How to Think About the New Peterson Institute Report on the TPP
The Peterson Institute for International Economics released a report today that trumpets embarrassingly small gains from the Trans-Pacific Partnership trade agreement. Indeed, Peterson and media headline writers focus upon one number – $141B increase to US incomes – to create the illusion of future prosperity from the TPP.
The truth is less happy. Here is how to think about that report. You can also find this on our website here.
1. Faulty Economic Model Used: Peterson used the controversial computable general equilibrium (CGE) model to analyze the TPP. That model is increasingly recognized as unreliable because:
1.1. Untrue Facts Assumed: The CGE model requires one to assume that untrue facts are actually true… to wit, that full employment always exists, that trade is in balance, that wages and productivity stay in alignment rather than diverge, and that all countries have perfectly free markets with rational economic behavior. All of these assumptions are false because: full employment rarely exists; trade is almost never in balance; wages have diverged downward from productivity for the past several decades; and many TPP countries have state-directed capitalism or strong industrial policies to influence and alter market outcomes.
1.2. Untrue Past Results: The US International Trade Commission (USITC) used the CGE model to project the future economic results of granting Permanent Normalized Trade Relations with China (China PNTR) (passed in 2000) and also for the Korea-US trade agreement (KORUS) (implemented in 2012). Both times, the CGE model mislead Congress and the public as to the results to be expected.
1.2.1. China PNTR: The USITC estimated, using the CGE model, that China PNTR would improve the US trade balance with China. US exports to China would increase by 10.1% and US imports from China would increase less, by 6%. (USITC 1999, TableES-4, xix). In 1999, the US had a $68.7 billion annual trade deficit with China. Now, the US now has a $337 billion annual trade deficit with China. (US Census Bureau)
1.2.2. KORUS: The USITC estimated, using the CGE model, that the annual U.S. trade deficit with Korea would improve by about $4-5 billion. Instead, this deficit worsened by $12 billion annually between 2012 (date of KORUS implementation) to 2015.
1.3. Untrue Assumption of No Net Job Losses: The CGE model wrongly assumes that there are no job losses to produce its results. The International Trade Administration assumes that for every billion dollars of U.S. exports supported 5,796 jobs, down from 7,117 jobs per billion dollars of U.S. exports in 2009. Conversely, every billion dollars of imports has the opposite result. Thus, where trade agreements result in worsening trade deficits, as is the case for the NAFTA, Korea and China PNTR deals, the job losses are drastic. The income gains projected by the CGE model do not and cannot occur.
2. Peterson Institute Study Admits to No Job Creation and Little Growth: Assuming, for the sake of argument, that the Peterson model’s conclusions true:
2.1. Job Creation Will Not Occur: The Peterson Study states “the TPP is not likely to affect overall employment in the United States”. (Report, pg 3). However, they state some will lose jobs and others will gain jobs. Typically, this means that high wage manufacturing jobs are replaced by low wage service jobs for most workers, especially those without a college degree.
2.2. Income gains are extremely small: The study projects that, by 2020, US incomes will rise a mere 0.1% of GDP. (Table 2). This means that 99.9% of growth will happen without regard to the TPP. The number 0.1% is equivalent to, or less than, a rounding error. It can only come true if all untrue assumptions in the CGE model are true. It will take another 10 years for the optimistic projection to deliver a meager 0.5% income gain by 2030.
2.2.1. Who gains the income? Assuming (which we do not) the income gains are true, the study is silent on who benefits from them. If there are any income gains, the middle class will be a net loser. The Economic Policy Institute reported that trade agreements account for 90% of wage inequality.
2.3. Other countries will “benefit” more than the US: The Peterson Study projects that Japan, Malaysia and Vietnam will gain far more than the United States. The US Trade Representative, by pushing the TPP, is helping open markets for competitors in Japan and other countries. Japan is estimated to gain five times more income (in relation to GDP) than the US, Vietnam 16 times more, and Malaysia 15 times more. (Report, Table 2).
3. Competing Economic Models Find Losses to the US and Other TPP Countries: Scholars at Tufts University used another standard econometric model to produce a report estimating the likely economic results of the TPP. That model is the UN Global Policy Model. The model does not assume untrue facts – i.e. full employment and invariant income distribution.
As a result, the Tufts report finds that TPP will negative affect US growth, will increase job losses in all economies and will increase income inequality.
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