Auditing the Administration’s TPP “Tax Cut” Claims: Funny Math and Misdirection
Executive Summary
With job-creation claims about the Trans-Pacific Partnership (TPP) falling flat, the Obama administration has shifted to a “tax cut” narrative to sell the deal, claiming it provides 18,000 “tax cuts” for “Made in America” goods. But a review of TPP tariff schedules reveals the 18,000 figure is dramatically inflated. More broadly, focusing on the number of tariff line cuts is a misdirect from the real questions of how the TPP would affect U.S. employment and growth.
The 18,000 figure is obviously wrong. In 2014, the United States exported items relating to a total of 8,687 tariff categories to all of the 11 TPP countries. Even assuming tariffs remained in each category, and many already are duty-free, the pact clearly would not equate to “tax cuts” for 18,000 U.S. products. Moreover, administration documents state that the 18,000 figure refers to tariffs with just the five TPP nations that do not now have a U.S. free trade agreement (FTA). But the United States only exported to these nations under 7,289 tariff categories.
That the administration’s 18,000 figure represents double, triple or quadruple counting also is revealed by reviewing the TPP tariff schedules for Brunei, Japan, Malaysia, New Zealand and Vietnam. None lists more than 10,000 tariff categories with many lines duty-free absent a TPP. But more importantly, redirecting attention to an impressive-sounding number distracts from the real question: Would cutting even 18,000 tariff lines necessarily equate to more U.S. exports, jobs or growth? The U.S.-Korea FTA has almost 10,000 tariff line cuts.
Yet, in its first three years, U.S. goods exports to Korea dropped 7 percent and the U.S. trade deficit with Korea surged 90 percent. The United States already has FTAs with the six TPP partners that collectively represent more than 80 percent of the trade counted in the oft-touted statistic that the TPP covers 40 percent of world trade. Thus, tariffs on U.S. goods going to Australia, Canada, Chile, Mexico, Peru and Singapore already are gone or are being eliminated. So while TPP countries may account for 40 percent of world trade, the TPP would cut tariffs on only 20 percent of that 40 percent share.
Even placing the TPP “tax cut” narrative into that limiting reality, whether cutting tariff with the other five TPP nations would translate into more U.S. exports depends on whether tariff levels in the remaining five TPP countries are sufficient to limit U.S. market access and whether the United States produces, and the TPP countries demand, goods that would obtain cuts.
For 80 percent of the categories in which the United States exports anything to the five relevant TPP nations, we export only small amounts. As shown in Table 1 below, tariff lines in which the United States exported less than $5 million per year comprised 5,830 of the 7,289 export code lines. For 25 percent of the tariff lines, the United States exported less than $100,000. In only 21 tariff lines did the United States export more than $500 million, and some of these lines already are duty free.
As far as the level of existing tariffs, Japan comprises fully 88 percent of the combined gross domestic product (GDP) of the TPP countries that do not already have a U.S. FTA. According to the World Bank, Japan’s average applied tariff weighted by product import shares is now only 1.2 percent. Indeed, the tariff levels in the remaining five TPP countries without a U.S. FTA are generally low. That tariff barriers among the TPP countries are not significant is one reason that prominent economists that supported past U.S. trade pacts, like Paul Krugman, have scoffed at the notion that the TPP could produce significant economics gains.
The raw number of tariff lines countries agree to cut in a trade pact also does not tell us much about how consumer prices will be affected. Average U.S. tariff levels are low, but there are categories for which the United States retains significant tariffs. The TPP includes tariff cuts on the shoes Nike produces in Vietnam to sell here, but currently shoes that retail for more than $100 cost about $10 to make. The tariff is charged on the cost, thus even a major percentage cut does not equate to much money. And, whether a firm like Nike will reduce prices or simply gain more profit on an item imported for sale here is determined by what consumers are willing to pay for the product.
While firms importing goods into the United States determine whether to pass savings related to U.S. tariff cuts on to consumers, the TPP’s reduction or elimination of tariffs does necessarily reduce U.S. Treasury revenue. According to President Barack Obama’s proposed 2017 budget, the TPP would cost the United States about $28 billion in lost tariff revenue over the next 10 years. (The calculation is based on the assumption that the TPP takes effect in 2017.)