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Median household income in the United States has stagnated for decades, and reaping more gains from trade could be one way to boost it. Trade supports higher-paying jobs; increases innovation and productivity growth, which are necessary to raise living standards; and expands the purchasing power of consumers.
The Trans-Pacific Partnership (TPP), negotiated by the United States and 11 other countries along the Pacific Ocean, would knit together a market covering nearly 40 percent of global GDP. The agreement would eliminate nearly all the tariffs facing American exporters, break through many of the often formidable nontariff barriers companies face, and also help level the playing field by requiring more stringent labor and environmental standards.
The agreement has documented benefits for the US economy. One study by Peter Petri and Michael Plummer finds that the TPP will increase real incomes by $131 billion annually by 2030, the equivalent of nearly $1,000 per household, while expanding US exports by $357 billion annually. Moreover, Petri and Plummer find that delaying the TPP for even a year would result in the US economy losing $94 billion in total gains in net present value.
But many Americans remain skeptical about the TPP in particular and trade agreements in general. These concerns relate to the impact trade would have on income inequality and on workers who will be displaced by the agreement. Let us consider each of these concerns in turn.
First, while both labor and capital would gain from the TPP, the Petri-Plummer study finds that the percentage gains to labor would actually be greater than the gains to capital. In addition my colleague Tyler Moran and I have found that US households in all quintiles of the income distribution will benefit. Once differences in spending shares are taken into account, the percentage real gains to poor and middle-class households are actually slightly larger than the gains to those at the top. Thus the TPP will not only confer net benefits to households at all levels of income but also slightly reduce income inequality.
The second major concern is that the TPP will displace US workers. It is important to understand that the large majority of job displacement that US workers face is the result of technology, market developments, and other factors. But there is no question that adjusting to Chinese import growth in particular has been costly for US workers. Although the TPP will generate job growth by stimulating US exports, it will undoubtedly also result in some US workers losing their jobs to import competition.
But perhaps surprisingly, even when the costs of any worker adjustment are taken into account, the TPP is still a good deal. The costs of job loss can be substantial for individual workers who are displaced, but in the aggregate these losses are likely to be a small fraction of the agreement’s overall benefits for workers.
That said, being laid off is a very painful experience. While a few workers may be fortunate to quickly find new jobs, most will not be that lucky. Some workers withdraw from the labor force. Others accept jobs that pay lower wages because they change occupations or lose seniority. Moreover, the lifetime impact for displaced workers is much larger than the initial wage loss and cost of unemployment because changing jobs can lower the trajectory of their earnings throughout their subsequent working life.
We estimated the costs that the TPP would impose on displaced workers using the severe assumption that each displaced worker will lose 1.4 times their annual income over their lifetime. Costs to workers are explored under various assumptions about the ability of firms to adjust to increased import competition (by reassigning workers to meet demand growth from other sources or not hiring as many workers as they normally would) and voluntary attrition. We find that between 2017 and 2030 the annual benefits from the TPP for workers are between 12 and 100 times the costs, depending on the assumption. Moreover, after 2030, the TPP becomes the gift that keeps on giving, since, once the US economy has adjusted, it simply reaps the annual benefits that grow with the volume of trade. Moreover, by expanding the size of markets and keeping companies on their toes, the TPP could expand innovation and raise economic growth as well.
These findings lend support to the passage of the TPP, but they also suggest there is a case to compensate those who lose. Since much of the loss occurs even after workers have found new jobs, there is a need for a wage-loss insurance program that supplements the earnings of displaced workers who accept jobs that pay less than they previously earned. An expanded Trade Adjustment Assistance program with more generous wage-loss insurance than the current program should be part of the legislation implementing the TPP. It would be even better, if Congress followed the Obama administration’s proposal and passed a similar program for all displaced workers, regardless of the reasons for their displacement. But none of this is a reason to delay an agreement whose most important impact will be more higher-paying jobs and benefits for consumers.
Robert Z. Lawrence is a Professor at Harvard Kennedy School and Non-Resident Senior Fellow at the Peterson Institute for International Economics.
