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The Pacific Trade Pact Is Big, but Is It a Huge Deal?

Paul Krugman explains why he has a hard time finding the Trans-Pacific Partnership trade deal especially important.

I’ve been getting a fair bit of correspondence from readers wondering why I have not written about the negotiations for a Trans-Pacific Partnership trade deal, which many regard as something both immense and sinister. The reason: I have been having a hard time figuring out why this deal is especially important. The usual rhetoric – from supporters and opponents alike – stresses the total size of the economies involved: hundreds of millions of people! Forty percent of global output!

But that tells you nothing much. After all, the Iceland-China free trade agreement, which was signed earlier this year, created a free-trade zone with 1.36 billion people. But only 300,000 of those people live in Iceland, and nobody considers the agreement a big deal.

The talk about the Trans-Pacific Partnership isn’t that silly. But my starting point for things like this is that most conventional barriers to trade – tariffs, import quotas and so on – are already quite low, so it’s hard to get big effects by lowering them further.

The deal currently being negotiated involves only 12 countries, several of which already have free-trade agreements with each other in place. It’s roughly, though not exactly, the “TPP11” scenario analyzed last year by the researchers Peter Petri, Michael Plummer and Fan Zhai. They are pro-T.P.P., and in general pro-liberalization, yet they can’t produce big estimates of gains from that scenario – only around 0.1 percent of gross domestic product. And that’s with a model that includes a lot of nonstandard effects.

(An aside: One little-known aspect of the literature on trade liberalization is that to get any kind of large effect, it’s necessary to drop the assumption that markets are highly competitive and efficient, and assume instead that there are large inefficiencies that will be reduced as a result of international competition. This was the case when people claimed large gains in 1992 for Europe, and it’s the case for the Trans-Pacific Partnership now. I’m not saying that this is wrong – the Melitz Model, in which inefficient firms don’t get driven out unless there’s increased external pressure, is a beautiful thing. But it’s sort of dissonant with the overall pro-market feel of this stuff. Oh, and 1992 was kind of a disappointment, wasn’t it?)

As I read it, to make the Trans-Pacific Partnership into something really important, you have to (a) bring China inside, which isn’t on the table right now and (b) produce evidence of major effects on foreign direct investment. To be fair, the North American Free Trade Agreement seems to have had effect (b) – but NAFTA changed the political environment in Mexico in a way that the Trans-Pacific Partnership probably won’t. O.K., I don’t want to be dismissive. But so far, I haven’t seen anything to justify the hype, positive or negative.

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