Appraising the TPP: What Should We Care About?

September 20, 2016 9:45 AM

It appears likely that the Trans-Pacific Partnership (TPP) will come up for a vote in the lame duck session to be held after the presidential elections. How should we judge if it is a good deal? On September 15, Republican presidential nominee Donald Trump said he would only sign phenomenal trade deals and would therefore reject the TPP. “Phenomenal” is not exactly a technical term, so it is hard to know what he means. But it is possible to be more precise.

The TPP is a very complex agreement, and objections can be raised about some of its provisions, but it is a grand bargain and it is important not to lose sight of the big picture: First, is it going to benefit US incomes and wages? And second, will these benefits outweigh its costs? Based on the leading studies of the TPP and my own research, I conclude that answer is yes.

The two leading studies of the TPP’s economic impact agree that its income gains would be positive. The study by the Peterson Institute undertaken by Petri and Plummer (2016) projects an increase of 0.5 percent of US income or $131 billion in 2030. The US International Trade Commission (USITC) forecasts a gain in income of 0.25 percent by 2032. These numbers might seem small—almost all policies are when compared with total income—but note that even with a handsome annual return of 5 percent per year, to earn the same income that would be provided by the TPP would require an investment of $2.6 trillion in 2030. Not a bad deal in return for a piece of legislation.

Democratic presidential nominee Hillary Clinton and running mate Tim Kaine have said they would only sign trade agreements that in addition to increasing prosperity would also increase wages, employment, and national security. Yet although they have rejected the TPP, it appears to meet all these criteria. Both the Petri-Plummer study and the USITC studies find that the TPP would increase wages; while the Petri-Plummer ignores the possibility that higher wages could increase labor participation, the USITC estimates that by 2032 an additional 128,000 workers will be working because of the attraction of higher wages. While the impact on US national security cannot be captured by economic analysis, there is little doubt that the agreement, which formed the key to President Obama’s “pivot to Asia,” will solidify US relations with key allies such as Japan, Australia, and New Zealand and with Muslim majority countries such as Malaysia and Brunei. Indeed, US Defense Secretary Ashton Carter has underscored the security benefits of the TPP.

But perhaps the Clinton-Kaine criteria are insufficiently demanding. Like all trade agreements, the TPP will also have those who lose. While the TPP will open markets for US exports, it will also increase US imports from TPP countries and this could result in some US workers losing their jobs. Being laid off is a very painful experience. Although a few workers may be fortunate to quickly find new jobs, most will not be that lucky. Some displaced workers will withdraw from the labor force. Others may have to accept jobs that pay lower wages because they change occupations or lose seniority. Moreover, the lifetime impact for these displaced workers could be much larger than the initial wage loss and cost of unemployment because changing jobs can lower the trajectory of their earnings throughout their subsequent working life. This suggests a more balanced view of the TPP should take its impact on displaced workers into account and compare the benefits to these costs.

Tyler Moran and I have estimated the costs of worker displacement from the TPP using the projections of import growth by Petri and Plummer, as well as the severe assumption found in the literature that over their working life, each dislocated worker loses 1.4 times their annual compensation. Depending on the ability of firms to respond to increased imports through voluntary attrition and assigning workers to meet demand growth from other sources, between 2017 and 2030 the annual benefits from the TPP are likely to be between 12.3 and 114.5 times the costs. Moreover, after 2030, the TPP becomes the gift that keeps on giving, since, once the economy has fully adjusted, the economy simply reaps annual benefits that grow over time.

There are a number of technical reasons the USITC study finds that the benefits of the TPP will be about half those forecast by Petri and Plummer. Petri and Plummer argue these are too cautious. In particular, the USITC applies an old-fashioned framework in which the goods that are traded are homogeneous and the TPP has no impact on productivity. By contrast, Petri and Plummer use more modern trade theory that takes account of the benefits that will accrue as a result of an increased variety of differentiated products as well as improvements in productivity. In addition, Petri and Plummer project larger effects on trade due to the reduction in nontariff trade barriers—an area in which impact is hard to measure.

But while the USITC study may be too cautious, its results actually imply a much larger benefit-to-cost ratio. Since it views the agreement as less powerful, the USITC forecasts that by 2032 US imports would increase by $48.9 billion—just a seventh of the import growth projected by Petri and Plummer. Making the reasonable assumption that the displacement from the TPP will be proportional to import growth, therefore, compared with Petri and Plummer, the USITC estimates would imply half the benefits for a seventh of the costs. In other words, the USITC study implies that the annual benefits of the TPP would between 43 and 400 times as large as its costs.  

In sum, whether or not the benefits from the TPP will be “phenomenal” is hard to say. But judged by more reasonable criteria such as overall benefits, impact on wages, employment, national security, and the ratio of benefits to costs, the TPP is a good deal. These calculations also suggest that some of these gains should be used to support an improved adjustment program for those who are displaced.

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