What’s Wrong with the TPP? This deal will lead to more job loss and downward pressures on the wages of most working Americans

In a recent op-ed in the Washington Post, three prominent economists, David Autor, David Dorn, and Gordon Hanson make a number of controversial arguments in favor of the proposed Trans-Pacific Partnership (TPP).

Autor, et al, acknowledge that the United States has lost 5 million manufacturing jobs since 2000 due to globalization and automation, but they then make the argument that these jobs are not coming back. There’s no sense closing the barn door after the horse has escaped, as it were. But this line of thought ignores the crucial role played by currency manipulation, which costs jobs by subsidizing foreign exports to the United States while acting like a tax on U.S. exports. Many prominent economists, including Fred Bergsten and Larry Summers, have said that trade deals like the TPP should include restrictions on currency manipulation. As Dean Baker notes, this is particularly important to keep in mind because the TPP is designed to be expandable, and countries such as China (the world’s largest currency manipulator), Korea, and India are candidates for early inclusion in an expanded TPP, if the agreement is completed.

Eliminating currency manipulation could reduce the U.S. trade deficit by up to $500 billion, adding up to 4.9 percent to U.S. GDP and creating up to 5.8 million U.S. jobs, with about 40 percent (2.3 million) of those jobs gained in manufacturing. So, many of those lost manufacturing jobs could in fact be recovered, in part through the inclusion of a currency clause that Autor, et al, fail to consider in their analysis of the TPP. A TPP without a currency clause will make it affirmatively harder to end currency manipulation in the future, and the effect of this on net exports swamps the effect of even large tariff cuts.

The TPP, trade, and job loss

Autor, Dorn, and Hanson go on to claim that because U.S. tariffs are already low, import competition from TPP members would “barely affect” U.S. manufacturers. This is an old claim, often made for previous trade and investment deals, and the actual outcomes have rarely supported these predictions. Under the North American Free Trade Agreement (NAFTA), it was Mexico that made large tariff concessions when U.S. tariffs were already low. Yet U.S. imports from Mexico still grew much faster than exports to that country, eliminating nearly 700,000 U.S. jobs by 2010 through growing trade deficits.

When China came into the WTO in 2001, it clearly had much higher tariffs than the United States, and China made large tariff cuts to gain WTO admission. Yet growing U.S. trade deficits with China through 2013 eliminated 3.2 million U.S. jobs. If tariff cuts are so favorable to U.S. exports, why do these deals usually result in growing U.S. trade deficits and job losses?

Mexico and China both experienced a tremendous increase in foreign direct investment (FDI) and outsourcing in the wake of NAFTA and China’s WTO entry. FDI in Mexico nearly tripled as a share of GDP in the decade after NAFTA, compared with the decade before NAFTA. China, meanwhile, became the third largest recipient of FDI in the world. In both countries, FDI fueled the growth of thousands of new manufacturing plants that generated exports to the United States and other markets.

Manufacturers were willing to invest in Mexico and China because of special protections offered in these deals for investors, including greatly expanded intellectual property rights and special, extra-judicial dispute settlement mechanisms to protect corporate investments (so-called investor-state dispute settlement or ISDS). The TPP threatens to roll back U.S. regulations in areas such as food safety, banking and finance regulations. These changes will be enforced through private actions under the ISDS, as well as changes in government rules.

Finally, Autor, Dorn, and Hanson’s claim that the TPP won’t significantly expand access to the U.S. market (“tariffs are already low”) is hard to reconcile with the desire of other countries to sign the deal. Why would they sign and make the sacrifices required, if not for access to the U.S. market?

It’s also important to acknowledge that terms of the TPP are still secret, and negotiations are incomplete. We are basing our analysis based on what’s happened under past agreements; other seem to be basing their analysis on their own policy preferences.

The authors claim that enhanced intellectual property rights in the TPP will generate substantial benefits for U.S. corporations and U.S. workers in industries such as information and computer services and other industries that derive much of their incomes from copyrights and royalties (including movies and hi-tech firms like Apple and pharmaceutical makers like Pfizer). While high-tech service industries are the glamour names in these discussions, it’s important to keep in mind that U.S. manufacturing firms, which stand to lose out as a result of the TPP, are responsible for more than two-thirds of U.S. business research and development spending (68.9 percent of total business R&D in 2012).

