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Conjuring Growth from the Trans-Pacific Partnership TPP

Jomo Kwame 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.

KUALA LUMPUR, Malaysia, May 26 2016 (IPS) - It is now generally agreed that the Trans-Pacific Partnership (TPP) has served US foreign policy objectives well. For this purpose, the Peterson Institute of International Economics (PIIE) has provided the fig-leaf for the empire’s new clothes with exaggerated projections of supposed growth gains from the TPP.

Jomo Kwame Sundaram. Credit: FAO

Jomo Kwame Sundaram. Credit: FAO

The only US government study, by the Economic Research Service of the US Department of Agriculture, also uses a computable general equilibrium (CGE) model to find modest growth gains from TPP tariff reductions. Needless to say, the PIIE studies have nothing to say about the more pessimistic findings of US government analysis.

In a timely update of its 2012 study, the PIIE has conjured up even greater gains from the TPP by claiming more, albeit still modest growth gains. Both PIIE studies claim greater benefits by assuming that the TPP will catalyse much more growth from non-trade measures (NTMs) which will, in turn, trigger foreign direct investment (FDI). They have also resorted to other novel methods to inflate its ostensible benefits.

Modest trade gains

To make the case for the TPP, the PIIE underplays costs and risks, and exaggerates benefits. Very diverse TPP provisions are fed into its economic model as simple cost reductions, with little consideration of downside risks and costs. Although associated costs and risks are not seriously considered, such projections are nonetheless presented as cost-benefit evaluations.

The new PIIE study estimates real income growth due to the TPP over 2015-2030 to average 1.1% for all TPP members, i.e. about 0.06% annually over 15 years, instead of the earlier finding of 0.4% growth over a decade, which remains modest by any standards. While this represents an increase over their earlier projections by about half, it is more than ten times what the USDA-ERS exercise yielded.

Most gains would go to the TPP’s Southeast Asian four (Vietnam 8.1%, Malaysia 7.6%, Brunei 5.9% and Singapore 3.9%), followed by Peru (2.6%), Japan (2.5%) and New Zealand (2.2%). NAFTA members (US, Canada, Mexico, Chile) would only gain 0.6% on average.

The biggest loser is expected to be Thailand (-0.8%), ahead of the ASEAN trio of Myanmar, Cambodia and Laos (collectively -0.4%), with Indonesia and the Philippines only slightly worse off (both -0.1%). Thus, the TPP is likely to jeopardize the future of the ASEAN Economic Community as well as the Regional Comprehensive Economic Partnership.

Most of the additional growth attributed to the TPP in 2016 is due to revisions of data and assumptions where the devil is in the detail. For instance, despite reduced and delayed tariff and non-tariff liberalization, the new data supposedly yield greater growth gains.

As before, most of their purported gains from the TPP are not from goods trade liberalization, but due to non-tariff barrier reductions and measures promoting services trade. Only 15% of the GDP increase would be due to tariff cuts, whereas non-trade measures (NTMs) account for 85% of total growth attributed to the TPP.

The PIIE and, since January, the World Bank claim other gains, mainly from investment surges from abroad. Much of the benefits projected have been attributed to foreign direct investment (FDI) booms, justified by the assumption that the TPP will place all participating countries in the top 10% of the World Bank’s Doing Business ranking, despite ambiguous evidence of such effects. The studies arbitrarily assume 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 theory, modelling procedure or empirical evidence for this supposition.

Provisions allowing foreign investors to sue governments in private tribunals or undermining national bank regulation, become trade-promoting cost reductions, ignoring the costs and risks of bypassing national regulations and taxation. Again, the huge gains claimed have little, if any, analytical bases in economic theory, past evidence or experience.

By understating crucial costs, projected benefits have been exaggerated. For example, provisions to strengthen, broaden and extend intellectual property rights (IPRs) become simple cost reductions that will increase the trade in services, ignoring impacts on consumers or governments subsidizing the availability of medicines besides the reduced trade in medicines due to higher prices and the prohibitions on importing generics.

Paltry gains

Thus, the studies greatly overstate 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 a seventh of the projected gains. Even these gains need to be compared against the costs ignored by the study as well as the actual details of the final deal.

Even unadjusted, the gains are small relative to the GDPs of TPP partner economies. Many benefits are mainly one-time gains, with no recurring annual benefit, i.e. they do not raise the economies’ annual growth rates. Also, while projected trade benefits are expected to take some time, the major risks and costs will be more immediate.

Not surprisingly, the TPP goes much further into redefining the role of government than is necessary to facilitate trade. TPP ‘disciplines’ will significantly constrain the policy space needed for governments to accelerate economic development and to protect the public interest.

The unjustified benefits projected by TPP advocates make it all the more critical to consider the nature and scale of costs currently ignored by available modelling exercises. After all, the TPP will impose direct costs, e.g. by extending patents and by blocking generic production and imports.

The TPP’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 foreign investors are already well protected, ISDS provisions are completely unnecessary for the TPP.

Advocates as well as critics of free trade and trade liberalization have criticized inclusion of such non-trade provisions in 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”.

Thus, the TPP, offering modest quantifiable benefits from trade liberalization at best, is really the thin edge of a wedge which will undermine the public interest in favour of powerful, often foreign, corporate interests. Net gains for all in TPP countries are a myth. Only a full, careful and proper accounting based on the full text can determine who benefits and who loses.

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