Krugman Wrong on the Trans-Pacific Partnership, Again

Paul Krugman

A Paul Krugman op-ed in The New York Times today, “No Big Deal,” incorrectly argues that completing a trans-pacific trade pact would be of little consequence to the U.S. economy. Rather, successfully concluding The Trans-Pacific Partnership (TPP), which includes 12 Asia-Pacific region countries—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States—is vitally important to the U.S. economy and to future global economic integration, as ITIF argues in Concluding a High-Standard, Innovation-Maximizing TPP Agreement.

Krugman argues that the “glory days” of trade deals are over, in part because previous trade pacts significantly reduced many countries’ tariff levels, such that “there just isn’t much more protectionism to eliminate.”

Unfortunately this line of thinking fails to acknowledge the pernicious and growing impact of NON-TARIFF barriers (NTBs) on innovation industries. These barriers include a range of unfair and distortionary practices, such as inadequate intellectual protections on foreign intellectual property (IP), restrictions on trade in services, barriers to digital trade and cross-border data flows, currency and standards manipulation, and localization barriers to trade—policies that mandate local production or the transfer of technology or intellectual property as a condition of market access. Such non-tariff barriers are designed, just like tariffs, to promote domestic firms and industries at the expense of global enterprises.

Of course, what do you expect from someone who doesn’t even think that nations are in economic competition, as Krugman has argued? For Krugman, U.S. companies may compete against foreign ones, but our economy does not compete against other economies. When you combine this view with a liberal Keynesian view that most economic policy simply concerns whether capitalists or labor win, it’s easy to see why he can say why care if companies in the United States are hurt by mercantilist trade policies, including IP theft—it just hurts those companies’ shareholders, not U.S. workers and consumers overall. Of course, Krugman is dead wrong on this as well. As ITIF has written, America’s economy does in fact compete against other economies and foreign mercantilism significantly hurts U.S. workers and consumers as well as the U.S. economy.

And the reality is that global use of non-tariff barriers is significantly increasing, with the World Trade Organization (WTO) identifying an all-time high of 1,560 NTBs reported globally in 2012. In other words, while some countries have decreased their overt tariff barriers, they’ve surreptitiously replaced them with “behind-the-border” NTBs. Worse, the WTO finds that such policies are actually twice as trade-restrictive as ordinary tariff barriers. So, despite Krugman’s rosy claims to the contrary, there’s still plenty of protectionism to eliminate in the global trade system, and its these types of trade barriers that next-generation trade agreements such as the Trans-Pacific Partnership (and the Trans-Atlantic Trade and Investment Partnership) have been explicitly designed to address.

The point is that the trade deals of yesterday—which focused mainly on reducing tariffs—are not like the trade deals of today, because the U.S. economy of today is not like the U.S. economy of yesterday. Rather, the modern U.S. economy is less dominated by exports of commodity manufactured products and more characterized by innovative, knowledge-based and IP-dependent enterprises—both in services and advanced manufacturing industries. Indeed, IP-intensive industries are increasingly vital to the U.S. economy, accounting for nearly 35 percent of U.S. GDP and over $5.1 trillion in economic output in 2010. And a recent study by Robert Shapiro found that intellectual capital in the U.S. economy in 2011 was equivalent to 52 to 59 percent of GDP and that intellectual capital accounts for 44 percent of the market value of publicly traded U.S. firms. This is precisely why we need new global trade rules that recognize and facilitate the increasing global trade in services and knowledge- and IP-intensive products.

For instance, it’s imperative that future trade agreements ensure open cross-border flows of data and unimpeded trade in digital services. This is because 50 percent of all trade in services depends on access to open data and moreover because it’s expected that half of all global economic value will be created digitally by 2025. That makes it critically important that the TPP address countries’ use of localization barriers to digital trade, such as Vietnam’s distortive Decree 72, which stipulates that Internet companies such as Google and Facebook must locate data centers in Vietnam to offer their digital services there.

