There’s no reason to celebrate the TPP

When the negotiators reached a final deal on the Trans-Pacific Partnership (TPP), you could almost hear the Champagne corks flying off in the nation’s leading newsrooms. The New York Times told us about the “the largest regional trade accord in history” and “legacy-making achievement” for President Barack Obama. The Washington Post called it “the largest free-trade accord in a generation, an ambitious effort led by the Obama administration to knit together economies across a vast region.” 

There were similar comments in other major news outlets. Clearly they wanted their audiences to think that the TPP is a really big deal that they should be excited about. And this exuberance was coming from the news section. This is supposed to be the truth, not just the opinion of a random commentator or the editorial board. Everyone likes a good party, of course, but is the TPP really something we should celebrate?

First, the idea that the TPP is a massive advance for free trade is nonsense on its face. The Post asserted that the 12 countries in the TPP account for 40 percent of world GDP. While that sounds like a big deal, the United States already has trade deals with most of the countries in the TPP, including Canada, Mexico and Australia. For these countries, there are few, if any, formal trade barriers to eliminate. These countries account for 82 percent of the GDP of touted by the Post.

Most of the rest of the GDP is from Japan. The formal trade barriers between Japan and the United States are already low in most areas, and where substantial barriers exist, they are not likely to be removed quickly as a result of the TPP. For example, the U.S. is supposed to phase out its tariffs on trucks imported from Japan by 2045 — three decades from now.

If we think of the TPP as a traditional trade deal that lowers tariffs, quotas and other traditional barriers to trade, there is not much there to justify the hype. There are always winners and losers from these sorts of trade pacts, but at least there is a clear logic of lower barriers leading to increased efficiency. With few barriers to lower, there is not much to be gained in terms of efficiency.

A study by the very pro-trade Peterson Institute for International Economics projected cumulative gains of 0.07 percent of GDP for the United States. This is not a boost to annual growth of 0.07 percentage points; this is the cumulative gain when the full impact of the deal is felt in about 12 years.  

If the TPP were about lowering trade barriers, the traditional subject matter for a free trade agreement, there would be little reason to pay much attention. But this is not what the TPP is about. The TPP is about locking in a regulatory structure for the 12 member nations that will severely limit the freedom of national and subnational governments to decide the sort of consumer, health, safety and environmental regulation they want.

The rules set out in the TPP in these areas will take precedence. The TPP, in fact, sets up an extrajudicial process to enforce its provisions. It provides for an investor-state dispute-settlement mechanism whereby foreign investors can have large penalties imposed on governments that are found to have violated the pact.

At this point, the text is not yet public, so we can’t know the extent to which the TPP may limit the ability of governments to protect their citizens and the environment. Perhaps the complaints of the critics are overblown, but on the other hand, since the reporters have not seen the text either, how do they know that it is something worth celebrating?

One area where we can be fairly certain of what the TPP will do, as a result of leaked draft chapters, is to strengthen and lengthen patent and copyright protections. These government-granted monopolies are forms of protection. They can raise the price of protected items by many thousand percent, leading to far larger economic distortions than traditional trade barriers.

In the case of prescription drugs, there is not just an economic cost. Patent and related protections can make drugs extremely expensive. This explains why some drugs can cost tens or even hundreds of thousands of dollars for a treatment. Without these forms of protection, almost all drugs would sell for $10 to $20 per prescription.

Since the exact terms of these protections were among the final issues in dispute, we will have to see how much the TPP increases protection. However, it is entirely possible that the increase in protection in drugs, books and movies, software and other areas more than offsets the small reduction in trade barriers in other areas. The negative economic impact of these protections is not factored into any of the modeling of the economic impact of the TPP.

These indisputable facts raise the obvious question, Just what did the celebrants of the TPP think they were celebrating?