Two recent studies quantifying the effects of the two major domestic protectionist acts (Brexit and the United States’ withdraw from the Trans-Pacific Partnership (TPP)) provide useful and insightful data on how various trading partners will be effected. A key take away from both studies is that the party that pulls out of a trade deal stands to lose the most.
The CanadaWest Foundation Report
The CanadaWest Foundation report that was released on June 13, 2017, entitled The Art of the Trade Deal: Quantifying the benefits of a TPP without the United States quantifies the effects of the United States’ withdraw from the TPP. The report identifies the winners and losers resulting from a TPP without the United States.
TPP11 Winners and Losers
The report primarily focuses on the continuing benefits to Canada and Mexico under what a TPP would look like with only 11 parties, referred to as the “TPP11.” According to the report, Mexico stands to gain the most as a result of the United States pulling out of the deal. Mexico’s expected increase to gross domestic product (GDP) between TPP12 and TPP11 goes from 0.008% with the United States included to 0.157% without. Canada goes from 0.068% to 0.082%. Japan, drops from a 0.135% increase to 0.039%. The biggest hit, though, is felt by Vietnam. It’s expected increase to GDP drops from 1.896% for TPP12 to 0.48% for TPP11.
As for the US, it’s expected gain of 0.033% to its GDP by joining TPP12 is reversed and predicted to result in a net loss to GDP of 0.008% GDP if TPP11 goes ahead without it. Finally, according to the study, China, India, Korea, Taiwan all benefit from the US leaving the TPP by reducing the negative impact on their respective GDP’s that would have invariably occurred if TPP12 would have gone forward as planned. Walking away not only directly harms US interests vis-a-vis the other trading partners within TPP, it makes it harder for US business to compete effectively across the entire APEC region.
The report also points out that it may be difficult to achieve these results under TPP11 if intellectual property litigation, Investor State Disputes Settlement (ISDS), and data governance remain sticking points. The rules governing these three issues set forth in the TPP were driven largely by US interests. Without the United States to push forward on their continued inclusion, it is not clear how much life these initiatives will continue to have as part of the TPP11 discussions.
Another interesting aspect of the report is how it drew a distinction between the knowledge economy and the economic factors that typically inform trade negotiations: goods, services and foreign direct investment (FDI). The United States is a leader in the knowledge economy and without the United States as part of the TPP, it is unknown if the result will be beneficial, immaterial or a detriment to the remaining parties.
Trade deals typically do not see the knowledge economy as a discrete area of concern. It is often the by-product of intellectual property rules, trade in high value services (financial, information technology), unrestricted data flows, and the mobility of related workers. How those features are addressed under TPP11 will be something to watch for. The stronger these elements are in a TPP11 deal however, the more leverage the TPP11 members could have if and when the United States engages in separate bilateral negotiations with one or more of the members.
The German Study on Brexit
Also this month, The German Federal Ministry of the Economy released a similar study it had commissioned from the IFO Institut entitled Ökonomische Effekte eines Brexit auf die deutsche und europäische Wirtschaft. The study models economic harm resulting from Brexit and a follow-up free trade agreement (FTA) between the United Kingdom (UK) and the European Union (EU27). The study is unique in that it looks at the economic harm from an EU27 perspective.
The study evaluates the economic cost to both the EU27 and the UK resulting from Brexit. According to the study, if there is no trade deal between the UK and the EU27, the UK GDP will suffer a 1.7% drop while the EU GDP will suffer a 0.3% drop. If there is an FTA the UK GDP would suffer only a 0.6% drop while the EU GDP would suffer only a 0.1% drop.
FTA will reduce the losses from Brexit
An intriguing aspect of the study is that in dollar terms, the loss ratio in GDP value between the UK and the EU27 is around 54/46 against the UK in both scenarios. Under scenario one with no FTA, both the UK and the EU27 lose a combined GDP value of $88.9 billion. While under scenario two, with an FTA in place, the combined loss is $58.0 billion.
At least two questions come to mind when evaluating this data. First, if it is possible to reduce the net loss between the two scenarios through a negotiated FTA, then why would not both the UK and the EU27 be incentivized to strike a deal? Second, if both the EU27 and the UK were going to lose out under either scenario, why didn’t the EU do more to keep the UK in when it negotiated to avoid Brexit in early 2016?
Quantifying protectionism, the result
What the CanadaWest Foundation report and the German study suggest is that there is a developing body of work that is looking at the economic implications on trade flows and GDP that result from these domestic protectionist political events.
In the case of Brexit, the UK went in with their eyes (relatively) wide open on the implications for leaving the EU. The repercussions from the irreversible decision to withdraw are only now beginning to be felt. However, they may not be of lasting significance if a “soft” Brexit – one where there is a negotiated solution between the EU and the UK on trade issues – does indeed pan out.
In the US, the decision to withdraw from TPP has been taken however, it can be reversed. The major issue today is over NAFTA. A US unilateral withdrawal from NAFTA would produce a devastating result on the US economy. Mexico and Canada would also most certainly be hurt. But if there is any, one single lesson from both the CanadaWest report and the German study it is this: the one who pulls out of a trade deal first loses the most.