The "Better In than Out" Attitude Underestimates the TPP’s Benefits

Peter A. Petri (PIIE) and Wendy Dobson (University of Toronto)

Published by Globe and Mail

May 12, 2016

In the fractious politics of trade, a recent, supportive C.D. Howe Institute report on Canada’s stake in the Trans-Pacific Partnership (TPP) made a welcome contribution. For Canada and its 11 partners, the TPP promises market-oriented rules for industries unknown two decades ago and a stronger gateway to the Asia-Pacific, the world’s fastest-growing region.

But even that positive study understates the benefits of the agreement. The study does not discuss geopolitical gains, which may be the TPP’s most important contribution—as eight former US secretaries of defense pointed out recently. The TPP will strengthen links across the Pacific and reinvigorate a rules-based approach to global trade. Some have argued that it will set rules so China doesn’t, but the real risk is a drift toward anarchy without any solid rules.

The geoeconomic case for the TPP is also stronger than the institute calculates. Yes, Canada is “better in than out,” but three other studies (by Japanese researchers and the Peterson Institute for International Economics) estimate gains in the range of 1 to 2 percent of Canada’s GDP, rather than the 0.08 percent estimated by C.D. Howe.

Unlike the C.D. Howe report, these studies emphasize the effects of the rules of the TPP, not just tariff reductions.

The rules-tariffs debate is not just academic. Global negotiations have mostly won the war against tariff barriers; in the United States, they are now 78 percent lower than after the Second World War. But regulatory obstacles—nontariff barriers—have mushroomed. The World Trade Organization (WTO) and others now see such barriers as the main bottleneck; the Peterson Institute estimates they are five times as restrictive as tariffs for TPP trade.

The new, authoritative Elsevier Handbook of Commercial Policy concludes that accords such as the North American Free Trade Agreement (NAFTA) have increased trade as much as five times more than could be expected from tariff cuts alone because they reduce nontariff barriers and uncertainty about future trade relations. More than 215 such agreements have been signed since 2000.

The TPP offers much progress by adopting rules to facilitate trade in the newest products and services by ensuring open network access, freer cross-border data flows and limits on data-localization requirements. It focuses on international supply chains with a cluster of policies requiring regulations to be less domestically biased and more coherent. And it facilitates trade with measures such as expediting express delivery and requiring ports to process goods trade in less than 48 hours.

The agreement also includes wider commitments than the WTO to reduce services and investment barriers.

Most TPP rules will be subject to a thorough dispute resolution process or enforced by high-level oversight committees.

Estimating the effects of these rules on specific industries, countries, and agreements is difficult and uncertain, but not optional. Developing new rules has to be central to tomorrow’s effort to liberalize trade. Researchers are right to be conservative, and the Peterson Institute’s study offers a range of estimates, with the whole range suggesting significant gains for Canada.

Even so, the TPP leaves stubborn barriers in some economies and several exceptions in its services and investment commitments. China and some key Asia-Pacific economies have yet to join. So work remains. But the agreement makes real progress on goals that were elusive in global negotiations and divisive in everyone’s politics. It stimulates international economic cooperation at a time when other sources of productivity, wage gains, and growth are difficult to find.