“No Big Deal” says Krugman

Gary Clyde Hufbauer, Cathleen Cimino 17 March 2014

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In a “man bites dog” column for the New York Times (February 27th), Paul Krugman, a self-proclaimed free trader, declared that the Trans-Pacific Partnership is “No Big Deal”. With free traders like this, who needs protectionists?

Equally disturbing as his headline, were the dubious justifications offered by Princeton’s Nobel Laureate.

  • For starters, Krugman instructs President Obama to spend political capital on domestic initiatives, not the TPP pact.

But Obama’s domestic programs are blocked by Congressional Republicans while TPP runs afoul of Congressional Democrats. There is simply no political trade-off between the two initiatives.

  • Krugman goes on to argue that the payoff from TPP will be trivial because tariffs are already low, yet the agreement will deliver rich benefits to intellectual property holders epitomised by “Big Pharma”.

Let’s look at these arguments in turn.

As Krugman says, it’s true that US exporters already enjoy nearly tariff-free entry into the markets of six TPP countries (and vice versa), thanks to existing free trade agreements. It’s also true that average MFN tariffs are very low for the US (3.4%) and Japan (4.6%), and low for most other TPP members (Tariff profiles 2012). But peak MFN tariffs are still significant – for example, the US duty is 25% on imported SUVs, and the Japanese duty is 39% on imported beef.

Far more important than tariffs in TPP talks are non-tariff barriers, especially regulatory barriers that obstruct cross-border trade in business services and block access to government procurement contracts. CEPII’s econometric work indicates that the tariff equivalent of TPP barriers to business services range from 2% at the lower end (Singapore), to 44% (Japan), to 67% (Australia), reaching 134% at the upper end (Mexico), see Fontagné et al. (2011). Barriers this high are quite harmful not only to US service exporters, but also to countries that pay exorbitant costs for local business services.

As for government procurement, which accounts for about 15% of GDP, the WTO Government Procurement Agreement has achieved only modest liberalisation, and only four of the 12 TPP members are GPA signatories, meaning that little or no competition exists for vast swaths of federal, state and local procurement in all TPP countries (“Parties and Observers to the GPA”, WTO). The unnecessary costs to TPP taxpayers are immense.

After dismissing the case for stronger intellectual property protection in the TPP, Krugman writes with a flourish, “What’s good for Big Pharma is by no means always good for America.” Not even the Pharmaceutical Manufacturers Association would claim that its interests always coincide with US interests.

But what about the general coincidence of interests? America’s competitive strength resides in innovation. Innovation costs lots of money; not surprisingly, some 60% of the value of US shares – or about $14 trillion in 2013 – represents the capital value of ideas, not tangible property.1 With this amount at stake, protection of intellectual property is clearly in the US national interest. From a global perspective, it’s worth asking how future innovation will be financed if good ideas – embodied in software, entertainment, electronics, and yes, pharmaceuticals – can be freely appropriated by rival firms based in foreign countries?

Apart from the nuts and bolts, Krugman’s op-ed conveys a larger message. By citing an inappropriate calculation from the International Trade Commission (import restraints cost the US only 0.01% of GDP),2 and by blowing away the TPP, Krugman essentially says that the era of globalisation has drawn to a close, and that the case for policy-driven liberalisation is over. Been there, done that.

But the era of globalisation is not over. Despite strong political headwinds, the need for policy-driven liberalisation is as great today as in the Kennedy Round. The new frontiers for liberalisation are services and investment, more than manufactures. The potential for cross-border trade in services has barely been touched: as Brad Jensen (2011) shows, US business service firms export just 4% of their output compared to 20% for manufacturing firms. While foreign direct investment has grown much faster than trade over the past two decades, and while outward global FDI stock measures $26 trillion – some 33% of global GDP – investment still remains short of its potential.3 The value of US shares in 2012 was $17 trillion, or 106% of US GDP (Federal Reserve 2012). Again, the comparison suggests that globalisation has distance to go.

Conclusions

In 2014, TPP negotiations represent the leading edge of policy liberalisation, with aspirations far beyond the original goals of the Doha Round. According to the calculations of Peter Petri and his colleagues (2013), the TPP could increase US GDP by 0.4%, and the GDP of other partners by larger amounts. Not counting the geopolitical ramifications, it would be a very big deal if the negotiations collapse because of political failure in the US.

References

Federal Reserve 2012 data on equity shares at market value for households and non-profit organizations. http://www.federalreserve.gov/releases/z1/current/z1.pdf

Fontagné, Lionel, Amélie Guillin and Cristina Mitaritonna (2011), "Estimations of Tariff Equivalents for the Services Sectors", No 2011-24, CEPII.

Jensen, J. Bradford (2011), Global Trade in Services: Fear, Facts and Offshoring, Washington: Peterson Institute for International Economics.

World Trade Organization “Parties and Observers to the GPA”, World Trade Organization (accessed on March 7, 2014).

Petri, Peter A., Michael G. Plummer and Fan Zhai, (2013) “Adding Japan and Korea to the TPP” 7 March (accessed on March 7, 2014).

WTO (2012), “Tariff profiles”.


1 "Ocean Tomo 300® Patent Index | Ocean Tomo," www.oceantomo.com/productsandservices/investments/indexes/ot300. Intangible assets also include “goodwill,” usually acquired through M&A, but not usually considered intellectual property. The value of US shares is based on Federal Reserve data on equity shares at market value for households and non-profit organizations.

2 Computable general equilibrium models calculated for the Doha Round, TPP and TTIP show much larger costs (the converse of potential gains) than the trivial figure calculated by the ITC.

3 Based on 2012 figures published by the World Bank, World Development Indicators and UNCTAD.

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Topics:  Global governance International trade

Tags:  globalization, Trans-Pacific Partnership, trade liberalization