Calculating the Effects of the Trans-Pacific Partnership

After six years of wrangling, last week in Atlanta trade negotiators from 12 countries in Asia and the Americas signed the Trans-Pacific Partnership. The deal, which still has to be signed into law by each member, was quickly touted as the most far-reaching free trade agreement (FTA) ever by its advocates, while detractors proclaimed it essentially a nail in the coffin of the working class. However, calculating the economic benefits involves a variety of assumptions.

Behind the data

Although the TPP encompasses 40% of the world’s GDP, it’s easy to oversell the deal’s potential benefits. For starters, the TPP zone is made up of largely open economies, including Mexico, Chile and Peru. As the left-leaning economist Dean Baker rightly points out in a column for Al Jazeera America, over 80% of the TPP’s economic zone is comprised of countries that already have a serious free trade regime in place. Given how open these economies are, further gains by removing tariffs will be small.

Moreover, calculating the actual benefits according to the TPP’s provisions involves reliance on varying assumptions and incomplete data. The East-West Center calculates that the TPP will increase the GDP of its members by 0.9%, about $285 billion, in the next decade.

However, while this forecast relies on computational general equilibrium modeling—the most authoritative approach to test how sectors of economies will benefit or be hurt by declining tariffs because of its reliance on a large database of import-export statistics—this estimate may be too rosy. CGE modeling tends to be overly reliant on agricultural statistics, as an article in The Economist pointed out recently, so calculating the impact on an economy’s services sector is less precise than weighing the impact of, say, milk products.

In trying to get around this, a study by Dan Ciriuk and Jingliang Xiao uses a different model. Crucially, the authors do not assume that more firms will become exporters as tariffs decrease. As a result, this study reaches the conclusion that the TPP will increase the GDP of member countries by just 0.21% by 2035. That hardly seems to be worth the trouble. Other, more critical studies conclude there will be no economic gains at all over the next 20 years.

Our Take

Economic growth will always spur divergent forecasts. But clearly more reliable trade statistics in the services and hi-tech sectors would help assess the prospects of FTAs, not to mention inform sound business investment. This was a clear takeaway from the statistics panel at the ALES convention in Guatemala City two months ago, where OECD statistics chief Fabienne Fortanier called for countries to report more granular data on where value is added in the services and software production chain.

Suffice it to say the TPP’s benefits will be slow to arrive for several of its members. Still, in other ways the pact will produce strategic gains, especially for Mexico. By remaining tied to the U.S. market at a critical time when the U.S. economy is accelerating faster than other developed countries, Mexico will continue to enjoy privileges from its neighbor to the north. Meanwhile, from a defensive perspective, it keeps Mexico positioned to be a go-to destination for U.S. carmakers and software firms alike, whereas the country was at a very real risk of losing market share in the U.S. to an Asian producer had Mexico stayed out of the agreement.