TPP: Estimates of Economic Effects

TPP: Estimates of Economic Effects

July 6, 2016
TPP: Estimates of Economic Effects
Background
Although the attendant adjustment costs for businesses and
The Trans-Pacific Partnership (TPP) is a proposed free
labor are difficult to measure, some estimates indicate that
trade agreement (FTA) among the United States and 11
they potentially are significant over the short-run and can
Asia-Pacific countries that would reduce and eliminate
entail dislocations for some segments of the labor force, for
tariff and nontariff barriers on goods, services, and
some companies, and for some communities.
agriculture, establish trade rules and disciplines that expand
on commitments at the World Trade Organization (WTO),
How Are Economic Effects Estimated?
and address new “21st century” issues, such as digital trade
Economists and others use various economic models and
and state-owned enterprises. It has both economic and
approaches to estimate the magnitude of changes in U.S.
foreign policy implications for the United States, and raises
economic activity and employment associated with a trade
potential strategic issues regarding U.S. trade policy and
agreement. Both proponents and opponents of trade
broader U.S. engagement in the Asia-Pacific region.
agreements cite results of these studies to support their
The TPP is termed by its participants a comprehensive and
respective positions. These models, however, differ in the
high-standard agreement. In considering the TPP, Congress
estimates they produce, reflecting different assumptions and
likely will examine various economic studies to assess the
differences in the structures of the models themselves.
impact of the agreement on the economy. The results of
While all the various models and approaches have strengths
these studies vary depending on the model and the
and weaknesses, although not always in equal proportion,
assumptions that are used to generate the results. The U.S.
they vary in the degree to which they reflect economic
International Trade Commission (ITC) is tasked with
reality, and they are highly sensitive to the assumptions that
providing the official U.S. Government estimate of the
are used.
economic effects of the agreement.
International Trade Commission (ITC)
By eliminating and lowering tariffs, the TPP is expected to
Study
impact the external market conditions under which TPP
The ITC provides the official U.S. Government estimate of
nations trade and lower the prices of traded goods among
the impact of proposed trade agreements on the U.S.
the parties. In turn, lower prices can affect trade patterns by
economy. The ITC uses an economic model known as the
increasing the amount of trade that occurs (trade creation)
Global Trade Atlas Project (GTAP), located at Purdue
and by shifting trade toward countries that are party to the
University, to estimate changes in trade (exports and
agreement (trade diversion). As a result, the TPP may alter
imports) that arise from changes in tariff rates and tariff rate
the level of trade among the participants and the mix of
quotas. This model is a long-run microeconomic model that
goods and services that are traded. Estimating the
has been widely used and tested. Such trade models are
employment effects from a trade agreement, however, is
limited in how accurately they can reflect certain aspects of
challenging due to the difficulties involved in disentangling
complex FTAs and require a number of assumptions.
the effects of trade and trade agreements from other factors
that affect the U.S. economy, among other things.
In May 2016, the ITC released a comprehensive assessment
of the economic impact of the TPP. In developing its
What are the Anticipated Economic Effects?
estimates, the ITC made assumptions about the evolution of
Most economists argue that liberalized trade and investment
the world economy without the TPP in five-year steps to
create both economic costs and benefits, but that the long-
2047, and it incorporated projections from various sources
run net effect on the economy as a whole is positive. They
about labor availability, growth rates for population, and
contend that: (1) the economy operates more efficiently due
gross domestic product (GDP). The model also includes
to increased competition through international trade; (2)
potential trade policy changes that would be expected to
consumers benefit by having a wider variety of goods and
occur in the absence of TPP. The ITC modified the standard
services at varying levels of quality and price than would be
GTAP model to include the 12 TPP countries, various
possible without international trade; and (3) trade may have
regions, and 56 industry sectors. Similar to previous studies
a long-term positive dynamic effect on production and
of FTAs, the ITC analysis of the TPP estimated the effects
employment. In addition, trade agreements could have
of liberalizing tariffs and certain nontariff barriers (NTBs)
significant economic effects on trade and commercial
and assumed that nations will take full advantage of
relations over the long run, particularly for developing and
increases in agricultural tariff rate quotas.
emerging economies.
The ITC estimated that by 2032, U.S. annual real income
Economists recognize that some workers and producers in
would be $57.3 billion (0.23%) higher than the baseline
the economy may experience a disproportionate share of the
projections, real GDP would be $42.7 billion (0.15 %)
short-term adjustment costs that are associated with shifts in
resources stemming from greater international competition.
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TPP: Estimates of Economic Effects
higher, and employment would be 0.07% higher (128,000
indicated in Figure 1. The ITC study estimated that U.S.
full-time equivalents) with TPP, as indicated in Table 1.
gains in output and employment would be driven by
changes in the agriculture and food sector, while output and
Table 1. ITC Estimated TPP Economy-Wide Effects
employment in the manufacturing, natural resources and
(Changes relative to baseline projections: 2032 and 2047)
energy sectors would fall slightly as resources would be
shifted from these sectors to other sectors in the economy.

