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Global Investment Regime Facilitates Land and Water Grabbing

Online Publication Date: 10 February 2015

Economic Gains and  Costs from the TPP

The Trans Pacific Partnership (TPP) bundles standard gains from trade with a wide range of non-trade requirements that set privileges for foreign investors and impose substantial costs on partner countries. More than any previous trade deal, it matters what level of gains can really be expected and whether these exceed costs.

New Zealand is one of twelve Pacific Rim nations participating in the TPP negotiations and its Government’s top trade priority is conclusion of the agreement. When estimating the gains, the New Zealand Government has relied on projections by a US modelling team - Petri, Plummer and Zhai. Their work was initially published in 2011 by the East- West Center and then extended in 2012 for the Peterson Institute for International Economics.

The most recent version projects total gains for TPP partner countries of US$374 billion in the year 2025. For New Zealand, the study projects the gains will be US$4.5 billion in 2025, or roughly NZ$5.5 billion.

These figures were constructed by adding together projections for three different types of economic gain in 2025.

Trade Effects

The first two types of economic gain (intensive- and extensive-margin trade) were estimated using a computer model of the economies making up the TPP. The projected changes are positive because the wide-ranging TPP provisions have been fed into the model as simple efficiency-enhancing cost reductions, with no attempt to account for their downsides - reductions in national sovereignty and regulatory autonomy that are actually central to the TPP. Because these costs are not included in the model, the published results have a one-sided focus that means they do not provide a cost-benefit assessment of the TPP.

Besides excluding the crucial costs, the authors appear to have seriously overstated the size of the projected trade benefits as a result of pushing their analysis into highly controversial and untested territory relative to the established economic literature. They use subjective judgements to model non-tariff barriers by, for example, translating measures to enforce intellectual property rights and copyright protection into simple cost reductions that increase trade in services. Similarly, provisions that allow foreign investors to sue governments in private tribunals, or that block national regulation of banks, are translated by the authors into trade-promoting cost reductions, ignoring the costs of sidelining the courts and regulators of sovereign nations.

Equally controversial is their modelling of the second form of gains – the “extensive margin” of trade - which is claimed to deliver far larger benefits than the first. The basic idea is that an agreement such as the TPP will trigger a wave of new entrants into exporting, by reducing the fixed costs of entering overseas markets. There is no objective way to estimate the size of this claimed effect, so the authors have simply assumed that half the impact of the TPP would be on fixed (as distinct from variable) costs of trading, and that the response by firms in the TPP would be dramatic.

Yet the resulting large gains reported do not appear to have solid analytical foundations. If the modelling had been restricted to using mainstream methods for estimating the gains from trade, the results would have been far smaller.

Timing is also relevant in striking a proper balance. The trade benefits projected by the Petri team take ten years to arrive, whereas the big costs they ignore will come immediately, as TPP deprives national governments of key aspects of sovereignty and chills their policy-making.

Foreign Investment Effects

The remaining benefits projected by the Petri team are from foreign direct investment (FDI) effects, that are claimed to result from an increase in the stock of international direct investment.

The authors have calculated “FDI gains” entirely outside the computer model, by arbitrarily assuming that every dollar of FDI transferred from country to country within the TPP bloc generates a net gain in annual income of 33 cents, divided evenly between the two countries. We are not aware of any economic theory or modelling practice that supports this claim; in effect the authors are saying that simply transferring a dollar of gains that account for a quarter of the TPP total and a third of those estimated for New Zealand should be discounted entirely in our opinion.

Total Gains Are Small

Overall, the benefits from the TPP modelled in the study greatly overstate the gains likely to be available. The only quantified benefits the authors have identified that meet standard tests of consistency with established economic theory and empirical evidence are the tariff-related trade benefits that make up an unknown, but small, fraction of those estimated for the first two sources of gains. The remaining claims lack justification.

The gains really in prospect are much smaller than have been claimed by the New Zealand Government, citing this modelling. Less than a quarter of the gains projected by the study for the TPP economies overall appear to rest on solid analytical foundations, and those gains still have to be balanced against the costs that the study has not counted. The gains estimated for individual countries should be similarly reduced.

Even unadjusted, the figures the authors present remain small relative to the GDPs of the TPP partner economies. The gains are a single boost to the economy: they are a recurring annual benefit but they don’t change the economy’s rate of growth.

Further, the distribution of gains has not been modelled and if they go mainly to the rich while losses are borne by the poor, the TPP could sharply increase income and wealth inequality. A significant part of the rise in inequality over the last three decades has been widely attributed to globalisation and the TPP can be expected to exacerbate this.

Is the TPP a Net Gain or a Net Loss?

The small gains available makes it all the more important to understand the nature and scale of the costs that the modelling excludes. The TPP will impose direct costs such as those arising from extensions of intellectual property rights that push up drug bills by blocking or delaying generics from becoming available. But it is provisions that inhibit or prohibit the exercise of national autonomy that should be central to any full accounting.

In its quest to penetrate ‘behind the border’,the TPP intrudes far further into how governments operate than is necessary to facilitate trade. These ‘disciplines’ amount to significant restraints on a nation’s right to self-determination and the ability to regulate locally to achieve that and so to limitations on its sovereignty. The most potent element is investor state dispute settlement (ISDS) rights that would allow foreign investors to file a suit against a government in an offshore tribunal if they believed that new regulations would diminish their expected future profits.

ISDS provisions are unnecessary to achieve their stated objective, given that private insurance is available. Other significant TPP proposals that similarly inhibit or prohibit the exercise of national autonomy are equally separable from trade issues. The US insists on bundling them with the trade gains in order to lock in the US designed template for “a managed trade regime that puts corporate interests first”, as Nobel prize-winning economist Joseph Stiglitz puts it.

Stiglitz and Jagdish Bhagwati (a leading promoter of free trade and globalisation) are among the prominent economists to have sharply criticised the inclusion of the non-trade provisions and warned of their consequences.

The TPP offers only small quantifiable benefits from trade liberalisation packaged with fundamental, hard-to-quantify ability to protect the public interest. Whether there would ultimately be a net gain for the peoples of the TPP partner countries seems doubtful at this stage. A proper accounting will be possible only when a full text is made public.

- The full report is available at http://www.sustainabilitynz.org/wp-content/uploads/2014/02/EconomicGainsandCostsfromtheTPP_2014.pdf


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