May 28, 2015 10:32AM

Is the TPP a Huge Deal or No Big Deal?

As more journalists and commentators discuss the Trans-Pacific Partnership, we’ve seen very conflicting descriptions of the agreement.  For some, the TPP isn’t about trade at all but about giving power to corporations and ending U.S. sovereignty, or about containing China and building U.S. influence in Asia.  When commentators do focus on the potential economic impact of the agreement, they either describe the TPP as a very big deal or as a very small one.  It all depends on your perspective.

My colleague Simon Lester has written about problems in how GDP gains from the TPP have been estimated.  I'd like to take issue with a different figure commonly cited to bolster the idea of the TPP’s hugeness---that the 12 countries involved account for almost 40% of global GDP.  This number is correct but highly misleading as a gauge of the TPP’s economic significance.

For one thing about 22.5% of global GDP comes from the United States.  So, one could claim accurately that the U.S.–Jordan Free Trade Agreement covers almost a quarter of the global economy.  Also, most of the remainder comes from Canada and Mexico, with whom the United States already has a free trade agreement.  In fact, the United States has free trade agreements with all but five countries in the TPP negotiations.

The only large economy country in the TPP that the United States doesn’t already have a free trade agreement with is Japan.  So, if you’re going to measure the “size” of the TPP, it would be best understood as a U.S.–Japan free trade agreement.  That’s a pretty big deal, actually, but it’s not two-fifths of the world.

Talking about trade agreements in terms of their size also obscures what trade agreements actually do.  Contrary to the rhetoric we hear from the White House, trade agreements benefit the United States because they lower artificial trade barriers, not because “we” get to write "the rules" instead of China.

But those claiming that the TPP is really small are missing something too.  Paul Krugman, for example, points out that U.S. tariffs are already really low, so the TPP won’t make much of a difference.  This argument misses the fact that while U.S. tariffs are low on average, a number of tariffs remain very high in order to protect domestic industries from competition.  Moreover, many of the high tariffs are on basic consumer goods like clothes and shoes.  These are essentially regressive consumption taxes, and their negative impact goes beyond a simple dollar amount. 

That’s why the inclusion of Vietnam in the TPP is so significant.  Tariff-free trade in labor-intensive manufactured goods from Vietnam could have great benefits for Vietnamese workers (and potential workers) and American consumers.  But U.S. negotiators may reduce those benefits by securing long tariff phaseouts or complex rules of origin at the behest of politically powerful domestic industries.

What all this means for the TPP is that its economic value hinges on how extensively, deeply, quickly, and uniformly it reduces existing trade barriers, something we won’t know until the negotiations are completed.