2032
2047
Figure 1. ITC Estimated Impact of TPP by Sector,

Billion$
Percent Billion$
Percent 2032
Real Income
$57.3
0.23%
$82.5
0.28%
(billions $ relative to baseline)
Real GDP
$42.7
0.15%
$67.0
0.18%
Employment (full
128.2
0.07%
174.3
0.09%
time equivalents,
thousands)
Capital stock
$171.5
0.18%
$343.5
0.24%
Source: ITC Study, p. 70.
The ITC also estimated that by 2032, annual U.S. exports
and U.S. imports with TPP partners would be $57.2 billion
(1.0 %) and $47.5 billion (1.1 %) higher, respectively,
relative to baseline projections, as indicated in Table 2. Of
this amount, annual exports and imports with new FTA
partners under TPP are projected to increase by $34.6

billion and $23.4 billion, respectively, by 2032. Overall,
annual U.S. exports to the world are projected to increase
Source: ITC study.
by $27.2 billion and imports are projected to increase by

$48.9 billion by 2032 under TPP.
Other Estimates
Table 2. ITC Estimated TPP Effects on U.S. Trade
Estimates by other organizations range from broadly greater
(Changes relative to baseline in 2032)
gains than that estimated by the ITC, or much greater losses
in jobs. A study by Peter Petri and Michael G. Plummer for

Exports
Imports
the Peterson Institute for International Economics estimates
that the TPP would increase annual U.S. GDP by $131

Billion$
Percent
Billion$
Percent billion by 2030 due to larger estimates of increases in
Trade with TPP
$57.2
5.6%
$47.5
3.5%
services exports and increased foreign investment and trade.
partners
The World Bank projected that by 2030, the TPP would
increase member country GDP on average by 1.1%, ranging
TPP New FTA
$34.6
18.7%
$23.4
10.4%
from over 8% for Vietnam to 0.5% for the United States.
partners
Using a non-standard model, a study published by Tufts
TPP Existing FTA
$22.6
2.7%
$24.2
2.1%
University Global Development and Environment Institute
estimated that TPP would reduce jobs among the TPP
Trade with the
$27.2
1.0%
$48.9
1.1%
countries by 771,000, with the largest losses occurring in
world
the United States, reduce employment in Europe by
Source: ITC Study, p. 71.
879,000, and among non-TPP developing countries by 4.5
million.
The ITC estimated that TPP would have little effect on
More Information
cross-border flows of direct investment, but the agreement
For more information see CRS Report R44489, The Trans-
would increase U.S. services output by $42.3 billion (0.1%
Pacific Partnership (TPP): Key Provisions and Issues for
increase) under TPP relative to the 2032 baseline. Global
Congress, coordinated by Ian F. Fergusson and Brock R.
U.S. exports of services were estimated to be $4.8 billion
Williams; CRS Report R44546, The Economic Effects of
higher by 2032, while exports to TPP countries were $16.6
Trade: Overview and Policy Challenges, by James K.
billion (10.8%) higher, and exports of services to non-TPP
Jackson; and CRS In Focus IF10161, International Trade
countries $11.8 billion (1.9%) lower. Global U.S. imports
Agreements and Job Estimates, by James K. Jackson
of services were estimated to be $7.0 billion (1.2%) higher
by 2032 with most of the increase coming from non-TPP
countries.
James K. Jackson, Specialist in International Trade and
Finance
According to the ITC, both U.S. agriculture and services
IF10431
sectors are projected to benefit as a result of the TPP, as

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TPP: Estimates of Economic Effects

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