The TPP, offering modest quantifiable benefits from trade liberalisation, is really the thin edge of a wedge package that will fundamentally undermine the public interest., says Jomo Kwame Sundaram.
The Trans-Pacific Partnership Agreement (TPPA), negotiated in Atlanta in October 2015 and to be signed in Auckland in February 2016, favours foreign investors while imposing substantial costs on partner countries. Touted as a “gold standard” 21st century trade deal, it is critical to ascertain what gains can really be expected and whether these exceed costs.
Modest trade gains
Mainly using methodologically-moot computable general equilibrium (CGE) models, all studies so far project modest direct economic growth gains from the Trans-Pacific Partnership (TPP) trade liberalisation. Actual net gains may be even more modest, if not negative, as many assumptions in projection exercises are not in the final trade deal.
To make the case for the TPP, some studies looked for ostensible benefits elsewhere, mainly from supposedly projected investment boosts, while ignoring costs or presenting them as benefits. The most widely cited one was issued in 2014 by the well known US globalisation cheerleader, the Peterson Institute of International Economics.
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Thus, wide-ranging expected TPP provisions were fed into the economic models as simple cost reductions, with no consideration of downside risks and costs, e.g. due to reductions in national regulatory autonomy due to the TPP. As such costs are not included, they do not provide a real cost-benefit assessment.
By excluding crucial costs, the advocates exaggerate projected trade benefits by claiming dubious gains. For example, they view provisions to extend intellectual property rights (IPRs) as cost reductions that will increase the trade in services.
Provisions allowing foreign investors to sue governments in private tribunals or undermining national bank regulations are seen as trade-promoting cost reductions, ignoring the costs and risks of sidelining national regulation.
Thus, the study claimed huge benefits by assuming that the TPP will catalyse large exports by lowering the fixed costs of entering foreign markets. Although the huge gains claimed to have no analytical bases, it assumed that half the impact of the TPP would be from cutting fixed trading costs.
If the modelling used conventional methods for estimating gains from trade, the results would have been much more modest, as in the only US government study of TPP impacts.
Fantastic foreign investment effects
The remaining benefits projected by the Peterson Institute study are mainly from a foreign direct investment (FDI) boom.
It 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 economic theory, modelling procedure or empirical evidence for this supposition.
Thus, the study greatly overstates benefits from the TPP. While most of its claims lack justification, the only quantified benefits consistent with mainstream economic theory and evidence are tariff-related trade benefits that make up an unknown, but very small share of the projected gains.
The gains are much smaller than claimed by the TPP governments citing it. Less than a quarter of the overall gains claimed can be considered seriously. Even these gains need to be compared against costs conveniently ignored by the study as well as actual details of the final deal. Needless to say, ostensible country gains calculated similarly need to be similarly discounted.
Even unadjusted, the gains are small relative to the GDPs of TPP partner economies. Also, while projected trade benefits will take a decade to realise, the major risks and costs will be more immediate. They represent one-time gains, and have no recurring annual benefit, i.e. they do not raise the economies’ growth rates.
The distribution of benefits has not been modelled by these exercises; if they mainly go to a few big businesses, with losses borne by others, the TPP would exacerbate inequality.
Net gain or loss?
The TPP goes much further into how governments operate than needed to facilitate trade. Such “disciplines” significantly constrain the policy space needed for countries to accelerate economic development and to protect the public interest.
The modest benefits projected make it crucial to consider the nature and scale of costs currently ignored by all available modelling exercises. The TPP will impose direct costs, e.g. by extending IPRs and by blocking or delaying generic production and imports.
The TPPA’s investor state dispute settlement (ISDS) provisions will enable foreign investors to sue a government in an offshore tribunal if they claim that new regulations reduce their expected future profits, even when such regulations are in the public interest. As private insurance is already available for this purpose, ISDS provisions are completely unnecessary.
Jagdish Bhagwati, a leading advocate of free trade and trade liberalisation, and others have sharply criticised the inclusion of such non-trade provisions in ostensible 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”.
The TPP, offering modest quantifiable benefits from trade liberalisation, is really the thin edge of a wedge package that will fundamentally undermine the public interest. Net gains for TPP partners also seem doubtful at this stage notwithstanding some significant gains for countries such as Vietnam, albeit at major costs in the longer term.
Only a full and proper accounting based on the full text can settle this key question. Already, the TPP has been used to try to kill the Doha “Development” Round of multilateral trade talks, buwwt may well also undermine multilateralism more broadly in the near future.
Jomo was an assistant secretary general responsible for analysis of economic development in the United Nations system during 2005-2015 and received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.