What Economic Models Tell Us about the TPP

February 18, 2015 1:45 PM

Congress prepares to take up the Trans-Pacific Partnership (TPP), the debate is reviving old misunderstandings about how trade agreements affect the US and other economies. Over the past four years, colleagues and I have built models of the TPP that are now frequently mentioned in the debate.1 Since this work is likely to provide the most detailed assessment of the TPP until the United States International Trade Commission (USITC) issues its report some months from now, our results and their limitations need to be clear.

We rely on a “computable general equilibrium” model to track supply and demand in many markets. We divide the world economy into 18 production sectors in 24 countries and regions and examine how the TPP would affect each of these markets over the next 15 years. This is a data- and computation-intensive exercise. We calculate, for example, the direct effects of US tariff reductions on imports of Japanese cars, as well as many indirect effects on variables ranging from the demand for steel and labor to real wages.

Similar models are used by most academic researchers and government agencies, including the USITC. Such models are inevitably imperfect, but they are built on increasingly sophisticated theory and data, as well as retrospective analyses of past agreements. Four broad insights emerge from our work.

1. The results do not suggest early, large effects from the TPP for the United States. More than 90 percent of US economic activity2 involves markets and jobs minimally affected by trade. Even much trade with TPP partners will not be affected at first.

The TPP will apply best practices that are mostly already in place in the United States, so will imply modest changes in US tariffs, standards, and regulations. Some of our partners will be affected more since they depend more on trade, have higher tariffs to cut, and will have to adopt new labor, environmental, and regulatory standards. But changes will be implemented slowly—some over as many as ten years—giving companies, workers, and countries time to adjust.

2. The results do show that the TPP matters over time. Trade agreements work by helping to move people and resources toward an economy’s most productive firms and industries. This raises wages and reduces the costs of what people buy, increasing their real purchasing power. Liberalizing economies like Chile, China, and Korea have consistently performed better than more inward-looking ones at comparable stages of development.

Likewise the TPP would benefit America’s most competitive sectors, in part by embedding them more firmly in global production chains that are now often centered in Asia. The TPP’s investment and intellectual property provisions, for example, should help to make American know-how—internet technologies, apps, movies, and more—more accessible and secure in dynamic markets.

Overall, we estimate that $77 billion per year would be added to US real incomes by 2025. (Such estimates could be wrong by one-third or more in either direction.) Expecting normal US employment then, we do not calculate any increase in the number of people at work. But by 2025 around 650,000 more people, close to ½ percent of the labor force, can be expected to work in export-related jobs and correspondingly fewer in less productive import-competing jobs because of the TPP.

These long-term shifts will benefit workers directly. Export jobs pay up to 18 percent more than those in import-competing industries.3 (Not everyone can move into those jobs, but people can still move incrementally toward higher skills and better pay.) Service export jobs are a prominent target of the TPP and, according to one study,4 paid an average of $66,454 per year in 2007, or one-third more than jobs in manufacturing.

Most such shifts, assuming healthy labor markets and time for adjustment, will be handled by routine hires and separations in the US economy. In an average month, more than 4 million Americans leave jobs and a similar number find new ones,5 dwarfing the 4,000 or so monthly job changes that we estimate could be caused by the agreement.

Still, some transitions will be difficult and costly—for example, those involving older workers and cities with a narrow industrial base. Even if overall benefits exceed costs many times, it would be highly unfair to let those workers and communities bear the costs. This argues for generous adjustment assistance and other initiatives to facilitate worker mobility.

3. The results show gains for our trade partners as well as the United States. The mechanisms will be similar—more productive firms, sectors, and jobs—but the industries will be different. To be sure, some countries excluded from the agreement will lose, but their losses will be small compared to global gains and will hopefully encourage them to join future agreements.

Ultimately, the TPP should stimulate deals with Europe and other Asian and Latin American countries. The TPP will set new benchmarks for global rules that were last updated in 1993, including in sectors that matter to the United States. If these broader implications follow, the benefits to the United States and the world would be multiplied by roughly three.

4. Finally, economics tells us that a trade agreement is no substitute for a comprehensive economic strategy. Maximizing the gains from the TPP will require investments in America’s capabilities. For our high-wage economy, this means sustained innovation and investments in infrastructure and skilled workers for data-hungry services and manufacturing. Not coincidentally, these initiatives would also help to reduce income inequality.

The TPP debate should be confident and forward-looking, befitting America’s enormous assets and recovering economic engine. The benefits of the TPP should not be overstated in an economy as large as ours, but they are significant. Exploiting gains from trade is a necessary part—if just one part—of the strategy to expand opportunity for Americans.

Peter A. Petri is the Carl J. Shapiro Professor of International Finance at Brandeis University, senior fellow (non-resident) at the East-West Center, and visiting fellow at the Peterson Institute for International Economics.

Notes

1. Peter A. Petri, Michael G. Plummer, and Fan Zhai (2012). The Trans-Pacific Partnership and Asia-Pacific Economic Integration: A Quantitative Assessment. Policy Analyses in International Economics 98. Washington, DC: Peterson Institute for International Economics. Data, updates and more recent publications are available on asiapacifictrade.org. This work has been discussed in Politico (February 15, 2015), the Washington Post (January 15, 2015), the Economist (November 15, 2014), Paul Krugman of the New York Times (December 12, 2013), and others.

2. Data from the OECD Trade in Value Added database. Accessed February 10, 2015.

3. A. Bernard, B. Jensen, S. Redding, and P. Schott (2007). Firms in international trade. Journal of Economic Perspectives 21, 105–130.

4. J. Bradford Jensen (2011). Global Trade in Services: Fear, Facts and Offshoring. Washington, DC: Peterson Institute for International Economics.

5. Data from the Bureau of Labor Statistics, JOLTS survey. Accessed February 13, 2015.

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