The Empire's New Clothes? Conjuring Growth From the TPP

While the main US motivation for the Trans Pacific Partnership (TPP) has been to counter China’s influence in the region, it has also been used to undermine the Doha ‘Development’ Round of trade negotiations to better advance politically influential US corporate interests. Hence, it has become all the more necessary to legitimize the TPP in terms of its ostensible benefits. Touted as a ‘gold standard’ 21st century trade deal, it is nonetheless necessary to ascertain what gains can really be expected and whether these exceed its costs.

The only US government study of the TPP’s likely impacts found very modest growth gains from tariff reductions of only 0.1% over a decade. In fact, all studies so far project negligible direct economic growth gains from TPP trade liberalization.

Instead, the Peterson Institute of International Economics (PIIE) has provided the fig-leaf for the empire’s new clothes with far more inflated projections of supposed gains. In 2012, it projected growth of 0.4% after a decade. In January, the PIIE came up with greater gains from the TPP by claiming more, albeit still modest growth gains from trade, at 0.5% after 15 years. Incredibly, using the same PIIE study, the World Bank’s January 2016 Global Monitoring Reportmanaged to more than double the same study’s growth gains to 1.1%!

If it used more conventional methods for estimating gains from trade, the benefits would have been much more modest, as in the US government study. The PIIE studies claim greater growth gains due to ‘non-trade measures’ (NTMs) and related foreign investment surges.

This is justified by the presumption that the TPP will place all participating countries in the top 10 percent of the World Bank’s Doing Business ranking, despite ambiguous evidence of such effects. The 2012 study arbitrarily assumed that every dollar of FDI within the TPP bloc would generate additional annual income of 33 cents, divided equally between source and host countries, without any theory, modelling procedure or empirical bases for these suppositions.

Provisions allowing foreign investors to sue governments in private tribunals, or those undermining national bank regulation, become trade-promoting cost reductions, ignoring the costs and risks of bypassing national regulations and taxation. The huge gains claimed have little, if any, analytical bases in economics, evidence or experience.

To make the case for the TPP, the PIIE understates costs and risks, while exaggerating benefits. Very diverse TPP provisions were fed into the trade model as simple cost reductions, with little consideration of downside risks and costs. Although such costs and risks are not seriously considered, the projections are nonetheless presented as cost-benefit evaluations.

By understating crucial costs, and exaggerating projected benefits, net gains are overstated. For example, provisions to strengthen, broaden and extend intellectual property rights (IPRs) become simple cost reductions that will increase the trade in services. Such analysis ignores impacts on consumers or on governments subsidizing the prices of medicines to patients.

Thus, the PIIE and World Bank studies greatly overstate benefits from the TPP. Tariff-related trade benefits are the only quantifiable benefits consistent with economic theory and evidence, but make up a very small share of the projected gains. Many benefits involve one-time gains, and do not raise the economies’ annual growth rates. Also, these gains need to be compared against the costs ignored by the study as well as the actual details of the final deal.

Even unadjusted, the gains are small relative to the GDPs of TPP partner economies. But even these gains are still modest, and need to be revised downwards as many assumptions made for these projections are not in the final deal. While projected trade benefits will take time, not least because of the TPPA provisions, the major risks and costs will be more immediate.

Also, any impact of the TPP on workers’ incomes is excluded by assuming that all economies operate constantly with full employment while income distribution, trade and fiscal balances remain fixed over time. If the paltry gains from the TPP mainly go to a few big businesses, with the losses borne by others — workers, consumers or tax payers — the TPP would worsen inequality.

Our own study — using a Keynesian macroeconomic policy model, more realistic specifications and the PIIE’s 2012 trade projections — found more modest growth, net job losses, greater pressure on wages, declining labour shares of income and greater income inequality.

The TPP goes much further to redefine the role of government than necessary to facilitate trade. TPP ‘disciplines’ will significantly constrain the policy space needed for governments to accelerate economic development and to protect the public interest. The dubious larger benefits projected by TPP advocates make it all the more critical to consider the nature and scale of costs and risksignored by available modelling exercises. The TPP will impose direct costs, e.g. by extending patents and by blocking generic production and imports.

The TPP’s investor state dispute settlement (ISDS) provisions will enable foreign investors to sue a government in an offshore tribunal if they claim that new policy or regulations reduce expected future profits, even if such regulations are in the public interest. As foreign investors are already well protected by other available means, ISDS provisions are completely unnecessary.

Even advocates of free trade and trade liberalization have criticized inclusion of such non-trade provisions in free trade agreements. Instead of being the regional free trade agreement it is often portrayed as, the TPP seems to be “a managed trade regime that puts corporate interests first”.

Thus, the TPP, offering very modest quantifiable benefits from trade liberalization at best, is really the thin edge of a wedge which will undermine the public interest in favour of powerful corporate interests. Net gains for all in TPP countries are a myth. Only a full, careful and proper accounting based on the full text can determine who benefits and who loses.