The 2016 election season has put international trade in the spotlight – or, actually, under the heat lamp – like never before. But just as some of us in the trade policy community started getting big heads over the increasing prominence of our pet issues, the U.S. International Trade Commission released this report yesterday, which concludes that the Trans-Pacific Partnership Agreement, if implemented, would boost real annual GDP by 0.15 percent by the year 2032. In other words, the economic growth from TPP could be wiped out by a single new major EPA regulation. So much for the importance of trade, I guess.
Of course, some will downplay the magnitude of the issue and turn these modest gains into positive talking points to encourage TPP ratification. In addition to GDP, small gains are estimated for real income, employment, and trade, as well.
Others will suggest that the estimates overstate the benefits, as the ITC studies are wont to do. But as Dan Pearson explained a few months ago in this paper, the ITC’s assessments are not intended to be interpreted as projections into the future. They are static comparisons. The TPP study compares today’s economy without TPP to today’s economy with TPP. The results are just estimates of what the various outcome metrics would be ceteris paribus. Accordingly, the utility of the estimates is limited and the validity of the model cannot be tested by comparing real future outcomes to these estimates because in the real world there is no ceteris paribus. Things change.
For example, the model doesn’t take into account things like: supply shocks (such as another fracking-type boom) or demand shocks (such as mass adoption of hand-held devices); transitions from human labor to robots; changes in institutions; the policy reactions of other countries to the TPP; accessions to the agreement by other countries; the impact on the multilateral trading system, and so on. All of these factors matter at least as much as the terms of the TPP itself.
So the question is: Why even bother performing these studies? The real outcomes are determined primarily by information that is unknown and difficult to estimate with reasonable accuracy when the models are run. The results are politicized and misused by advocates and proponents of trade agreements alike.
As it stands now, the ITC is required under the terms of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (the Trade Promotion Authority Bill) to conduct an economic impact assessment of a trade agreement within 105 days of the president entering into such an agreement. While there is some useful information to obtain from these assessments, it seems that their greatest utility is to provide political cover to members of Congress.