No, the TPP Won’t Be Good for the Middle Class
President Obama has been vociferously defending the Trans-Pacific Partnership (TPP) recently. He insists that it will be good for the American middle class and that TPP’s critics arguing otherwise are wrong. But in this case he’s wrong and the TPP critics are right: there is no indication at all that the TPP will be good for the American middle class.
I tried to take this on in very wonky terms in this long-ish report here, and in this post I’ll try to boil it down a bit.
The basic argument for why the TPP is likely to be a bad deal for the middle class is pretty simple. For one, even a genuine “free trade agreement” that was passed with no other complementary policies would actually not be good for the American middle class, even if it did generate gains to total national income. For another, the TPP (like nearly all trade agreements the U.S. signs) is not a “free trade agreement”—instead it’s a treaty that will specify just who will be protected from international competition and who will not. And the strongest and most comprehensive protections offered are by far those for U.S. corporate interests. Finally, there are international economic agreements that the United States could be negotiating to help the American middle class. They would look nothing like the TPP.
Even genuine “free trade” would likely be hard on the American middle class
Most (not all, but most) of the countries that would be included in the TPP are poorer and more labor-abundant than the United States. Standard trade theory has a clear prediction of what happens when the United States expands trade with such countries: total national income rises in both countries but so much income is redistributed upwards within the United States that most workers are made worse off. This is sometimes called “the curse of Stolper-Samuelson”, after the theory that first predicted it. And there is plenty of evidence to suggest that it’s not just a theory, but a pretty good explanation for (part of) the dismal performance of wages for most American workers in recent decades and the rise in inequality. And the scale of the wage-losses are much, much larger than commonly realized—it’s not just those workers who lose their jobs to imports. Instead, the majority of American workers (those without a 4-year college degree) see wage declines as a result of reduced trading costs. The intuition is simply that while waitresses and landscapers might not lose their jobs to imports, their wages are hurt by having to compete with trade-displaced apparel and steel workers.
All of this evidence means that the burden of proof is awfully high for those claiming that a simple trade agreement that reduces trading costs and expands imports and exports will be affirmatively good for the American middle class. What exactly will this treaty do that will turn the predictions and evidence about past global integration completely on their head?
The standard argument from those supporting trade agreements who are genuinely concerned about the middle class (and to be clear—I do believe the President is genuinely concerned about the middle class) is that these agreements generate gains to total national income, and that these gains then could be channeled through subsequent policy maneuvers to those on the losing end.
Maybe, but the net national gains from lowering trade costs tend to be wildly overestimated. In short, even “free trade” tends to redistribute a lot more (about 5 or 6 times as much) income as it generates. Given that complementary policies to re-re-distribute the income redistributed away from typical American workers are a necessary condition to make the middle class better off from “free trade”, one is compelled to ask just what are the subsequent policy maneuvers that the current Congress will likely undertake to compensate those on the losing end? Yes, there has been some talk about beefing up Trade Adjustment Assistance (TAA), but this is compensation that is too small by an order of magnitude (see the conclusion in this report for the right comparison).
TPP isn’t even about free trade—it’s about who will and won’t face fierce global competition. And guess who won’t?
And as has been well-documented by now, much of what the U.S. policymaking class champions under the rubric of “free trade” is nothing of the sort. For example, the biggest winners from trade agreements have traditionally been U.S. corporations that rely on enforcing intellectual property monopolies for their profits—pharmaceutical and software companies, for example. These companies have been successful in getting U.S. negotiators to make enforcing their intellectual property monopolies in our trading partners’ economies the price of admission to preferential access to the U.S. market.
It is not just an irritating bit of chutzpah to label agreements with provisions like this as “free trade agreements” (though it certainly is that), these provisions actually affirmatively make the distributional outcomes even more regressive than simple “free trade” would already make them.
Further, between these provisions and the intentional failure to include a strong provision to stop currency management undertaken by our trading partners, the TPP will even manage to substantially blunt any beneficial impact the treaty might have had in expanding access to foreign markets for most U.S. exporters. Because foreign consumers will have to pay more now for US exports covered by intellectual property monopolies and will hence have less income left over to buy other U.S. exports, and because foreign governments will remain free to keep their own currencies artificially competitive relative to the U.S. dollar, U.S. exporters of manufactured goods are likely to see not much improvement at all in their market share in trading partner economies.
What would a good international agreement for the middle class look like?
Simply put, nothing at all like the TPP. An agreement that fostered international cooperation to let countries tax capital income without it simply fleeing abroad would be hugely useful. So would an agreement that instituted a harmonized financial transactions tax across international borders. And so would an agreement that tried to stop carbon “leakage”—the movement of activity that produced greenhouse gases to those countries that have not institute measures to mitigate greenhouse gas emissions. And so would an agreement that finally put teeth into provisions to stop currency management that led to global trade imbalances.
But there really is very little basis for arguing that the TPP is doing anything useful for the middle class.