On January 25, 2016, the Peterson Institute for International Economics (PIIE) released a report on the Trans-Pacific Partnership trade agreement. The Coalition for a Prosperous America (CPA) promptly released their commentary on the Peterson Institute report the same day, which was based on oral and written testimony CEO Michael Stumo had given to the U.S. International Trade Commission on January 15, 2016.
The Peterson Institute analyzed the TPP using the "computable general equilibrium (CGE) model." I'm not an economist. I live and work in the real world of manufacturing. Thus, I am not familiar with some of the terms economists use for economic models, and had not heard of this term previously. I tried to find explanations that make sense, but even the Wikipedia definition was complex: "A CGE model consists of (a) equations describing model variables and (b) a database (usually very detailed) consistent with the model equations... CGE models are useful whenever we wish to estimate the effect of changes in one part of the economy upon the rest. For example, a tax on flour might affect bread prices, the CPI, and hence perhaps wages and employment. They have been used widely to analyse trade policy."
The World Bank states, "Computable General Equilibrium (CGE) models offer a comprehensive way of modeling the overall impact of policy changes on the economy... However, CGEs are significantly affected by the assumptions that they are based on which, depending on their definition, can impact on the results."
CPA criticized PIIE for using "the controversial computable general equilibrium (CGE) model to analyze the TPP rather than models that produce less optimistic results." Stumo stated that the CGE model is increasingly recognized as unreliable because:
Untrue facts assumed ─ "full employment always exists, trade is in balance, that wages and productivity stay in alignment rather than diverge, and that all countries have perfectly free markets with rational economic behavior." These assumptions are false ─ "full employment rarely exists; trade is almost never in balance; wages have diverged downward from productivity for the past several decades; and many TPP countries have state-directed capitalism or strong industrial policies to influence and alter market outcomes."
Untrue past results ─ The CGE model was used to analyze China's being granted Permanent Normalized Trade Relations with the U.S. (China PNTR) in 2000 and the Korea-U. S. trade (KORUS) agreement in 2012. A reduction in the trade deficits were predicted for both countries, but the reality is that the U. S. trade deficit with China increased from $68.7 billion in 1999 to $337 billion in 2015, and the Korea trade "deficit worsened by $12 billion annually between 2012 (date of KORUS implementation) to 2015." (US Census Bureau)
Untrue assumption of no net job losses─ "The CGE model wrongly assumes that there are no job losses to produce its results. The International Trade Administration assumes that every billion dollars of U.S. exports supported 5,796 jobs, down from 7,117 jobs per billion dollars of U.S. exports in 2009. Conversely, every billion dollars of imports has the opposite result. Thus, where trade agreements result in worsening trade deficits, as is the case for the NAFTA, Korea and China PNTR deals, the job losses are drastic."
Additionally, Stumo criticized the Peterson report because it ignores the fact the Trans Pacific Partnership Agreement does not address problems with currency misalignment, border taxes (VATs), and industrial policies, such as state-owned enterprises and government subsidies.
Stumo stated, "The PIIE model incorrectly assumes that currency valuations will be set by the perfectly free market and will not be manipulated. It does not take into account rising foreign value added taxes - which replace tariffs - charged to imports from the U.S. It also ignores the industrial policy and state-directed strategies that Japan, Vietnam and others use to give an advantage to state-influenced or national champion domestic industries."
Stumo criticized the fact that PIIE admits the TPP will create no new jobs and little growth even if the CGE model's conclusions are true.
Job creation will not occur ─ "…while the TPP is not likely to affect overall employment in the United States, it will involve adjustment costs as U.S. workers and capital move from less to more productive firms and industries. Section 4 estimates that 53,700 U.S. jobs will be affected—i.e., that number is both eliminated in less productive import-competing firms and added in exporting and other expanding firms—in each year during implementation of the TPP. This kind of movement between jobs and industries is what economists refer to as “churn,” and most kinds of productivity growth cannot occur without it taking place. For perspective, 55.5 million American workers changed jobs in this way in 2014—so the transition effects of the TPP would represent only less than 0.1% increase in labor market churn in a typical year. Most workers who lose jobs do find alternative employment, but workers in specific locations, industries, or with skill shortages may experience serious transition costs including lasting wage cuts."
