March 14, 2015
The big money is sweating big time since it seems large segments of the American public have caught wind of the Obama administration’s plans for the Trans-Pacific Partnership. After several decades in which trade has been a major factor depressing the wages and living standards of the country’s workers, the Obama administration is going back to the well to push for more.
The immediate goal is the Trans-Pacific Partnership (TPP), which includes a number of countries in Asia and Latin America. While it excludes major countries like China and India, the explicit intention is to expand the pact so that these countries will eventually be included. This fact is important in assessing this deal.
For example, the Washington Post (which has a religious devotion to these sorts of trade deals) ran a column by three prominent economists, David Autor, David Dorn, and George Hanson (ADH), which tells readers the TPP is good for the country’s workers. ADH is an interesting team to make this argument since they have written several papers showing that our patterns of trade have been an important force depressing the wages of a large segment of the U.S. workforce.
ADH start out by saying that manufacturing workers have little to lose in this deal because tariffs with the countries in the pact are already near zero, therefore we will not be opening ourselves to new competition if the few remaining barriers are eliminated. Here is where the possibility of expansion is important.
Many prominent economists, including many strongly pro-trade economists like Fred Bergsten, the former president of the Peterson Institute for International Economics, have argued the TPP should include rules on currency manipulation. While this may not be a big issue with most of the countries in this round, it is certainly a big deal with China and other countries that could join. According to calculations by Bergsten and others, actions of foreign central banks to raise the value of the dollar have added several hundred billions of dollars to our trade deficit and cost us millions of manufacturing jobs.
If the TPP does not have rules on currency values it may be far more difficult to address the problem of over-valued currencies and reduce the country’s trade deficit. This is hugely important in the context of an under-employed economy, or “secular stagnation” to use the term now popular among mainstream economists.
We have no easy mechanism for replacing the $500 billion in lost annual demand (@ 3.0 percent of GDP) due to the trade deficit. We could do it by running large budget deficits, but that is not politically viable. The other mechanism that has been used to fill this demand gaps is asset bubbles, as in stock and housing bubbles. That does not seem like a promising path going forward either. In other words, if we want to see a full employment economy we should be very concerned about the trade deficit and the TPP.
If ADH’s assurance that workers need not worry about any downsides from the TPP are not convincing their claims for the upside are an even bigger failure. They make the correct point that the deal is mostly about imposing a corporate friendly regulatory structure on the other countries in the pact. They argue this would largely benefit U.S. corporations since they would get more money for their patents and copyrights and would be less concerned about foreign regulations damaging their profits.
Before dealing with the foreign aspects of this deal, it is important to note that the deal will also bind the U.S. Congress and every state and local government in the United States. Regardless of intentions, it is very likely that provisions will affect the ability of governments in the United States to get lower drug prices and to impose environmental and health and safety regulations. The assurances to the contrary have exactly zero value. Once the deal is written it is out of the hands of the negotiators, who do not know how it will be interpreted by the judges in the extra-judicial investor-state dispute settlement mechanism established by the TPP.
But the argument about the benefits to U.S. corporations is even more interesting. U.S. corporations like Apple, GE, and Merck have been telling us for decades in every way they can they are not in any meaningful sense “U.S.” corporations. They are corporations. They are interested in making profits. If this means shifting jobs overseas to take advantage of low cost labor, they will do that in a second. The same applies to environmental regulations. And, when it comes to paying taxes, if they can find a legal or semi-legal way to have their profits appear in an Irish or Cayman Islands subsidiary, they will do it, end of story.
What part of getting kicked in the face do you not understand? We care about these companies if we own stock in them, otherwise there is no reason that we should prefer that Apple or GE make profits than Samsung or Toyota.
In fact, the main way that these companies hope to profit from the TPP will likely hurt U.S. workers. By getting more money for their drug patents and copyrights from foreigners, they will effectively be crowding out net exports of U.S. manufacturing goods. The increased patent fees and royalties will increase the demand for the dollar, raising its value, thereby making U.S. manufactured goods less competitive.
To put this in more practical terms, imagine that you are selling fruit and vegetables at an outdoor market. Suppose that the people at the next two stalls are clever hucksters, we’ll call them Bill Gates and Pfizer. Because of their cleverness, they can sell worthless junk at very high prices to almost everyone who passes their stalls. Since most people pass their stalls before they get to yours, the odds are that you won’t sell much fruit and vegetables. Most of your potential customers will have given most of their money away to Bill Gates and Pfizer before they got to your stall. For this reason, it is not just a matter of indifference to U.S. workers that the TPP will suck more money away from foreigners in the form of higher patent fees and royalties, it is actually harmful.
In short, the TPP is likely a really bad deal for American workers. I say “likely”, because I haven’t seen it yet. But remember, Microsoft and Pfizer are at the negotiating table, you are not.
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