March 18, 2016
The proponents of the protectionist Trans-Pacific Partnership (TPP) trade agreement are getting ever more shrill as it becomes clearer that the public is not buying what they have to sell. David Ignatius does the rant for the deal in his column in the Post today. The title of his column warns against “Trump and Sanders’ dangerous revolt against free trade.”
The first point that everyone should remember is “free trade” is just a term that the proponents of these deals throw around to make themselves feel virtuous and so that they can call their political opponents names. These deals are actually about selective protection, where protections that benefit some groups are left in place, while other groups (i.e. ordinary workers) are forced to compete with much lower paid workers in the developing world.
As far as the protectionism in the TPP, the deal is quite explicitly about increasing the length and strength of patent and copyright protection. Yes, that is “protection” as in “protectionism.” Patent and copyright protection do serve a purpose in providing an incentive for innovation and creative work, but all forms of protection serve a purpose. The question that serious people ask is whether there is a better way to serve the purpose.
There are lots of reasons for thinking that our rules on patent and copyright protection are already too strong, as they have led to massive abuses. This is especially true in the case of prescription drugs. To take one prominent example, generic versions of the Hepatitis C drug Sovaldi can be profitably manufactured for $300 to $500 per treatment. The list price for the drug in the United States is $84,000.
And raising the price of a drug by more than 10,000 percent as a result of patent monopoly causes all the economic waste and corruption that imposing a 10,000 percent would. The market doesn’t care that we call the intervention a “patent” rather than a “tariff.”
The TPP will also do nothing to reduce the protectionist barriers that allow our doctors and dentists to earn twice as much as their counterparts in other wealthy countries. Unlike autoworkers and textile workers, doctors and dentists have the political power to protect themselves from being forced to compete with their lower paid counterparts in the developing world.
The point here is that if you support stronger and longer patent and copyright protections, if you don’t think that doctors anywhere in the world should be able to train to U.S. standards and practice freely in the United States, then you are a protectionist, not a free trader. This is not changed by the fact that you think autoworkers and textile workers should have to compete with low-paid workers in the developing world.
So if we can get beyond the name-calling and ask what does the TPP offer, the answer for most people is likely to be not much. The TPP study by the Peterson Institute that is cited by Ignatius is not very informative on this topic, since it explicitly assumes that the trade balance is not affected by the TPP. It tells readers:
“The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.”
Of course much of the story of trade over the last two decades has been the explosion in the size of the trade deficit, from around 1.0 percent of GDP in the mid-1990s to almost 6.0 percent of GDP at its peak in 2005. It is currently near 3.0 percent of GDP (@$500 billion a year). These deficits create a huge gap in demand in the economy which is not easily filled with other spending. We could fill the demand gap with larger budget deficits, but this is not politically acceptable, especially in places like the Washington Post.
It is also worth commenting on the Peterson Institute’s record on projecting the impact of trade deals. They generally have been better at dishing out vitriole against opponents than projecting the impact of policy. For example, a 2000 Peterson Institute paper by Gary Hufbauer included the comment:
“The Economic Policy Institute (http://www.EPINET.org) has advanced the most extravagant claims about the US bilateral trade deficit with China. Based on a count of 13,000 jobs lost per billion dollars of manufactured imports, the EPI asserts that current trade with China already costs the United States 880,000 high-wage manufacturing jobs. Then, extrapolating the US ITC’s estimate of the one-time percentage import and export trade changes for 10 years, the EPI asserts another 817,000 US jobs will be eliminated through PNTR and Chinese membership in the WTO.”
The Economic Policy Institute’s “extravagant” claim probably understated the actual job loss associated with PNTR for China by more than 50 percent. The paper by Hufbauer projected a trivial jobs impact as does the Peterson Institute’s latest study on the TPP.
There is another important point worth noting in this picture. Using the Peterson Institute’s assumption that the TPP cannot affect the trade balance, we can conclude that the stronger and longer patent and copyright protection will necessarily mean job loss in manufacturing and other areas. This must be the case, since the stronger protections will mean that the Pfizer, Microsoft, and Disney will be getting more money from the TPP countries. If the total balance does not change, then everyone else will be getting less on net.
In other words, the TPP is about redistributing money from the rest of us to the pharmaceutical industry, the software industry, and the entertainment industry. Needless to say, this will increase the market for economists and policy types doing analyses to determine what can be done about income inequality.
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