The Peterson report even admits job loss from past trade agreements, stating "The largest loser is the United States, whose trade and current account deficits have been $200 billion to $500 billion per year larger as a result. The United States has thus suffered 1 million to 5 million job losses.
The reality is that we lost 6.2 million manufacturing million jobs in the past 20 years as a result of NAFTA, China's being granted PNTR in 1999, and the subsequent trade agreements with Central America, Korea, and other countries. Since manufacturing jobs create three to four other supporting or related jobs, we really lost 18 – 20 million jobs, which partly explains why 94,610,000 Americans are no longer in the labor force, which is the lowest participation rate in 38 years.
What do the report's authors mean by "import-competing firms"? It appears to me that this means American manufacturing firms whose domestically-made products compete with imports for market share in the U. S. In addition, the Made in USA products are also competing as exports to other countries against the exports of China, Korea, and our other trading and non-trading partners. So what guarantee do we have that the people losing jobs at import-competing firms will find jobs at exporting companies? None!
In addition, the CPA commentary highlighted the following:
Income gains are negligible ─ "The study projects that, by 2020, US incomes will rise a mere 0.1% of GDP. (Table 2). This means that 99.9% of growth will happen without regard to the TPP. The number 0.1% is equivalent to, or less than, a rounding error. It can only come true if all untrue assumptions in the CGE model are true. It will take another 10 years for the optimistic projection to deliver a meager 0.5% income gain by 2030."
Middle class will not benefit- "Assuming (which we do not) the small income gains are realized, the study is silent on who benefits from them. The Economic Policy Institute reported that trade agreements account for 90% of wage inequality. If there are any income gains, the middle class will be a net loser."
Other countries will “benefit” more than the U.S. ─ "The Peterson Study projects that Japan, Malaysia and Vietnam will gain far more than the United States. The U.S. Trade Representative, by pushing the TPP, is helping open markets for competitors in Japan and other countries. Japan is estimated to gain five times more income (in relation to GDP) than the U.S., Vietnam 16 times more, and Malaysia 15 times more. (Report, Table 2)."
Finally, CPA points out that other economic models show losses to the U.S. and other TPP countries. The commentary cites the fact that scholars at the Global Development and Environment Institute of Tufts University released a working paper in January 2016 that used the United Nations Global Policy Model (GPM). The executive summary of this paper states, "This GDAE Working Paper employs a more realistic model that incorporates effects on employment excluded from prior TPP modeling. We find that any benefits to economic growth are more limited, and even negative in some countries such as the United States. More importantly, we find that TPP would lead to losses in employment and increases in inequality. This is particularly true for the United States, where GDP is projected to fall slightly (-0.54%), employment to decline by 448,000 jobs, and inequality to increase as labor’s share of income falls by 1.31%."
The paper states that the job loss would not be limited to the U. S, stating, “The TPP would lead to employment losses in all countries, totaling 771,000 lost jobs...Participating developing economies would also suffer employment losses, as greater competitive pressures force them to limit labor incomes and increase production for export."
In fact, it also states that job losses would not be limited to TPP trading partners: "The TPP would lead to losses in GDP and employment in non-TPP countries. In large part, the loss in GDP (-3.77%) and employment (879,000) among non-TPP developed countries would be due to losses in Europe, while developing country losses in GDP (-5.24%) and employment (-4.45 million) would reflect possible losses in China and India."
The CPA commentary concludes that the PIIE report reveals “the lack of any economic benefit from the TPP under the most optimistic, albeit implausible, circumstances. It is more likely that job destruction and industry shrinkage will continue being the net result."
I will be even more emphatic in my predictions if the TPP is approved by Congress. The TPP will result in millions of job losses since past predictions were always exceeded. It will be another nail in the coffin of American manufacturing. The TPP is so overreaching in its scope that it would change many aspects of American life. I've written several previous articles posted on the blog section of my website under "trade" on the dangers of the TPP and why we must stop it from being approved by Congress. Do your own research and don't be fooled by the rhetoric of its supporters. You can read the full text of the agreement for yourself here.