Special protections for investors in the proposed TPP will encourage the growth of outsourcing to TPP countries. In this regard, what’s important to remember is that 12 million jobs remain in U.S. manufacturing. It’s these jobs that are on the line in the next wave of outsourcing. The TPP will open up countries like Vietnam and Malaysia to more U.S. FDI and outsourcing. If China and India are allowed to join the deal in the future, the threat of additional outsourcing will increase exponentially.

The United States already has a large and growing trade deficit with the 11 other countries in the proposed TPP that reached $265.1 billion in 2014. In contrast, the United States had a small trade surplus with Mexico in 1993, before NAFTA took effect. Outsourcing to the TPP countries is a potentially much greater threat than it was under NAFTA with Mexico.

TPP will increase wage inequality

Globalization has already increased wage and income inequality, and here our findings are similar to those of Autor, et al’s, published research (though not mentioned in their column). Our research has identified two channels through which trade and globalization have driven down the wages of working Americans. First, the growth of trade deficits with China (along with other low wage countries) has forced workers out of good-paying jobs with excellent benefits into lower-paying jobs in non-traded (e.g. service) industries. I have estimated that this resulted in direct wage losses of $37 billion for the 2.7 million workers displaced by China trade in 2011 alone.

And second, my colleague Josh Bivens has used standard trade models to estimate that expanded trade has changed the composition of jobs in ways that reduced the annual wages of a full-time American worker without a four-year college degree who earns the median wage by $1,800 per year. Given that there are roughly 100 million non-college-educated workers in the U.S. economy, the scale of wage losses suffered by this group likely translates into close to a full 1 percent of GDP—roughly $180 billion.

Autor et al’s arguments about the benefits of the TPP add fuel to the income inequality fire. As Dean Baker notes, they argue that the regulatory structures being developed in the agreement would “largely benefit U.S. corporations, since they would get more money for the patents and copyrights,” and would gain new tools to use against foreign governments who threaten those profits.

The corporations that stand to benefit have few, if any, organic ties to the U.S. economy—most have outsourced a large share of production jobs to other countries. The primary beneficiaries will be people from the United States who happen to own stock in these companies. And the greatest benefits will flow to those who own the most stocks, primarily those in the top 1, 5, and 10 percent of the income distribution. So, the TPP and similar agreements will only serve to worsen U.S. income inequality.

What’s more, there are costs to providing greater protections to intellectual property. As Paul Krugman recently noted, protecting intellectual property creates a monopoly for the patent or copyright holder, which makes the world poorer. And as Dean Baker notes, it also diverts resources to the monopolists, reducing demand for everything else made by producers of other products. Questions about the impact of the TPP on income distribution and the distortions imposed by tightening intellectual property rights have motivated Nobel Prize winning economists such as Krugman and Joseph E. Stiglitz to challenge the justification for the TPP.

There is a choice

The administration has chosen to conduct a high-stakes campaign for fast-track authority to conclude negotiation of the TPP and a similar agreement with the European Union (the Transatlantic Trade and Investment Partnership). While fast-track requires congressional approval of negotiating objectives, it creates a process for consideration of final agreements that denies members of Congress the right to revise or amend any part of those agreements.

Alternatively, the president could decide to take steps to end currency manipulation by China and more than 20 other countries, mostly in Asia.  There are a number of steps that could be taken, such as the inclusion of currency manipulation clause in the TPP. The president and federal agencies already possess the tools needed to end currency manipulation outside of the TPP. The Treasury and Federal Reserve Board of Governors have the authority needed to offset purchases of foreign assets by foreign governments by engaging in countervailing currency intervention. By taking these steps, the U.S. government could make efforts by foreign governments to manipulate their currencies costly and/or ineffective.

Ending currency manipulation could create up to 5.8 million U.S. jobs, and up to 2.3 million jobs in manufacturing alone. Manufacturing is not dead. Manufacturing job loss is not a “fait accompli,” in the words of Autor, et al. Creating millions of jobs in the United States, and especially good jobs in manufacturing, would raise U.S. wages and begin to reverse the rise in U.S. income inequality that has had a strangle hold on the economy for the past 30 years.

The president can continue the fight for fast-track and the TPP, raising corporate profits while putting good manufacturing jobs and wages at risk. Or he can take action to create jobs and reduce inequality. He can’t do both.