Are Trade Pacts (and the Trans Pacific Partnership) really the Villian?

Driving in my car, I listened to an interesting rebuttal on why the Trans Pacific Partnership (TPP) is actually a big benefit to most in the economy and the few that lose out can be compensated (or at least partially) via various policies.

Bear in mind, anyone staking a claim here uses some model. And models have flaws.  I have seen models that claim a moderate increase in GDP and employment outcomes in the United States to ones that show moderate decreases.  Models attempt to calculate the effects of tariffs and non-tariff barriers, and the implications of trade projections on growth, employment and income distribution.  That is no easy task.

Support of TPP can come down to whose model you believe and whether you support the arbitration process.

Robert Z. Lawrence, Professor of International Trade and Investment, Harvard Kennedy School wrote a piece on Why the TPP has benefits for workers that far outweigh its costs.

The TPP negotiated by the United States and eleven other countries along the Pacific Ocean would knit together a market covering nearly 40% of global GDP.

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Professor Lawrence argues trade supports higher-paying jobs, increases the innovation and productivity growth that are necessary to support sustained increases in living standards and also expands the purchasing power of consumers.

One study by the Peterson Institute found that the deal will increase real incomes by $131 billion annually by 2030, the equivalent of nearly $1,000 per household, while expanding exports by $357 billion annually. Professor Lawrence’s model says that the percentage real gains to poor and middle class households are actually slightly larger than those at the top.

He also argues that job displacement, while painful for those losing their jobs, surprisingly the TPP is still a good deal. Although the costs of job loss can be substantial for individual workers who are displaced, in the aggregate these losses are likely to be a small fraction of the agreement’s overall benefits for workers. He argues for a policy to compensate those who lose their job via a wage-loss insurance program that supplements the earnings of displaced workers who accept jobs that pay less than they previously earned. I would like to see the lobbyists in Washington put that one together.

His models find that between 2017 and 2030 the annual benefits from TPP are between 12 and 100 times the costs. Moreover, after 2030, the TPP becomes the gift that keeps on giving, since, once the economy has adjusted, the economy simply reaps the annual benefits that grow with the volume of trade.

I’ve always been taught trade is a good thing, low or no tariffs benefit all consumers, but we have seen a hollowed out America over the last few decades. Manufacturing has peaked for many industries years ago.

In addition, Dr. Lawrence failed to address the arbitration process. This is known as the investor-state dispute settlement (ISDS) mechanism that allows foreign investors to sue state parties for violating broad investor protections contained in the agreement.  Only a handful of very specific measures – those related to tobacco control and taxation, for instance – are selectively excluded from arbitration.  Efforts to enforce environmental obligations or court decisions invalidating patents could by challenged by foreign investors.

There is also another bigger issue at play here and it’s China. If the US vacates its role in global trade, China will certainly fill the void. And we have seen how China has manoeuvred to take control of the Spratly Islands, there is no reason to think they will not use their leverage here.

What do others think?  Would you approve or reject the TPP as is?

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