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ITC Foresees Small Economic Impact of Trans-Pacific Partnership

Friday, May 20, 2016
Sandler, Travis & Rosenberg Trade Report

The International Trade Commission released May 18 a report stating that the Trans-Pacific Partnership Agreement would likely have small but generally positive effects on the U.S. economy. However, critics objected to the ITC’s review methodology and said its estimates for previous agreements have been erroneous.

The report is a necessary precursor to the submission to Congress of legislation to implement TPP, but that step is not anticipated in the near future given the current political climate. U.S. Trade Representative Mike Froman said the Obama administration’s work with congressional leaders on TPP implementation “will continue and accelerate in the days and weeks ahead,” but House Ways and Means Committee Chairman Kevin Brady (R-Texas) said “we cannot move forward until the administration has addressed member concerns on key aspects.” Similarly, Senate Finance Committee Chairman Orrin Hatch (R-Utah) said “this is a once-in-a-lifetime opportunity, and we have to make sure that we get it right.”

The ITC’s report examines the likely impact of the TPP on U.S. gross domestic product; exports and imports; aggregate employment and employment opportunities; and the production, employment and competitive position of industries likely to be significantly affected. It estimates the economic effects of TPP provisions related to tariffs and tariff-rate quotas, selected non-tariff measures affecting trade in goods and cross-border trade in services, and restrictions affecting foreign investment.

Economic Impact. The report states that by the 15th year after TPP take effect U.S. annual real income would be $57.3 billion (0.23 percent) higher than baseline projections, real GDP would be $42.7 billion (0.15 percent) higher and employment would be 0.07 percent higher (128,000 full-time equivalents). These gains would be slightly higher after 30 years, when all TPP provisions would be in force.

Public Citizen commented that past ITC studies of trade agreement effects “have systematically projected positive outcomes that have been contradicted by the actual results” and that given the fairly small projected gains with respect to TPP, the actual results “could really be disastrous.” United Steelworkers International President Leo Gerard agreed, stating that the “grim picture” painted by the ITC could make this “the most damning government report ever submitted for a trade agreement.”

USTR countered that the report does not provide a quantitative estimate of the impact of many aspects of TPP that will provide “significant economic benefit.” Dan Ikenson, director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, added that the ITC’s assessments “are not intended to be interpreted as projections into the future” but instead compare “today’s economy without TPP to today’s economy with TPP.”

Imports and Exports. The report states that U.S. exports and imports would be $27.2 billion (1.0 percent) and $48.9 billion (1.1 percent) higher, respectively, in year 15 relative to baseline projections. U.S. exports to TPP parties would grow by $57.2 billion (5.6 percent) and U.S. imports from those countries would grow by $47.5 billion (3.5 percent). Michael Stumo, CEO of the Coalition for a Prosperous America, said this means the U.S. trade balance “may marginally improve” with TPP countries “but will worsen with the world.”

Sector Effects. By year 15, the ITC states, total exports and imports for each broadly defined sector of the U.S. economy would increase. The percentage gains would be greatest for agriculture and food (2.6 percent and 1.5 percent, respectively), followed by manufacturing, natural resources and energy (0.9 percent and 1.1 percent) and services (0.6 percent and 1.2 percent). Total output is estimated to increase 0.5 percent for agriculture and food and 0.1 percent for services but to fall 0.1 percent for manufacturing, natural resources and energy.

The report states that benefits for the agriculture and food sector would come primarily through new export market access in Japan and Vietnam, where the farm sectors are currently protected by high tariffs. Only a relatively small value of U.S. trade with TPP partners in the manufacturing, natural resources and energy sector is currently dutiable, but U.S. exports in this sector would benefit from duty reductions and the elimination of non-tariff barriers. Specific estimated changes include higher exports of passenger vehicles and auto parts to Japan and Vietnam; higher vehicle imports from Japan, Mexico and Canada; a 35.2 percent increase in imports of apparel from new FTA partners (particularly Vietnam, though initial growth could subsequently be moderated by the agreement’s rules of origin and long tariff phase-outs for some goods); a 23.4 percent jump in footwear imports from TPP countries (mostly Vietnam at the expense of China) and a 12.2 percent rise in footwear exports (mostly parts to Vietnam for assembly); titanium imports from Japan that could more than double; and higher imports (1.3 percent) and exports (0.7 percent) of chemicals.

According to the Sierra Club, the report projects that TPP would spur an overall decline in U.S. manufacturing output and employment, including in the textiles, chemicals, auto parts, machinery and equipment, metal and metal products, instruments and medical devices, and electronic equipment sectors. In some cases, the group said, these declines are due to a projected increase in imports from Vietnam and Malaysia. Public Citizen added that the report estimates a worsening trade balance for 16 of 25 featured sectors.

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