The newly finalized 12
Trans-Pacific Partnership (TPP) is motivated by a desire to help domestic
exporters get better foreign market access. The key idea is one of mutual
concessions. However, if as they claim, really wanted to promote economic
growth and raise living standards, they would have sought to include China from
the outset.(Reuters Photo/Marco Garcia)
Like many trade policy initiatives,
the newly finalized
12-nation Trans-Pacific Partnership (TPP) is motivated by a desire
to help domestic exporters get better foreign market access. The key idea is
one of mutual concessions – in exchange for foreign market access we give up
some of our own subsidies or protection.
Despite the headlines, however, the
TPP agreement has little to do with the economic argument for free trade.
This is because the economic gains from
trade trade don’t come from exporting more, or from preferential market access.
They have nothing to do with mutual concessions. Rather the gains from trade
are derived from being able to import at lower prices. This means that costs of
trade barriers are incurred by consumers in the country that imposes the trade
barriers. Consequently the benefits of free trade can be mostly gained by
removing one’s own trade barriers.
When one thinks about the costs of trade
barriers and the benefits of trade liberalization, it is easy to see major flaws
in the TPP as an economic policy.
Firstly because tariff barriers are all
already very low between the member countries, any economic gains that might be
realized by mutual concessions are likely to be exceedingly small. Reasonable
estimates come up with numbers like one tenth of a percent of GDP. This, as the
Nobel Laureate and economist Paul Krugman notes, is hardly world-shaking.
Second, the TPP is an international club
with exclusive benefits for members. Like any selective club, it’s not so much
about who you let in, but who you keep out - like China.
This exclusivity and security baggage is
the second flaw. If, as they claim, the twelve TPP countries really wanted to
promote economic growth and raise living standards, they would have sought to
include China from the outset. The omission of China is of course strategic.
But it is further cause for skepticism over the claim that the TPP is designed
to generate economic benefits. The benefits would have been much larger with
China and larger still with other countries.
Am I being too idealistic? Proponents of
TPP say the collapse of the multilateral World Trade Organization (WTO)
process, at Cancun in 2003, shows that is unrealistic to expect a trade deal
that is all inclusive. This then necessitates regional agreements with
like-minded nations.
That failure, however, was not a result of
too many countries with different agendas. Rather it was caused by the refusal
of the United States, and a few other rich countries with high levels of
agricultural protection, to reduce those protection levels.
This hurts US consumers since US farm
support schemes are currently costing taxpayers $20 billion dollars per year.
But, along with similar schemes in OECD countries, it also depresses world
prices and so which redistributes income away from many of the worlds’ poorest
countries that export agricultural products.
So the exclusivity of the TPP agreement,
and the omission of China, is not borne of necessity. It results from the
torpedoing of the WTO process by the protectionist stance of some influential
large countries with highly protected agricultural sectors.
Thus the TPP seeks to remove barriers only
where there is the least political cost, and excludes countries and sectors
where there could be significant economic gains. As such it appears to be
maximizing political kudos while minimizing the potential for economic gains.
The eminent trade economist Jagdish Bhagwati has labelled it “a testament to
the ability of US to obfuscate public policy.”
No doubt the politicians are pleased with
the last minute deal. The Economist magazine suggests it has saved face for US
political leadership. But - as Shania Twain says - that don’t impress me much.
Peter Robertson is a Winthrop professor at
University of Western Australia.
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