TPP Won't Be a Game Changer For the Economy

The twelve nations of the Trans-Pacific Partnership (TPP) reached a final agreement this week in Atlanta, setting the stage for Congress to vote up or down on the agreement in the last year of Barack Obama’s presidency. Approving the free-trade deal will surely entail a titanic legislative battle, with progressives such as Senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) opposing the agreement, and pro-business Republicans and the president on the other.

But when one looks at the actual effects of the TPP on tariff rates, the whole debate seems to be a tempest in a teapot. It will not be a disaster as progressives claim—there is near-universal agreement among economists that the benefits of free trade outweigh the costs—but it will not usher in a renewed era of economic growth.

One of the main goals of the TPP is to reduce tariffs among the twelve partner countries. When a nation imposes import tariffs, consumers face higher costs. This is beneficial for domestic industries which compete with goods from abroad, but terrible for everyone else. The U.S. Chamber of Commerce estimates that imports increase the purchasing power of the average American household by $10,000 per year. Lowering tariffs is an admirable goal.

But these tariffs are already quite low. In the post-World War II era, tariffs across the world fell through several rounds of negotiations. In the United States, the average tariff on imported goods approached 60 percent in the 1930s, but fell dramatically throughout the second half of the twentieth century. Now, the weighted average tariff on all imports to the United States is a near-insignificant 1.5 percent. Import restrictions are no longer holding back the American economy as they once did.

The United States also has an interest in lowering tariffs that other countries impose, so American producers can more easily sell their goods in foreign markets. But the average tariffs on all imports to TPP countries are also quite low, concentrated in the low single digits—hardly protectionist.

In the past two decades, the nations included in the TPP have made substantial progress reducing their tariffs to the low levels that they sit at today. Ten of the twelve nations have cut their average tariffs by half or more, including major trading partners of the United States such as Mexico (55 percent reduction) and Japan (69 percent).

None of this is to suggest that America should abandon the TPP. There is still work to do on tariff reduction, along with easing other trade regulations. For instance, Malaysia imposes a 50 percent tariff on imports of American motorcycles. Vietnam levies a 70 percent tariff on American cars. One of the most egregious examples is Japan’s tariff on American rice—778 percent.

Scrapping these tariffs would help specific American industries gain a competitive edge, but the overall effect on the American economy will be muted—a paltry 0.4 percent of GDP by one estimate. Free trade helped America achieve the high-income status it enjoys today, but most of those gains have already come, and scraping the bottom of the tariff-reduction barrel will not yield many more.

If President Obama wants a game-changer for the anemic American economy, he should look to domestic tax and regulatory reform. Unfortunately, on those points the TPP does not address what is really holding back U.S. growth.

Preston Cooper is a Policy Analyst at Economics21. You can follow him on Twitter here.

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