Question for Fareed Zakaria: Can We Stop the Trade Deal Hype Machine?

May 15, 2015

That’s the inevitable question people would ask after reading his column headlined, “you can’t stop the trade machine.” The piece conflates trade, which obviously is not going to be stopped, with the Trans-Pacific Partnership (TPP). There is of course no direct connection, but if you’re trying to promote the TPP, why not?

Whether or not the TPP passes, trade between the United States and the countries in the region will continue to grow. It’s not even clear that it will grow faster with the trade deal. While the TPP will lower tariffs, most tariffs with most of the countries in the region are already low. (Six of the eleven non-U.S. countries in the TPP already have trade agreements with the U.S.)

On the other hand a major thrust of the deal is to strengthen and lengthen patent and copyright protection. This will raise the price of many items, most importantly prescription drugs, thereby reducing trade. The price increases from these forms of protectionism are equivalent to large tariffs. In the case of drugs, patent protection can raise the price by close to 100 times the free market price.

For example, the Hepatitis-C drug Sovaldi sells for $84,000 for a 3-month course of treatment in the United States. A high quality generic version is available in India for less than $1,000. This has the same effect on the market as imposing a tariff of 10,000 percent. Since the economic distortions from a tariff are proportionate to the square of the size of the patent, the distortions from patent and copyright protection on a limited number of items can easily exceed the gains from eliminating small tariffs on a large number of items. In other words, Zakaria has little basis for even asserting that the TPP will increase trade and growth.

Furthermore, the deal imposes a business friendly regulatory structure that Zakaria just assumes we should want. As Canada’s finance minister recently demonstrated when he argued that the Volcker Rule violates NAFTA, these trade deals can impede our ability to regulate the financial industry. The TPP may in fact limit the ability for the federal, state, and local governments to impose regulation in a wide range of areas, including the environment, consumer safety, and labor rules. Since the terms of the agreement will be enforced in the United States by an Investor State Dispute Settlement system, not the U.S. judiciary, it is entirely possible that a wide range of regulations in these areas could be considered violations of the trade agreement.


Finally, it is worth comparing the potential gains from the TPP with the potential gains from addressing currency imbalances, which is a central issue raised by opponents of the deal. According to a widely cited analysis by the Peterson Institute for International Economics, the TPP is projected to raise U.S. GDP by a total of 0.4 percentage points when its effects are fully felt more than a decade in the future. (This model does not include any projections of losses due to higher prices for drugs and other items that will be subject to stronger protections.)

By comparison, if we had a lower valued dollar, which reduced the trade deficit by one percentage point of GDP (@$175 billion a year), this would quickly add roughly 1.5 percentage points to GDP. By not including currency rules in the TPP, we are losing a major opportunity to address currency imbalances, which could mean that large trade deficits persist long into the future. Since we have no other mechanism to fill the gap in demand created by the trade deficit, this likely will mean that the economy remains below full employment. This would also mean that most workers will lack the bargaining power to share in the gains from growth. So for most of the population, the impact of action on currency values would swamp any potential benefits from the TPP.

Anyhow, it is striking that folks like Zakaria spin bizarre stories about the inevitability of trade to push TPP rather than addressing the specific of the deal. This presumably speaks to the difficulty of making a real case for the deal.


Support Cepr


If you value CEPR's work, support us by making a financial contribution.

Si valora el trabajo de CEPR, apóyenos haciendo una contribución financiera.

Donate Apóyanos

Keep up with our latest news