ITC study shows minimal benefits and downplays potentially high costs of Trans-Pacific Partnership

Robert E. Scott

Robert E. Scott Economic Policy Institute

Yesterday, the U.S. International Trade Commission (ITC) released a long-awaited report on the projected economic impacts of the TPP agreement. The report is remarkable for its frank estimates of the costs of the agreement, and the minimal benefits it identifies. Overall, the ITC projects that by 2027, the TPP will increase U.S. exports to the world by $27.2 billion (1.0 percent, as shown in Table 2.2) and U.S. imports from the world by $48.9 billion (1.1 percent), increasing the U.S. global trade deficit by $21.7 billion. All else equal, this rise in the trade deficit would put downward pressure on U.S. GDP. Nonetheless, the report concludes that over the next 16 years, the agreement will increase U.S. national income by $57.3 billion, 0.23 percent. This GDP gain stems largely from the ITC’s adoption of the standard full-employment assumption in modeling the TPP’s effects. There may have once been a time where such an assumption was warranted, but it seems highly inappropriate to apply to an economy that has been operating beneath full employment for at least 8 years and counting.

Dean Baker notes that even if the too-rosy GDP estimate were correct, it means that, “as a result of the TPP, the country will be as wealthy on January 1, 2032 as it would otherwise be on February 15 2032.” Worse yet, the ITC has a terrible record of forecasting the actual impacts of trade and investment deals, both overall and at the industry level. There is little reason to believe that this study will yield better results than past ITC efforts if the agreement is approved and implemented. In practice, whatever the ITC forecasts, U.S. trade and investment deals been near-inevitably followed by growing trade deficits and downward pressure on the wages of U.S. workers. There is every reason to expect that the TPP agreement will reinforce these trends.

The ITC study predicts that most of the gains from the TPP will be concentrated in agriculture and service industries, while manufacturing, natural resources, and energy will see growing trade deficits. The ITC estimates that the TPP will increase exports in these industries by $15.2 billion (0.9 percent, Table 2.3), while imports will rise by $39.2 billion, leading to a $24.0 billion increase in the trade deficit. As a result, output in manufacturing, natural resources, and energy is projected to fall 0.1 percent, and employment will fall by 0.2 percent.

Hard-hit durable manufacturing sectors (Table 2.5) include titanium and downstream products (output down 1.2 percent, and employment falling 1.3 percent), electronic equipment (output and employment both falling 0.8 percent), metal and metal products (output falling 0.4 percent and employment falling 0.3 percent), auto parts and trailers (output and employment both falling 0.3 percent), instruments and medical devices (output falling 0.2 percent, employment falling 0.3 percent), and machinery and equipment (output and employment falling 0.2 percent). Non-durable industries projected to experience losses include leather products (output and employment falling 1.5 percent), wood products (output down 0.5 percent and employment falling 0.6 percent, respectively), textiles (output and employment each falling 0.4 percent), and chemicals (both falling 0.3 percent).

The only potential comfort for these hard-hit industries is that the ITC has a terrible record on forecasting the actual impact of trade and investment deals on the U.S. economy—even when it simply comes to identifying likely import and export gains by industry. For example, the ITC projected that the U.S.-Korea Free Trade Agreement (KORUS) would increase U.S. exports to Korea by $9.7–$10.9 billion, while imports would only increase by between $6.4–$6.9 billion, leading to a falling trade deficit. However, since the agreement took effect in 2012, U.S. exports to Korea are unchanged, while imports have increased by $15.2 billion, resulting in a growing trade deficit and the loss of more than 95,000 U.S. jobs.

When China entered the WTO, the ITC projected that tariff cuts would increase the U.S. trade deficit with that country by $1 billion–$2 billion. In fact, after China entered the WTO, the U.S. trade deficit with that country increased by more than $240 billion between 2001 and 2013 alone, costing 3.2 million U.S. jobs. Growing trade with low wage countries has eliminated millions of high-wage jobs with excellent benefits for American manufacturing workers, and put downward pressure on the wages of all non-college educated workers in the United States, who make up nearly two-thirds of the U.S. labor force.

These results make it doubly hard to swallow claims in the ITC report than the TPP will raise wages of both “unskilled” and “skilled” workers in the United States 0.18–0.19 percent (Table 2.9), respectively. These results fly in the face of both the rising gap between the wages of college and non-college educated workers, and the ITC’s own claim that the TPP will reduce output and employment (Table 2.3) in high-wage manufacturing industries, while increasing output in low-wage agriculture (0.5 percent) and service sectors (0.1 percent, despite a growing trade deficit).

Furthermore, as Rosnick and Baker have shown, the models used by the ITC have a poor track record in projecting the actual pattern of trade following recent trade deals. In addition to being wrong about the overall size and direction of trade flows, the ITC also failed to “correctly identify the winning and losing industries in trade” with Mexico and Korea. Similarly, the ITC projects that the TPP deal will result in increased exports of passenger vehicles “primarily to Japan and Vietnam (ITC report at 233).” There is little reason for optimism from other trade deals about the prospects for auto exports from the TPP. For example, autos and parts are responsible for 85 percent of the increase in the U.S. trade deficit with Korea following the KORUS Agreement.

The failure of the TPP to include enforceable disciplines on currency manipulation is a major flaw in the agreement, and the failure of the USITC TPP to consider the possibility of currency manipulation is one reason why the actual results of the deal will differ from their projections. The agreement includes a number of known currency manipulators, including Japan, Malaysia and Singapore. Any increase in currency manipulation by TPP members could easily nullify any benefits the U.S. might obtain from the agreement.

The U.S. had a $189 billion deficit with the 11 other TPP partners in 2015 that cost 2 million U.S. jobs and (with multiplier effects) reduced U.S. GDP by $284.6 billion (1.6 percent). Despite the findings of the ITC’s TPP study, past experience suggests that the TPP will likely result in growing trade deficits, trade-related job losses and downward pressure on the wages of the majority of U.S. workers.

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This has been reposted from the Economic Policy Institute.

Rob Scott joined the Economic Policy Institute in 1996. His areas of research include international economics, trade and manufacturing policies and their impacts on working people in the United States and other countries, the economic impacts of foreign investment, and the macroeconomic effects of trade and capital flows. He has published widely in academic journals and the popular press, including The Journal of Policy Analysis and ManagementThe International Review of Applied Economics, and The Stanford Law and Policy Review, as well as The Los Angeles TimesNewsdayUSA TodayThe Baltimore SunThe Washington Times, and other newspapers. He has also provided economic commentary for a range of electronic media, including NPR, CNN, Bloomberg, and the BBC.