So the Trans Pacific Partnership is due to be signed next week. This means very little, beyond a confirmation that the text being signed was indeed the text that was negotiated. There is no guarantee that the US will ever actually ratify it, nor is there any clarity about when Congress will get to vote for it, or in which year – 2016 or 2017 ? – such a vote might occur. For its part, Canada will sign the TPP next week, but its International Trade Minister Chrystia Freeland has just made it clear that signing the deal shouldn’t be confused with ratifying it:
…… The Trudeau Liberals remain officially uncommitted to the trade deal reached by the former Conservative government during the 2015 election campaign… Ms. Freeland explained that the signing ceremony…..is not a green light for the deal.
“Signing does not equal ratifying. Only a majority vote in our Parliament can allow the agreement to take force. Signing is simply a technical step in the process, allowing the … text to be tabled in Parliament for consideration and debate before any final decision is made,”
Even if this is merely a case of the Trudeau government soft-soaping the Canadian public to prepare them for on its eventual surrender to the inevitable, the research evidence is accumulating that the alleged benefits from the TPP are being wildly over-stated. Citing evidence on the TPP published this month by researchers from Tufts University, Canadian trade commentator Peter Clark pointed out that – ultimately – the best argument for Canada joining the TPP may be the need to defend its existing markets, rather than the much-touted ability of the TPP to unlock fresh new markets.
A Tufts University study claims that signing the Trans-Pacific Partnership Agreement (TPP) would cost Canada 58,000 jobs, while the benefits would amount to less than the cost of compensating the seriously affected stakeholders. This is gloomier than the World Bank projections — which themselves suggest an underwhelming result. The Tufts team has focused on changes in competition, which will force shifts between labour and capital in higher-wage countries, as duty-free access intensifies competition.
In most TPP member countries, the public remains justifiably sceptical-to-hostile about the deal’s alleged benefits. Much of that opposition is based on the contentious TPP provisions whereby corporations can charge the public for any damage done to their profits, while being insulated from any reciprocal charges for the damage that they may do to public health (or environmental or intellectual property) interests. The interesting thing about the Tufts University study – which is available here is that it heads off somewhere else entirely. It directly challenges prior estimates of the alleged economic gains from the TPP, and the (flawed) assumptions of the economic modelling on which they have been based. This is not an entirely new criticism. This 2015 study for instance pointed out that TPP cheerleaders were highlighting the estimated net national gains, while ignoring the directly related impact that the TPP will have on wealth and income patterns, and on savings, debt and spending – once you reshuffle jobs and incomes away from the labour intensive, import-competing sectors of the economy. The Tufts study usefully explains some of the mechanisms whereby the TPP will contribute to income inequality, by further tilting the existing imbalance between those reliant on profit taking as a source of income, and those reliant on wages. With these kind of deals, the only free lunch is for the already well fed – and the ripple effects travel well beyond those who immediately stand to lose their jobs:
If trade policy provides an incentive for firms to cut unit labor costs further, in order to become more competitive on global markets, the labour share of income will continue to fall. This has serious consequences for the economy. With a shrinking share of total income, working households encounter increasing difficulties in purchasing the consumption and investment goods that make up domestic demand. As a result, the economy becomes increasingly dependent on debt, external demand or both. Income concentration may generate economic instability.
Plus, on another front :
First, the TPP will push countries to increase trade performance. In order to preserve their market shares, producers in each country will have to sell at lower prices, and thereby cut costs. Specifically, we assume that this process will lower nominal unit labour costs, the main factor in total costs, through the combined actions of business managers and policymakers who negotiate lower wages (or limit their growth in the face of growing prices and productivity) and introduce more capital-intensive technologies.
And furthermore by expediting capital flows, the global economic system will be rendered that much more vulnerable to the likes of the GFC of 2008 , while also depressing domestic living standards :
The second dimension of international competition that the TPP will affect is capital flows. By facilitating cross-border capital movements, the TPP will push firms and other borrowers in each country to provide higher returns in order to avoid losing investors to other countries. For a given level of economic activity, a higher profit rate requires a higher profit share of total income and, therefore, a lower labour share. At the same time, it is generally recognized that inflows of foreign capital depend on a country’s fiscal policy (as summarized by its government deficit), although the link between investors’ preferences and constraints on government expenditure is seldom explored in empirical models….Since all TPP countries will want to preserve their market shares, we assume that they will engage in a race to the bottom, pushing labour shares downward across the whole TPP bloc.
In that respect, the TPP will function as a transnational scythe to push down labour’s share of wealth across all its participating member countries, and vis a vis those countries in the Asia Pacific that are not currently part of the bloc. Which takes us back to Peter Clark’s argument that for Canada, the rationale for being part of the TPP is primarily defensive – and not because of the putative gains the deal is being touted to deliver.
Before getting into what the Tuft University research says about the likely impact of the TPP on New Zealand, it is worth noting – in passing – its criticisms of the economic models commonly used to measure the benefits of trade liberalisation. (I’m talking about the influential 2012 paper on the TPP by Petri, Plummer and Zhai, and the Global Trade Analysis Project (GTAP) model relied on by the World Bank in its recently released evaluation of the TPP deal.)
