Why should the United States consider rejoining the Trans-Pacific Partnership?
by Arnav Singh
One of the dilemmas countries are facing today is whether to adopt a policy of free trade, allowing foreign goods to enter the country with minimum tariffs and encouraging companies to relocate abroad or make it difficult for foreign goods to enter the country by the imposing trade barriers and discouraging domestic firms from moving manufacturing abroad to cut production costs.
On 23 January 2017, President Donald Trump signed a Presidential memorandum to withdraw the United States from the Trans-Pacific Partnership (TPP).
Before Trump withdrew, the TPP was set to become the World’s largest free trade agreement covering 40% of the world economy. The TPP was a proposed trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States- aiming to deepen economic ties, reduce tariffs and make similar policies and regulations.
According to the U.S. International Trade Commission, U.S. trade with TPP countries amounted to more than $1.5 trillion, or approximately 40 percent of its total trade, in 2015.
After Trump’s withdrawal, the remaining 11 countries decided to move ahead with the deal, leading to the Comprehensive and Progressive Agreement for Trans-Atlantic Partnership (CPTPP) which entered into force for countries that ratified the agreement on December 30, 2018.
TPP member nations have maintained that the trade deal can re-admit the United States if consensus is reached by all 11 nations.
The major complaints by critics were that flooding of cheap goods would result in heavy losses to local industries, jobs, increase trade and budget deficits, and threaten national security.
Some argued that the TPP could turn out like the North Atlantic Free Trade Agreement (NAFTA), which many blame for job losses in the manufacturing sector in the U.S.
This begs the question- Does Free Trade serve a Nation's Economic Interests?
Let us start by looking at the impact of free trade on a country’s economy: For this, we will be examining the North Atlantic Free Trade Agreement (NAFTA), signed by the United States, Canada, and Mexico, which came into force on January 1, 1994.
The United States International Trade Commission estimated that NAFTA increased US Economic Growth by a little less than 0.5% a year.
Furthermore, 6 million jobs depend on trade with Mexico and another 8 million on trade with Canada, according to an economic study commissioned by the US Chamber. U.S. services exports to Canada and Mexico have tripled, rising from $27 billion in 1993 to $82 billion in 2011.
Opponents of Free Trade argue that such agreements are to blame for increased job outsourcing.
Many US Manufacturing Industries did lay off workers, outsourcing jobs to Mexico. This allows the companies to benefit from cheap labor, which drives down their cost of production and enables them to sell goods to consumers in the U.S. at affordable prices.
Though a study by Peterson Institute for International Economics (PIIE) concluded that only about 15,000 jobs are lost on the net due to NAFTA and the 200,000 export-related jobs created by NAFTA pay an average of 15% to 20% more than jobs that were lost.
Also, the availability of cheaper goods and services has increased the annual income by approximately $15,000 per household.
Critics also argue that Free Trade Agreements (FTA) increase trade deficits between countries.
Note: Trade deficits are the balance between goods and services exported and imported.
Between 1993 and 2018, the US - Mexico trade balance went from a $1.7 billion surplus for the US to a growing deficit of $80.7 billion.
The problem here is that trade deficits are not necessarily bad. Trade deficits can be a problem when those deficits are covered by government borrowing or if a country has weak political and economic institutions.
Many economists stress that the result is higher overall global economic growth. Dartmouth College Trade expert Douglas Irwin and many other economists worry that too much focus on trade deficit could lead to a revival of protectionism and a new global trade war that would make everyone worse off, especially in an era of supply chains that cross many borders.
From the above discussion, we can lucidly infer that countries benefit from Free trade with the advantages outweighing the disadvantages.
Free Trade Agreements (FTAs) lead to the creation of multiple jobs in industries in which a country is competent in but we should not overlook the fact that in the process, a country can lose jobs in sectors that are impacted by the increased access of consumers to cheaper products from other countries.
US service sectors saw job growth due to an increase in exports while losing jobs in the manufacturing sector, particularly in the Automobile sector to Mexico.
These negative effects of free trade can be minimized by either compensating workers who lose their jobs or providing retraining programs such as the US Trade Adjustment Assistance (TAA), to help them transition to new industries.
If these programs are executed properly there will be no need to question the policy of free trade and cease arguments in favor of protectionism. Free Trade at its best allows countries to harness their potential and improve the lives of its citizens; rejection of free trade and the advent of protectionism will only make things worse.
Many economic studies, including those by PIIE and other think tanks, have projected that the TPP would boost the U.S. economy by increasing GDP by $130 billion by 2030, annual exports by 9% ($357 billion) and also create 796,000 export-related jobs.
Given the level of integration of markets across the globe and China’s growing influence, it could be counterproductive for the United States to not reconsider its decision to withdraw from the Trans-Pacific Partnership Agreement (TPP).