The Trans-Pacific Partnership (TPP) was signed by the twelve participating countries on February 4, 2016. The 5,544 page (2,056,560 words, about three times the King James Version of the bible) document was then submitted to the U.S. Congress for approval. The U.S. Trade Representative’s website makes TPP sound good: “Leveling the playing field for American workers & American businesses.” This article will explore whether TPP achieves that objective.
TPP has become one of the most visible issues of the 2016 presidential campaign. Donald Trump and Bernie Sanders aggressively promised to reject TPP. Hillary Clinton is now opposing TPP after referring to it as the “Gold Standard” for trade agreements during her years as Secretary of State.
One’s attitude towards TPP depends on one’s priorities. I will simplify to two views:
Reject: Any trade agreement must move dramatically towards eliminating the trade deficit, resulting in a 25% increase in U.S. manufacturing, cutting the budget deficit in half and reducing unemployment and income inequality. Exporting to the U.S. market is the target for all other countries. Only provide that access on a basis that eliminates our trade deficit. Reducing imports is the key.
Support: The U.S. needs to offer the Pacific region an alternative to Chinese economic dominance and strengthen the economies of Pacific Rim developing countries. Encourage labor and environmental standards in other countries. U.S. manufacturing is a lower priority. Jobs would mainly be achieved by increasing exports.
After WWII, the U.S. was the world’s economic Colossus, producing about 60% of the world’s manufacturing1 and providing a standard of living far above other countries. We established a pattern of providing to other countries favorable access to U.S. markets to achieve our diplomatic or humanitarian aims: democratization, stability, capitalism, allegiance against the Soviet Union, or later North Korea and Iran. Sacrificing U.S. manufacturing to achieve U.S. diplomatic goals for 60 years has played an important role in making the U.S. uncompetitive in world trade. Our trade deficit is about 4.5 times2 as large as that of any other country. Our current agreements typically are either biased against the U.S. or are not enforced in developing countries, e.g. many countries practice domestic content requirements, IP theft, currency manipulation, etc. We can no longer afford agreements that do not address the underlying causes of our trade deficit.
The last U.S. trade surplus was in 1975. We now routinely average trade deficits3 of about $700 billion per year counting just goods, i.e. tangible items, and about $500 billion after allowing for a $200 billion surplus in services. I believe that this huge deficit is unsustainable, especially in conjunction with a $500 billion federal budget deficit that will mushroom to $1 trillion as more baby boomers retire. Since 1975 we have accumulated an aggregate trade deficit of almost $11 trillion, approximately equal to the current value of all stocks traded on the NASDAQ4 (including Apple, Alphabet and Microsoft) exchange or about one third of the value of all U.S. homes. Foreign countries hold these dollars as a call on a huge percentage of U.S. assets.
PAST TRADE AGREEMENTS
Almost all of our trade agreements have resulted in our trade deficit with the other country rising faster than our trade deficit rose with the world. The deficits rose faster because our imports accelerated and our exports only increased slowly. For example Mexico (NAFTA) cost the U.S. about 400,000 jobs and China (PNTR) cost 3,200,000 jobs as measured by the resulting increases in trade deficits.
There is no evidence that TPP will be any more effective than these earlier agreements. In fact the official study by the U.S. International Trade Commission concluded that TPP would reduce U.S. manufacturing by $245 billion in 15 years. That negative result was arrived at despite unrealistic assumptions such as that displaced workers will immediately find equivalent jobs.
Elimination of tariffs and other barriers to trade makes more foreign products competitive in our market, just like reducing friction in a pipe increases flow through the pipe. Our huge trade deficit shows the U.S. is not price competitive in foreign markets and, too often, even in our home market. So lowering barriers will reduce the “friction” on imports, increasing our trade deficit. As has been proven by past trade agreements, lower barriers help our exports less than our imports.
Before exposing the U.S. to more imports, take the actions needed to make us competitive. The following list is a good place to start:
Strengthen our skilled workforce by shifting resources from university education, especially liberal arts, to training of toolmakers, precision machinists, welders and similar professionals.
Lower the USD. As the world’s reserve currency, the USD is consistently too high. In addition, especially in times of global uncertainty, funds flow from other countries seeking the U.S. safe haven. By becoming the home for financial investments we have raised the USD to the point that manufacturing is not competitive here.
Institute a VAT (Value Added Tax) as in almost all other countries. Offset the VAT by reductions in domestic taxes to keep the price of domestic products stable. A VAT subsidizes exports and taxes imports.
Lower the corporate tax rate to about 20%, eliminating all special deals.
Train corporations and MBAs to make sourcing and siting decisions based on product Total Cost6 instead of wage rates and price.
Once we are competitive, proceed with TPP or other trade agreements. Until then, reject any agreements that do not flatten the playing field.
5 https://www.usitc.gov/publications/332/pub4607.pdf Table ES.3