Trans-Pacific Partnership likely to open markets but may produce tougher import competition, Stanford scholar says

Stanford economist Michael Boskin says the proposed Trans-Pacific Partnership should expand trade and increase growth in the U.S., though some businesses and workers may encounter stiffer competition from imported goods.

Secretary of State Kerry at TPP meeting

U.S. Secretary of State John Kerry participates in a 2013 meeting in Bali, Indonesia, with other nations’ leaders discussing the Trans-Pacific Partnership. (Image credit: William Ng/State Department )

American firms, especially those in California, stand to gain if the Trans-Pacific Partnership is enacted, a Stanford economist says.

But as with any trade agreement, some sectors of the economy may initially face tougher competition from imported goods, according to Michael Boskin, the Tully Friedman Professor of Economics and senior fellow at the Hoover Institution.

A proposed trade agreement among 12 Pacific Rim countries (including the United States) and reportedly one of the largest ever, the Trans-Pacific Partnership now awaits its fate by Washington, D.C. lawmakers. Boskin, also a senior fellow at the Stanford Institute for Economic Policy Research, was recently interviewed by the Stanford News Service on this issue:

What benefits would the Trans-Pacific Partnership bring to the U.S. economy, businesses and workers?

Expanded trade leads to higher growth in income, greater efficiency and lower costs and increased variety for consumers. In addition to eliminating many tariffs, the TPP will, if ratified and implemented by the parties with minimal slippage, reduce non-tariff barriers such as excessive red tape and protection of state-owned enterprises; harmonize policies and procedures; and include dispute settlement mechanisms. On balance, that should enable American firms and their workers to expand exports to these markets. California firms and workers, in particular, stand to benefit disproportionally, given the central role the state plays in trade with Asia, from goods and services we export to the flow of goods through our ports.

What are the downsides?

If two (or more) sides willingly agree to trade, both are better off overall, otherwise at least one would refuse to trade. But trade liberalization may initially entail some (smaller) losses for some firms and workers, e.g., facing greater import competition. These should be dealt with through relocation and adjustment assistance, such as our Trade Adjustment Assistance program, and transition rules for affected industries, firms and their workers that allow gradual adjustment.

Some also worry that rather than mostly increasing trade, it will just divert it to members from non-members. Also, that it might harm broad global freer trade negotiations (currently, the Doha Round, an international trade negotiation). The opposite happened with NAFTA – little diversion and a kick-start for the Uruguay Round (also an international trade negotiation).

What is the right level of trade openness in the Pacific region?

The right level of trade openness is debated at least twice a generation. Historically, trade systems have ranged from quite open to substantially closed (by tariffs and non-tariff barriers). But even in “closed” systems, underground or even above ground markets develop owing to large gains from trade. Following an era of open trade, extreme protectionism in the 1930s – the Smoot-Hawley tariff in the U.S., which begat analogues abroad – helped turn a sharp downturn into the Great Depression, the severe suffering from which helped set the stage for World War II. Countries that have substantial trade have a stake in the success of their trade partners, and that has beneficial geopolitical ramifications.

While current levels of protection are far more modest, it’s also important to realize that the status quo isn’t the current level of non-tariff barriers (which include quotas, embargoes, sanctions and other restrictions).  When trade isn’t being liberalized, non-tariff barriers grow like weeds. 

So, the right level of trade, among the TPP nations and more generally, is substantial openness, reflecting the basic economic forces generating gains from trade, based on clear rules, enforceable through transparent dispute settlement processes. The U.S. and the world have moved closer to that standard, under presidents of both political parties, since WWII. South Korea is waiting to join the TPP and many expect China will ultimately. That would be good for the TPP, and especially for China, if it helps reduce the power of the state-owned enterprises via rules-based competition. Finally, most trade liberalization has focused on tariffs on goods. Non-tariff barriers and services are just beginning to receive increased attention.

With growth globally slowing or failing to meet expectations, what would the impact of the Trans-Pacific Partnership be among its member countries?

It is estimated that the TPP would generate hundreds of billions of dollars of additional GDP per year for the 12 member countries, and many additional jobs. While all nations would, on balance, benefit, the smaller and developing economies will probably gain the most, relative to their size. These are significant benefits, but because tariffs in the TPP member countries are already low, with exceptions for some specific products, they are modest compared to the gains from some earlier trade liberalizations when tariffs were higher and reduced more.

Do you think it will be ratified in the U.S.? What are the politics involved?

As often in the political process, the concentrated interests that oppose can be more powerful than the diffuse interests in favor. And, of course, the 2016 elections are approaching. Hillary Clinton, the likely nominee for president of the Democrats, has come out against the TPP (she called it the gold standard of trade deals when she was secretary of state, before many improvements were incorporated) and Donald Trump has sworn not only to negotiate “good deals” in the future, but to renegotiate existing trade agreements. Although most of the other Republican contenders are more pro-trade, some are saying they don’t trust a deal negotiated by President Obama.

So, I would say ratification is 50-50 and, like NAFTA and the Uruguay Round, may occur after the election. But I wouldn’t rule out, if he chooses to do so, a big push by President Obama getting enough Democrats to join most Republicans in passing it before then.