The Trans-Pacific Partnership is a bad deal – Part 4

Dean Baker with an assessment of the economics in “Fun With Brad DeLong on TPP“:

Brad thinks he has a winner policy with TPP, taking issue with Paul Krugman who says the deal is not worth doing. Brad argues that even if the deal is worth half of the 0.5 percent of GDP figure that is widely cited, we are still talking about 0.25 percent of GDP, or $75 billion a year for the region as a whole and $45 billion for the U.S.

He acknowledges that these gains may not be spread evenly, but wants to see evidence that the losses to workers would be larger than their share of this $75 billion. He also notes Krugman’s complaint about increased protection for intellectual property, especially drug patents, and wants to see evidence that these losses will be large enough to offset the $75 billion in annual gains. Okay, let’s take the DeLong challenge.

First, one of the issues raised by many TPP opponents is that it will almost certainly have nothing on currency. This mean that it will not make it any easier, and could well make it more difficult, for the United States to address the trade deficit that results from having an over-valued dollar. Whether or not that ends up being the case is of course speculative, but this could be a very big deal…. If we could reduce the value of the dollar enough to lower the trade deficit by just 0.2 percent of GDP, but are blocked from this path by TPP provisions, then the resulting loss of 0.3 percent of GDP (assumes a multiplier of 1.5 on net exports) would exceed the gains that have Brad so excited. Of course the losses from not reducing the value of the dollar could be much larger (our trade deficit is @ 3.0 percent of GDP), but it’s worth noting that Brad has not set a very high bar….

Next we have Brad asking how bad the increase on patent protection and copyright protection can be. Well, the countries of the region spend close to $700 billion a year on pharmaceuticals. The difference between patent protected prices and free market prices can easily be more than a 1000 percent (with the Hepatitis-C drug Sovaldi, it’s close to 10,000 percent). Let’s say the TPP raises drug prices by 20 percent. That gets $140 billion a year, a sum that’s more than 80 percent larger than Brad’s $75 billion….

Finally, we should consider the issue of the mix between winners and losers. There probably won’t be much further direct downward pressure on the wages of workers subject to international competition … as opposed to protected workers \… since the barriers were already very low. However it is possible to see a way in which the increased protection overseas for our patents and copyrights hurts ordinary workers….

Increased money coming … for patent fees and … for royalties will effectively crowd out net exports of manufacturing goods. Other things equal, the protectionist parts of the deal should make the dollar higher relative to other currencies. This will cause us to run larger deficits in manufacturing, putting further downward pressure on the wages of manufacturing workers and service sector workers who will compete with displaced manufacturing workers for jobs….

Suppose that this rise in royalty payments from abroad and the resulting rise in the dollar led to a loss of net exports of manufactured goods of 0.4 percent of GDP. This probably would not be large enough to offset a gain to workers of 0.25 percent of their wages, but could easily be in the neighborhood of 0.1 percent, or 40 percent of their TPP dividend.

… All of this [analysis] is incredibly crude, but it is possible to think of plausible scenarios in which most of the people in this country end up as losers from the TPP. So, why should we buy this industry-crafted deal?

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The Trans-Pacific Partnership is a bad deal – Part 4