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Talking Trade blog

TPP: The costs of staying “out” for America


Published 24 May 2016

Last week, the United States International Trade Commission (USTIC) released a keenly awaited report on the economic benefits of the Trans-Pacific Partnership (TPP). While the sizable document suggested only modest gains for the United States, viewed from Asia, the costs of staying out of the TPP look considerably higher.

Most urgently, the report failed to properly consider what will happen to American companies and US interests if the TPP collapses while the other mega-regional trade arrangement in Asia, the Regional Comprehensive Economic Partnership (RCEP), is successfully concluded.  RCEP brings together 16 countries in Asia and does not involve the Americans.

As the United States gears up for a general election in November, trade has become a key issue. Republican nominee Donald Trump has strongly attacked both the North American Free Trade Agreement (NAFTA) and the TPP. Presumed Democratic candidate Hillary Clinton, despite her past support of the TPP as Secretary of State, now says she wants to renegotiate aspects of it, especially adding provisions on currency.

The report represents an opportunity for building a more reasoned debate on an impartial, widely respected foundation. The USTIC is an independent federal agency charged with producing a report for Congress within 105 days of TPP signing.  The agency reviewed the TPP agreement, other analyses of the TPP and projected its impacts on the United States.

The report’s findings were modest overall.  It found that by year 15 of the TPP, America’s income would be 0.23% higher, imports and exports would both be about 1% higher, and there would be 128,000 more US full-time jobs than there would be without the TPP. American agriculture and services would benefit most, while manufacturing, energy and resource sectors would be 0.1% lower than without the TPP.

While the US already has FTAs with most TPP countries, the report predicts exports to increase 18.7% to the five countries (Brunei, Malaysia, New Zealand Vietnam, and most significantly, Japan) where it did not have prior free trade agreements. Trade with the other six nations would increase 2.4% as a result of further improvements to existing FTAs.   The TPP can only come into force if the United States is included (along with at least Japan and four other parties). 

The US trade deficit is projected to increase by $21.7 billion due to the TPP, though this rests on the assumption that there is a fixed ratio between GDP and the size of the trade deficit, i.e. the deficit grows because GDP is higher.

The report used a computable general equilibrium model, known as GTAP, to predict the economic outcomes. This model allows large variegated databases that should lead to more accurate results than simpler economic models used in the past. But USTIC’s model also includes certain (questionable) assumptions:

·   The US economy is operating at or close to full capacity (long-run aggregate supply). Thus the TPP will reallocate resources from less liberalised to more liberalised sectors. (p73)

 ·   All spillover effects are ignored, particularly the likely removal of non-tariff barriers by non-TPP members. (Note that these are included in an important report released by PIIE.)

·    It does not assume that US firms will become more competitive due to the TPP (p45)

While some non-tariff measures were included, the modeling omits many that were difficult to quantify. This cautious approach may suggest an underestimation of effects. It also ignores spillover effects resulting from other countries’ actions following TPP implementation.

Early reactions to the report varied. Many US industry groups welcomed it. The American National Association of Manufacturers used it as an opportunity to restate the importance of the other 27 chapters, beyond just tariffs reductions, especially improvements in transparency, fair competition and intellectual property (IP) laws among trading partners.

Peter Petri and Michael Plummer, authors of important calculations of economic benefits from TPP, praised the ambition of USTIC’s report but found it too cautious. Economist Jared Bernstein made a similar point: the overall economic impacts may be negligible, but there will be significant changes for some industries and changing regulations in other countries.

One of the Senate’s key gatekeepers, Finance Committee Chairman Orrin Hatch, stressed the importance of implementation for the potential gains of the TPP to be realized.

U.S. Trade Representative Michael Froman has now said his agency has begun an "unprecedented accelerated implementation process to make sure… [that] by the time the agreement enters into force [TPP countries] will have already complied with the agreement."

This underlines the importance of building understanding and capacity of the complex, interlocking elements of the TPP among member government officials at all levels.

The ITC report was congressionally mandated, so it should come as little surprise that is US-centric, aimed at members of Congress who need impartial information on the TPP, and have elections to fight. At 792 pages, there will be plenty of ammunition for both supporters and opponents. 

However, the TPP is not just about improving market access through lower tariffs, though many of the reductions are significant. Much more important is the creation, improvement and coordination of economic rules in the Asia Pacific region to promote inter-dependence.

While the report is rightly cautious about putting a figure on improved regulations, much of which will depend heavily on the extent of domestic level implementation, these are the most consequential changes in the TPP.

Issues like aligning standards for testing, removing unnecessary delays at borders and enforcing basic environmental protections may not result in many changes to US laws but will lock in beneficial domestic reforms in other countries.  The momentum behind these types of changes may go beyond TPP participants as well and encourage non-member states to consider similar policies or risk trade and investment diversion.

Given the difficulty of economic forecasting, the error margins beyond two-year forecasts and the small economic impacts on the US (less that 0.5%) after 15 years, the ITC report downplays the economic significance of the TPP for the United States.   

The report, however, fails to adequately consider the costs of a rapidly changing economic environment.  The USTIC report compares two scenarios: America with the TPP and America without it. It makes no mention of RCEP. This is likely to be a major oversight. 

Not implementing the TPP drastically changes the political dynamic of the RCEP. RCEP includes China, Japan, Korea, India, Australia, New Zealand and 10 countries in ASEAN. These 16 countries account for nearly half the world’s population and the fastest growing economies in the world. The US will rue an opportunity missed if China and other members in Asia able to set the rules of the game by concluding RCEP before the TPP is implemented.

The seven countries on both the TPP and RCEP tracks may tire of waiting for America to ratify TPP and redouble their efforts to conclude RCEP instead. This could lead to trade diversion for the US, and exclude it from negotiating economic regulations in Asia.

This is not what TPP countries in Asia want. Singapore’s Prime Minister Lee Hsien Loong said the TPP could be a “demonstration with substance” of America’s commitment to the region, beyond platitudes of friendship. They want an outward looking United States.

Nor is this what firms, American or otherwise, in the region want. The stakes are greater than the modest calculations proposed by the ITC suggest.  The time for getting the TPP ratified is getting uncomfortably short.

***This Talking Trade post was co-written by Jack Coleman and Deborah Elms, Asian Trade Centre, Singapore***

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Dr. Deborah Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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