A successful TPP will also address the central role that innovation and IP-intensive industries play in the modern U.S.—and global—economy. These innovation-based industries develop products such as biopharmaceutical drugs, medical devices, software, music, and movies that are characterized by high initial fixed costs of research, design, and development but low costs of incremental production. They depend on the protection of intellectual property in global marketplaces to earn a fair return on their risky investments in innovation, particularly so that profits can be reinvested to finance future generations of innovation. The success of such innovative industries depends not on making a particular drug, semiconductor, or movie cheaper, but on inventing the next-generation one.

As such, the intellectual property provisions in the TPP are not about “corporations asserting control over intellectual property” as Krugman claims, but about protecting the intellectual property rights of all innovative individuals and enterprises in TPP-member countries, American or foreign. It’s about ensuring that the TPP becomes the group of countries in the world where genuine innovation flourishes to the greatest possible extent and where innovators and artists can be confident their works are protected from being freely expropriated, pirated, or copied. This is a serious issue when software piracy rates exceed 60 percent in countries such as Chile, Brunei, Peru, and Vietnam. In short, trade agreements should be about patents and copyrights because these are critical to healthy innovation industries which bring jobs and economic growth to the nations that properly support them.

And while Krugman attempts to unoriginally smear the TPP as in the interest of “Big Pharma,” the innovative biopharmaceutical drugs that the industry has produced have been responsible for tremendous improvement in global health outcomes, helping to develop solutions to a range of diseases that have plagued developing countries, including malaria, measles, dengue, and AIDS. These companies are now investing billions to address the once-intractable diseases that afflict citizens in developed and developing countries such as Alzheimer’s and cancer. The IP protections in the TPP are not just good for “Big Pharma,” they are good for America, and they are good for citizens around the world.

Finally, Krugman mistakenly conflates low American tariffs with low tariffs on the part of other nations, including our would-be TPP partners. Krugman notes that, “Average U.S. tariff rates have fallen by two-thirds since 1960. The most recent report on American import restraints by the International Trade Commission puts their total cost at less than 0.01 percent of GDP,” vividly pointing out just how open U.S. markets are to exporters from other nations. But Krugman’s wrong that there’s not still a lot of high tariffs throughout the word, or indeed even among our would-be TPP partners. In fact, in 2011, the average most-favored nation (MFN) tariff applied by Chile was 6 percent, by Malaysia 6.5 percent, by Mexico 8.3 percent, and by Vietnam 9.8 percent. Many TPP countries’ tariffs are even higher for the types of advanced ICT products U.S. enterprises manufacture. For instance, Microsoft’s exports of Xbox video game consoles face 20 percent tariffs in Vietnam and 10 percent in Malaysia. And those countries’ tariffs on multi-component semiconductors (and/or the products that use them) made by U.S. firms such as Intel and Texas Instruments remain high—especially relevant since semiconductors are America’s top exporting industry. Put simply—even considering tariff and market access issues alone—the TPP matters deeply to the U.S. economy.

In conclusion, the TPP matters greatly, not least because it will set the standard by which future trade agreements are measured and because it will set the terms of the discussion by which greater global economic integration ensues. At the same time, it will generate genuine economic growth for the United States and the greater global economy. In fact, one analysis finds the TPP will provide global income benefits of an estimated $223 billion per year by 2025, with real income benefits to the United States estimated at $77 billion per year. Moreover, the TPP could generate an estimated $305 billion in additional world exports per year, by 2025, including an additional $123.5 billion in U.S. exports. These numbers matter a great deal at a time when U.S. economic and employment growth remains sluggish.

The TPP is a big deal. And Senate and House leaders should get behind the President in supporting it.

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About the author

Stephen Ezell is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF), with a focus on innovation policy, international information technology competitiveness, trade, and manufacturing and services issues. He is the co-author with Dr. Atkinson of "Innovation Economics: The Race for Global Advantage" (Yale, 2012). Mr. Ezell comes to ITIF from Peer Insight, an innovation research and consulting firm he co-founded in 2003 to study the practice of innovation in service industries. At Peer Insight, Mr. Ezell co-founded the Global Service Innovation Consortium, published multiple research papers on service innovation, and researched national service innovation policies being implemented by governments worldwide.