After 8 years of trade negotiations, a massive trade agreement called the Trans-Pacific Partnership has been signed by twelve countries: Brunei, Chile, New Zealand, Australia, Singapore, Vietnam, Malaysia, Japan, Peru, Mexico, Canada, and the United States.
This trade agreement aims to strengthen economic ties between the twelve nations involved, as well as eliminate tariffs in order to increase global trade and economic growth. Although this pact appears to benefit the US as a whole, it is geared towards benefitting large US corporations, while American workers will end up suffering.
The twelve countries involved in this free trade agreement make up roughly 40% of the world’s GDP. In 2013, the US exported 698 billion dollars’ worth of goods and services to the eleven other members of the TPP, which was close to half of its total exports that year. According to US President Barack Obama, “this partnership levels the playing field for our farmers, ranchers and manufacturers by eliminating more than 18,000 taxes that various countries put on our products.” A reduction of the taxes on imports would make US exports more competitive overseas, because these exporting companies can make higher profit margins than ever before. Not only will profits increase, but these lower costs will allow companies to increase their participation into more markets.
The TPP was aimed to benefit both American businesses and American workers, but the latter may actually be affected negatively. With the elimination of export taxes, American products will be more competitive in the global arena, which should increase wages of American workers. But, historical data from the North American Free Trade Agreement (NAFTA) says otherwise. According to EPI economist Robert Scott, “U.S. government officials predicted that the North American Free Trade Agreement (NAFTA) would lead to growing trade surpluses with Mexico and that hundreds of thousands of jobs would be gained.” By 2010 however, “U.S. trade deficits with Mexico totaling $97.2 billion had displaced 682,900 U.S. jobs.” Similar to NAFTA, the Trans-Pacific Partnership sought to tear down trade barriers between various countries. One of the main goals of NAFTA was to increase both US jobs and surpluses, but instead, both figures declined. The US trade deficit grew and hundreds of thousands of jobs were lost due to cost reductions or job outsourcing overseas.
The Trans-Pacific Partnership could send the US down a similar path. With the reduction of taxes, outsourcing American jobs to the countries involved in the agreement is now more appealing. For example, Vietnam and Malaysia offer much lower wages than manufacturing positions in the US. Robert Scott points out that “the United States already has a large and growing trade deficit with the 11 other countries in the proposed TPP that reached $265.1 billion in 2014. In contrast, the United States had a small trade surplus with Mexico in 1993, before NAFTA took effect. Outsourcing to the TPP countries is a potentially much greater threat than it was under NAFTA with Mexico.” (Source: http://www.huffingtonpost.com/robert-e-scott/fast-track-to-lost-jobs-a_b_7042270.html)
Under TPP, global trade should become easier between the twelve members involved in the agreement. With lower tariffs, each country can benefit more through trade by specializing. Under the Ricardian trade model, each country can produce the good that they have a comparative advantage in, allowing both trade partners to benefit from trade. However, historical data shows that it does not always work this way. NAFTA showed that free trade can result in job outsourcing, increased income inequality, and downward pressure on wages.
There is no guarantee that the Trans-Pacific Partnership will play out the same way NAFTA did, however. After all, the terms and trade partners involved are very different. Nonetheless, it is important to be cautious of the past so as not to repeat it. This trade agreement has the potential to reshape industries, raise living standards, and bring global trade into the 21st century.