The Senate recently granted President Obama fast track authority on the Trans-Pacific Partnership. Fast track authority, or Trade Promotion Authority as it is formally known, allows presidents to agree to trade with other countries with expedited congressional procedures. With fast track authority, trade agreements can come together between countries without threat of congressional amendments dampening the impact of the agreements. According to Republican Paul Ryan, after this week’s Senate agreement, the Trans-Pacific Partnership will likely be formally agreed to soon, allowing for an examination of who will benefit more from the agreement: capital or labor.
Ten years in the making, the Tran-Pacific Partnership (TPP) represents a trade agreement between 12 countries geographically located around the Pacific Rim. Potential TPP members represent a third of all global GDP at approximately $28 trillion annually, and a third of all global trade. In addition to the United States, the TPP member nations include: Canada, Mexico, Japan, Australia, and seven more.
With trade agreements already in place between many of the potential TPP nations (NAFTA, for one, between the United States, Canada, and Mexico), the TPP hopes to expand trade agreements beyond simple “free” trade and expedite trade outside of the cumbersome consensus trade agreements already in place. According to the Office of the United States Trade Representative, TPP will “open markets, set high standard trade rules, and address 21st century issues in the global economy. By doing so, TPP will promote jobs and growth in the Unites States and across the Asia-Pacific region.” In order to meet these broad intentions, TPP countries have expressly discussed the following: total Pacific Rim free trade zone, environmental, labor, and intellectual property standards, and a free flow of electronic data across borders.
Predicted Labor Benefits
Understanding TPP’s intended purpose, we can examine the benefits U.S. labor is purported to receive with TPP passage.
The most cited benefit for labor with TPP passage is an increase in income. An income increase in the United States is expected through TPP due to lower prices on purchased goods. The logic follows that free trade will lead to a lower cost of goods, stretching the value of current labor incomes. Calculations estimate an income increase valued at $77 billion by 2025. While not a direct result of TPP creation, some economists also expect income increases as the TPP sets precedence for expanded free trade agreements.
Job creation is the next most cited labor benefit of the TPP. According to Secretary of State John Kerry, the TPP would create over 650,000 new jobs in the United States. Using the increased income cited above ($77 billion), and an estimated new job creation cost of $121,000, the TPP would create these 650,000 new jobs with the increased income. Despite these public claims of job creation, many economists are quick to refute their accuracy. Many trade economists believe trade agreements do not change the number of jobs, but instead change the types of jobs. More productive trade should lead to more productive jobs, raising incomes; not increasing the number of less productive jobs.
The final benefit to labor comes in the form of increased exports in both goods and services. With the TPP, the United States expects to grow exports of goods with a group of countries that already represent the largest export market for the U.S. In 2013, TPP members represented 44% of all received U.S. exports, and with the TPP, the country hopes to further open the markets. Potentially more of a benefit to labor is the increase in services exports expected with a TPP. With a TPP, the United States should expect service exports to increase to $76.4 billion.
Predicted Capital Benefits
There are many capital benefits that will directly result from the passage of TPP. Two of these gains for capital will come in the form of tariff incentives and intellectual property rights.
As discussed, there are already trade agreements in place between more than half of the TPP member nations. With these agreements, the tariff and free trade benefits that reduce costs for labor are already in effect for most countries that import to the United States. Instead of helping labor then, increased tariff incentives will benefit capital and industry, which will both have new markets for exporting.
The agriculture market in Japan and in the United States serves as an example of how powerful these tariff incentives can be. Agriculture accounts for 7% of all U.S. exports, and Japan, which currently has high tariffs against U.S. agriculture, is the world’s third largest economy by GDP. The agriculture industry could see tremendous growth if the world’s third largest economy removes tariff barriers.
Intellectual property rights are an additional benefit to capital. A draft of the TPP has included copyright laws that go beyond current U.S. regulations for the entertainment and pharmaceutical industries, among others. Boosting intellectual property rights is a boon to capital, as these industries will no longer have to fear losing their competitive advantages to stolen capital. A New York Times study claims that the clearest winners of the TPP would be “technology and pharmaceutical companies” who could expand their exports.
Who Benefits More: Capital or Labor?
Further examining the benefits for both capital and labor, it is clear that capital would reap rewards far greater than labor. The benefits being described for labor by supporters of TPP acceptance have often already been accounted for, or are based on misguided calculations.
In regards to the expected income increases that are being calculated for the TPP, the numbers being presented are misguided. For one, while the $77 billion is often quoted as the income gain from the TPP, this number is only 1% of the national GDP, hardly enough to drastically move the needle for any one person. In addition, the increases in income will really only benefit two groups: those in the labor market who will reap rewards from an expected increase in minimum wage, and those at the very top of the labor market who will see gains from patent and intellectual property right protection.
For job creation, possibly misstated benefits have briefly been discussed above. Recall that the calculation being used to determine jobs created relies on a direct connection from income increases to job growth, when in actuality the TPP should lead to more productivity requiring fewer jobs. In addition, the model being used to calculate job growth does not account for any wage increase, meaning jobs can only be added if wages stay static compared to a dynamic rate of inflation. Finally, even if the benefits calculated (650,000 new jobs) are realized, this is only 4% of all employment in the United States. As with income increase estimates, the total expected benefits look less impactful when viewed as a percent to total.
The Bottom Line
While labor will certainly receive benefits from a TPP, the benefits are small, and may not necessarily be impactful for every individual. Income increases are too small to have an everyday effect, and job creation, even if actualized, is minute.
Capital however will see large gains from a TPP, and will benefit more than labor. Opening up new markets, restriction free, allows capital to gain new consumers. And with intellectual property laws enforced, capital can gain these customers without loss of property fears.