Comment: TPP report raises serious questions about inequality and trade policy

September 26, 2013

As the Trans Pacific Partnership (TPP) talks continue behind closed doors, the case for the trade deal becomes more and more untenable. Reviews of the impacts of past free trade pacts, as well as modelling of the TPP, paint a grim picture of lower labor standards and greater inequality.

The Center for Economic and Policy Research (CEPR) has been producing excellent critical research on globalization for over a decade. One of the center’s early publications, “The Scorecard on Globalization: 1980-2000” made a clear and accessible indictment of the right wing economics that took hold in the US and elsewhere in the late 1970s and early 1980s. It was released when the debate over globalization was at its hottest, just before 9/11, and CEPR became a go-to source for documenting the results of twenty years (at that time) of market fundamentalism on income growth, life expectancy, health, and education.

The Center publishes many useful special issue reports including a new one by David Rosnick on the effect of the proposed TPP trade agreement on wages. In my view this agreement will lower labor standards, strengthen the hand of management and ownership, and it has been negotiated in a profoundly anti-democratic manner. Rosnick adds a statistical estimation of the TPP’s possible effects on wages. He does this by critiquing a study produced by the pro-TPP Peterson Institute for International Economics.

His results are consistent with the predictions of standard academic trade theory. The so-called “factor price equalization” theorem states that wages and returns to capital will be equalized across countries that establish free trade. Since most of the countries currently expected to sign the agreement have lower wages than the US, orthodox trade theory predicts that wages would fall in the US if we enter the agreement.

Rosnik separates out the likely effects of TPP on different groups of people. Workers in the bottom quarter of the income distribution are unlikely to be affected much, as their income is determined more by the minimum wage rate. Those at the top of the income distribution will likely gain due to easier enforcement of copyrights and patents. These gains and losses are not large but they are consistent with the overall direction of economic policy since the Reagan era: increasing protection for capital incomes and increasing exposure of workers to competition from low wage countries.

This policy set has been more consistently applied under recent Democratic than under Republican Presidents. Reagan and both Bushes included some “protectionist” elements in their coalition but the Democrats under both Clinton and Obama are increasingly the party of Hollywood, trial lawyers, cultural liberals, the West Coast technology giants, and finance capital, with a certain kind of charity for the poor. Not bad people necessarily but generally the winners from recent globalization of capitalism.

TPP’s proponents rely on an old argument that free trade is beneficial even if some groups lose because, at least in theory, the winners – capital and those who have monopoly-like positions in the labor market – could compensate the losers and still have something left over. In this case, as even the pro-TPP studies indicate if you dig into them, the expected gains for the US are so small that no one is even talking about trying to compensate the losers. In fact, the issue here is not necessarily the gains and losses that economists are most comfortable estimating but the extension of corporate control over both the global economy and the global policy-making apparatus.

If the economic argument for free trade is that overall output will rise, the political argument is that it is always necessary to pursue freer trade so as to beat back the forces of protection. Thus for the Peterson Institute researchers it is better to have a less ambitious agreement soon than to wait for a better agreement as waiting might allow protectionist “special interests” to gain control of the agenda. Given the evident failure of the now decade old Doha round at the WTO this is not an idle fear. The people don’t support these agreements and so moving fast and more or less undercover has been the Obama administration’s TPP strategy.

Studies like Rosnick’s at CEPR and his opponents at Peterson create the impression that economists can predict things with a precision that they are simply not capable of. For one thing, Rosnick’s predicted effects are drawn from data on current and recent past trading patterns, not on the new ones that TPP might generate. More important, as Rosnick himself intimates, the effects of these agreements are swamped by large and unpredictable events such as 9/11, the financial crisis, etc.

Most American economists generally support free trade out of an almost religious belief in the power of markets and not because of empirical studies. Such studies tend to justify pre-determined beliefs rather than the other way round, in the case of the Peterson Institute study the beliefs of the political and economic elites. Increasing the effective labor pool and securing foreign property rights have been consistent aspects of American trade policy for a generation and a half. It is good that CEPR continues to expose specious claims to the contrary.

~ Richard McIntyre is the U.S. Trade Representative in the Economy Branch of the Green Shadow Cabinet.