- Development & Aid
- Economy & Trade
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Tuesday, August 30, 2016
Jomo Sundaram 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.
- The Trans Pacific Partnership Agreement (TPPA), negotiated in Atlanta in October 2015 and to be signed in Auckland in February 2016, privileges 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 TPP trade liberalization. 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 benefits elsewhere, mainly from supposedly projected investment boosts, while ignoring costs or presenting them as benefits. The most widely cited study was issued in 2014 by the well known US globalization cheerleader, the Peterson Institute of International Economics.
Wide-ranging expected TPP provisions were fed into the economic models as simple cost reductions, with no consideration given to downside risks and costs, e.g. due to reductions in national regulatory autonomy resulting from the TPP. As such, costs are not included, they do not provide a real cost-benefit assessment.
By excluding crucial costs, TPP 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 regulation, are seen as trade-promoting cost reductions, ignoring the costs and risks of side-lining national regulation.
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 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 per 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 the benefits to be derived from the TPP. While most of its claims lack justification, the only quantified benefits consistent with mainstream economic theory and evidence, are tariff-related benefits that make up an unknown but very small share of the projected gains.
The gains are much smaller than claimed by the TTP governments citing them. Less than a quarter of overall gains claimed can be considered seriously. Even these 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 discounted for the same reason.
Even unadjusted, the gains are small relative to the GDPs of TPP partner economies. Also, while projected trade benefits will take a decade to realize, 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 sufficiently analysed in 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 liberalization, along with others, have sharply criticized 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 liberalization, is really the thin edge of a wedge package which will fundamentally undermine the public interest. Net gains for TPP partners seem doubtful at this stage.
Only a complete and proper accounting based on the full text can settle this key question. The TPP has, in fact already been used to try to kill the Doha ‘Development’ Round of multilateral trade talks, but may well also undermine multilateralism more broadly in the near future.
– The Peterson Institute report is available at http://www.sustainabilitynz.org/wp-content/uploads/2014/02/EconomicGainsandCostsfromtheTPP_2014.pdf