associated with higher prices for the items that will be subject to stronger and longer patent and copyright protection. Stronger intellectual property protections were quite explicitly one of the main goals of the deal and were one of the last major issues to be resolved. As a result of the TPP, the countries that are party to the agreement will be paying more for prescription drugs and other protected products. The effect of longer and stronger IP rules is the same as a tariff, except we are talking about raising the price of protected items by many times above their free market price. This is equivalent to a tariff of several thousand percent on the protected items.
It does not appear as though the study has taken account of the losses associated with these implicit tariffs. There may be some offset if greater protection is associated with more innovation, but it would be a heroic assumption to assume this is automatically the case. Furthermore, even if innovation did offset the losses, it would not be done instantly, since there is a long lead time between when research is undertaken and when there is a product brought to market, especially with prescription drugs.
It is also worth noting, in the context of the balanced trade assumption of the Peterson Institute model, if the United States gets more money for its drugs patents and video game copyrights, then it gets less for its manufactured or agricultural goods. The greater income for drugs companies, the software industry, and other gainers from stronger IP protection imply less income for other exporters or import competing industries.
Finally, it is important to put the projected gain of 0.5 percent of GDP as of 2030 in some context. The Post article told readers:
“If those projections [from the Peterson Institute study] are correct, that additional growth would help a domestic economy that has struggled to regain the growth rates of previous decades in the wake of the Great Recession.”
The study’s projection of a cumulative gain to GDP of 0.5 percent by 2030 implies an increase in the annual growth rate of 0.036 percentage points. This means that if the economy was projected to grow by 2.2 percent a year in a baseline scenario, it will instead grow at a 2.236 percent rate with the TPP, assuming the Peterson Institute projections prove correct.
The projections imply that, as a result of the TPP, the country will be as rich on January 1, 2030 as it would otherwise be on April 1, 2030. Of course, other things equal, this would clearly be a positive story, but as noted above, there are reasons for believing that other things may not be equal and that these projections may not prove correct.
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