President Barack Obama must be having difficulty rounding up the necessary votes in Congress to pass fast-track authority for the Trans-Pacific Partnership (TPP). Otherwise we would not be seeing President Bill Clinton’s former chief of staff Thomas McClarty, Secretary of State John Kerry and many other prominent people saying such silly things about the trade deal. While more arguments may be invented in the weeks ahead, it’s worth a quick review of the ones produced to date.
The first and most easily dismissed argument is that TPP will increase exports. There is a simple answer to this one: Who cares? If GM moves a car assembly plant from Ohio to Mexico, it increases exports because the car parts that were being shipped to Ohio will now be exported to Mexico. This switch is associated with a loss of the jobs in manufacturing due to the closing of the assembly plant in Ohio, but pro-TPP politicians will be touting this as an increase in export jobs.
If anyone is arguing that we should be happy about TPP because it will increase exports, they either do not understand basic economics or are trying to play games. Either way, this argument deserves to be ignored.
The second line of argument concerns net exports or the trade deficit. This is what affects demand in the U.S. economy. If we export more than we import, then trade is adding to demand. If we import more than we export, then trade is draining demand from the U.S. economy.
In the last two decades we have been running large trade deficits. The trade deficit is currently running at an annual rate of more than $500 billion (or approximately 3 percent of GDP). This has the same impact on demand as people stuffing $500 billion of their income under their mattress each year.
If the economy were near full employment, then the trade deficit need not be a big deal. It would mean that we could have more investment or consumption than if we had balanced trade. But we are not near full employment and may not be for many years to come.
This raises the specter of secular stagnation, which many mainstream economists now accept. It means that the economy faces a persistent shortfall in demand. In that context, trade deficits of the size we have been seeing deprive us of millions of jobs because they mean less demand in the U.S. economy.
It is hard to tell a story of how the TPP will boost net exports. After many past trade deals our trade deficit got worse. The evidence is not solid enough to say TPP will definitely worsen the trade deficit, but there certainly is no reason for thinking it will reduce the deficit.
If the TPP included rules on currency values that would make the dollar more competitive internationally, this would improve our trade balance. But it is clear that the Obama administration decided not to include currency rules in the TPP. This means we will be giving up an important opportunity to address the chronic trade deficit that is costing us so many jobs.
The third argument we often hear is that the TPP will reduce barriers to trade, which will make us all richer. It’s not true that free trade automatically makes everyone richer. (It can make some people worse off.) More important, the TPP is not just about reducing trade barriers. It raises trade barriers in the form of stronger patent and copyright protection.
The former is especially important in the case of prescription drugs. When drugs are sold in a free market, they are generally cheap. Most generics sell for $5 or $10 per prescription. However when the government gives a drug company a patent monopoly, the same drug can sell for hundreds or even thousands of dollars per prescription. For example, a high quality generic version of the hepatitis C drug Sovaldi is sold in India for less than $1,000 a treatment. The patent-protected version of the drug sells here for $84,000.
These patent monopolies create the same sort of economic distortions as a tariff of 1,000 or even 10,000 percent. Markets don’t distinguish between a price being high because of a tariff or a patent monopoly; what matters is that the price is artificially inflated. Raising the price of drugs and other protected products hugely above their market price will impose substantial costs, which have not been factored into the projections of the TPP’s benefits.
The losses from the equivalent of 10,000 percent tariffs on drugs could easily exceed the gains from reducing tariffs of 1 to 2 percent on a wide range of products. This is especially likely in the case of prescription drugs, both because of the enormous asymmetry between what doctors know and what drug companies know about their drugs and also because it directly affects people’s health and survival. In any case, no one has tried to project the losses from stronger patent and copyright protection and compare them to the modest economic gains projected from tariff reductions.
This means the numbers the public hears about gains from the deal are completely one-sided. They do not factor in significant effects, and they also assume a fully employed economy.
If the economic arguments for TPP can’t sell the deal, lately we have seen people pushing it for geopolitical reasons. I won’t attempt to assess the geopolitical merits of the TPP, but it reasonable to ask about the expertise of those who say we need the TPP for geopolitical reasons. Did these geopolitical experts support the Iraq War? If so, is there reason to believe that their understanding of world politics has improved in the last 13 years?