Trans-Pacific Partnership: A Grand Name for More Really Dumb Trade Policy

Although I promised an article on this topic back in the spring, another very intensive project has diverted my attention since then.  My apologies. 

The “Trans-Pacific Partnership” (TPP) began life in 2005 as a small agreement between three countries:  Chile, New Zealand and Singapore.  The tiny country of Brunei soon joined the pact.  Never wanting to miss out on any trade deal, the U.S. joined in 2008, followed by Australia, Vietnam, Peru, Malaysia, Canada, Mexico and, most recently, Japan. 

Of course, the United States already trades vigorously with all of these nations, following the precepts of the World Trade Organization.  The TPP aims to liberalize trade among these nations even further. 

The problem with the TPP is that, like all free trade agreements, it’s based on the assumption of early-19th century trade theory that, rather than being a zero-sum game in which one nation wins and the other loses, free trade promotes efficiency and stimulates further economic growth and more trade.  However, the theory assumes that all people of all nations are equal in their capacity to consume products because, even to this day, economists don’t recogize the inverse relationship between population density and per capita consummption, and the role of that relationship in driving huge trade imbalances.

The TPP is further evidence of the folly of applying free trade theory blindly across the board with all nations.  In 2012, the United States suffered a trade deficit in manufactured goods with TPP nations of $59 billion.  But, when broken down by the population density of each nation, the results are starkly different.  With the five nations less densely populated than the U.S. – Australia, Canada, Chile, New Zealand and Peru – we enjoyed a trade surplus with each of them in manufactured goods totaling $100.4 billion. 

However, it’s a very different story for the six nations that are more densely populated than the U.S. – Brunei, Japan, Malaysia, Mexico, Singapore and Vietnam.  With that group of nations, the U.S. suffered an enormous trade deficit in manufactured goods in 2012 of $159.4 billion.  Among this group of nations, the U.S. did have a trade surplus with two of them – by far the tiniest – Brunei and Singapore.  Singapore is a tiny city-state – slightly larger than Chicago, but with twice as many people.  The effect of population density upon trade imbalances doesn’t apply in such cases because such city-states manufacture virtually nothing.  (They tend to be hubs of services, like financial services, which they trade for manufactured goods.)  Brunei is also tiny – about the size of Anchorage, Alaska, and is one of those rare examples of a tiny nation virtually afloat on a sea of oil and gas, which it trades for manufactured goods – similar in that regard to only a handful of other tiny nations like Kuwait and the United Arab Emirates.  Together – Singapore and Brunei accounted for a U.S. trade surplus in 2012 of only $4.8 billion. 

The five nations less densely populated than the U.S. comprise an area of 7.4 million square miles.  The six nations more densely populated comprise an area of only 1.2 million square miles.  So, the nations of TPP that account for only 14% of the land surface area not only completely wipe out the surplus we enjoy with the other 86%, but they account for an additional loss of $59 billion. 

You might argue, as economists would, that it’s actually low wages or perhaps currency manipulation that cause the trade deficits among those more densely populated nations.  You’d be wrong.  Expressed in per capita terms, our largest trade deficit by far is with Japan, a nation whose wages are on a par with other wealthy nations among the PPP.  And, in spite of Japan’s currency gaining 36% in value since 2001, our trade deficit with them actually worsened by 13%.  It’s actually Japan’s population density – ten times more densely populated than the U.S. – that drives our trade deficit with them. 

The reasons for the disparity in trade results with the TPP nations are clear – at least to me and to anyone willing to invest the time to study the effect of population density on per capita consumption.  Extremely densely populated nations come to the trading table with nothing to offer but badly bloated labor forces and markets that are stunted by severe over-crowding.  They’re hungry for work,  unable to consume their own productive capacity.  In effect, they’re looking for someone to relieve them of their inevitably high unemployment by taking it upon themselves.  Free trade with such nations is, in fact, closer to a zero sum game where their gain is our loss, and is tantamount to economic suicide. 

Wouldn’t it be much smarter trade policy to liberalize trade with the less densely populated nations and utilize tariffs to assure a balance of trade with the others?  Oh no, economists would respond, that would be “protectionist,” as though protecting oneself from parasites (what else can it be called when one feeds on another’s market to sustain themselves?) is somehow a bad thing.  Better to not rock the boat, so that the president can enjoy pleasant conversations around the punch bowl at G20 and TPP meetings.  Who cares if it results in a few million Americans losing their jobs?

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