To non-economists, the basic assumptions and exclusions that these models entail – and the rosy a priori outcomes they generate, which are then widely cited by politicians and policy-makers – are utterly hair-raising. The Tufts study is particularly unimpressed with the CGE (Computable General Equilibrium) model – and its GTAP variant – that MFAT has relied on to calculate the economic benefits it claims will accrue to New Zealand, as set out in its just-released paper on the TPP. See page 23 for the footnote confirming MFAT’s reliance on a “dynamic” version of a CGE model. The MFAT analysis is available here.
What is so suspect about CGE modeling (and the GTAP variant) that has been used for decades to project the likely outcomes of trade liberalisation? As the Tufts researchers point out, the premises of the standard CGE model – which assume the existence before and after of (a) full employment regardless of the real world evidence to the contrary (b) efficient market clearing mechanisms for prices and wages and (c) no shift in the relative earnings between profit takers and wage earners etc etc – are precisely what critics of the TPP see as relevant and needing to be justified – and not shunted aside, and ignored on principle. Yet the economic modeling all but ensures that the protagonists keep on talking past one another. As the Tufts researchers put it :
First, the CGE model used excludes, by assumption, TPP effects on employment and income distribution, thereby ruling out the major risks of trade liberalization. Negative outcomes after several trade liberalization experiences in the 1990s have been associated precisely with failure to appreciate these risks.
The Tufts team point to the tendency of CGE enthusiasts to make assumptions on income distribution that – for instance – insulate their positive outcomes from any demand shortfall :
First, income is assumed to accrue to a single representative household in each country bloc, thereby overlooking any distinction between wage earners and profit earners. The distinction is critical because individuals’ spending behaviour is closely related to the source and amount of their income. For the economy as a whole, a higher concentration of income in the hands of profit earners leads to an increase in total savings and a reduction in spending, with adverse consequences for growth and employment.
Secondly, the model assumes that income distribution follows the “productivity rule”, according to which real wages increase at the same rate as productivity. If this were really the case, the share of labour incomes in total income would be stable over time. Instead, the labour share has been decreasing in the US since the mid-1970s, and it has been far from stable in other TPP countries.
Finally, the Tufts team concludes, CGE modelling takes for granted a rosy connection between foreign direct investment (FDI) and economic growth that is not empirically justified :
The results obtained by Petri, Plummer and Zhai (2012) depend strongly on the projected increase in foreign direct investment, estimated to generate, on average, 33 percent of the TPP’s total income gains. This is at odds with the findings in the literature that analyzes the causes and effects of FDI. As Ackerman and Gallagher (2005) note, there is no convincing theory that explains the effects of liberalization or FTAs on FDI, or indeed, any convincing evidence of an FDI-growth nexus.
Instead and for reasons they state at length, the Tufts team use a different mechanism – the UN Global Policy Model – which makes far more realistic assumptions about economic adjustment and income distribution, and which is more capable of tracing the changes in income distribution, prices and financial flows in relation to the assumed trade expansion.
As a consequence, they find genuine – but far more modest – gains to New Zealand of 2.3 % growth in exports during the forecast period to 2025 alongside a net loss of 5,000 jobs. For New Zealand the export gains are considerably larger than for the US, Japan and Canada – for some of whom the TPP will create significant losses – and entail a smaller extent of job destruction. Even so, these gains are only relative and will be equivalent – at best – to less than what a few cents off the currency rate for the NZ dollar would deliver over the forecast period.
Moreover, if the TPP harms our trading partners as predicted by the Tufts University analysis – entirely possible, given that the TPP will serve as a tool for transnationals to cut their labour costs, amid concessions on IP rights that will inhibit New Zealand’s ability to reap added value from our exports – then that impact will eventually hurt the people we hope will buy our products. If everyone exports – competitively by cutting wages and jobs – and wealth thereby continues to concentrate in the hands of the few, this unsustainable trend will come back to bite our own exporters, too. On that score, it may be appropriate to leave the last word to the research team at Tufts University :
In TPP countries, the largest [employment] effect will occur in the US, with approximately 450,000 jobs lost by 2025. Japan and Canada follow, with approximately 75,000 and 58,000 jobs lost respectively. The smallest loss – approximately 5,000 jobs – is projected to occur in New Zealand, where the increase in net exports is projected to be the largest.
Encouraging cost reductions and compression of labour
shares in all member countries, the TPP will affect domestic demand, income distribution and employment in each country, but is unlikely to dramatically change competitiveness among them. Since all countries will reduce costs, no TPP country will gain a large advantage on other TPP members. Competitiveness is a relative feature. The risk with this prospect is that, with all countries cutting costs, losing jobs and aggravating already high levels of inequality, aggregate demand will suffer. This could compromise the ability of countries to achieve sustainable growth.
Maybe, someday, Labour leader Andrew Little will be able to reach a decision as to whether he – and Labour – consider this process to be one that they should support. Or oppose. As of this morning, Little was still sitting on the fence.
And Busta says….
Secrecy has been the bane of the TPP process. As Busta Rhymes said nearly 20 years ago in this great Hype Williams-directed video, you need to put your hands where my eyes can see…