By Thomas Cronin
January 27, 2023
The Trans-Pacific Partnership (TPP) was a proposed free trade deal between the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam that, if enacted, would have eliminated most of the trade barriers, such as tariffs, between the signatories. The deal was one of the largest proposed since NAFTA, as the 12 countries together accounted at the time for an annual GDP of over $28 trillion, or approximately 40% of the global GDP, and a third of global trade. While free trade deals were once the subject of significant bipartisan support, the recent emergence of populism on both sides of the political aisle in the United States meant that TPP faced widespread opposition from U.S. policymakers. Prominent contender for the Democratic Party’s 2016 presidential nomination Senator Bernie Sanders, for example, claimed the deal would “[force] American workers to compete against desperate and low-wage workers around the world”, and shortly after assuming office in January of 2017, Republican President Trump withdrew the United States from the agreement before it was ever enacted, citing the outsourcing of U.S. jobs to other countries as a principal concern. Although the U.S. was by far the largest player involved in negotiating TPP, the other 11 countries proceeded ahead without the United States. Consequently, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), borne out of TPP, came into force between the first six signatories—Australia, Canada, Japan, Mexico, New Zealand, and Singapore—in December of 2018, and grew to include the remaining five countries over the course of the next four years.
Geopolitical arguments surrounding TPP are mostly favorable in the United States, likely motivated by the widely-held goal of limiting China’s power, both economic and otherwise, over the Asia-Pacific region—in TRIP’s Fall 2020 Snap Poll of international relations scholars, over 70% of respondents indicated some amount of support for TPP, with nearly 30% expressing strong support:
Still, political rhetoric surrounding the economic effects of free trade deals remains divided, especially surrounding their effect on jobs. Advocates laud trade as an opportunity to create millions of jobs by attracting foreign direct investment and increasing exports, while critics argue that eliminating trade restrictions on developing countries with less labor laws will drive American manufacturing and service industries out of business by flooding the market with cheaper goods than they can produce, leading to a net elimination of jobs, especially for low-income, low-skill workers. This study will evaluate the short-run effects of the CPTPP on unemployment rates in the countries in which it was enacted to determine which, if any, of these claims have proven to be true so far.
The nature of the claims being made by both proponents and opponents of TPP requires a broad evaluation of the labor market conditions of involved countries. CPTPP went into effect in late 2018, so trends from 2019 onwards will be of interest. Because Peru, Malaysia, Brunei and Chile enacted the deal much later than the other members, they will be eliminated from the analysis, and only Mexico, Japan, Singapore, New Zealand, Canada, Australia, and Vietnam will be considered CPTPP countries. In order to evaluate differences in trends by national wealth, both CPTPP countries and non-CPTPP countries will be split into separate groups—developed and developing—as defined by the IMF’s World Economic Outlook database. Unemployment will be calculated by averaging national unemployment rates, sourced from the World Bank’s World Development Indicators, for all members of each group. This study seeks to understand the deal’s effect on CPTPP countries’ unemployment rates separately by varying levels of education compared to global trends in these metrics by non-CPTPP countries in the short run. Higher unemployment rates in developed CPTPP countries (relative to other developed countries) accompanied by lower unemployment rates (especially among workers with low education levels) in developing CPTPP countries relative to their peers will support claims by opponents of TPP that the deal would outsource American manufacturing jobs to involved developing countries with less labor regulations. The inverse, that is, a decrease in unemployment numbers for developed CPTPP countries, will support TPP proponents’ claims that the increased trade prompted by the deal would attract more jobs in the United States.
In the three years since its adoption, CPTPP does not appear to have had a significant effect, positive or negative, on national unemployment rates for developing countries. Developing CPTPP countries (Mexico and Vietnam) had significantly lower unemployment rates on average than other developing countries; in 2018, the mean unemployment rate for these two countries was 2.22%, compared to 7.84% for all other developing countries. This changed very little over the course of the next three years, as the developing CPTPP countries’ unemployment rates decreased in 2019 to an average of 2.58%, while other developing countries’ unemployment rates increased to 8.22%. Both CPTPP and non-CPTPP developing countries saw similar spikes in unemployment in 2020 likely due to the COVID-19 pandemic, and recovered in unemployment at similar rates in 2021 (developing CPTPP countries saw an average 0.04% decrease in unemployment, while developing non-CPTPP countries had their unemployment rates decrease by 0.24%):
Contrary to the opponent of TPP’s expectations that the deal would drive American manufacturing jobs overseas to developing countries with fewer labor standards, it seems that trends in overall unemployment rates in developing CPTPP countries were barely affected after the deal’s enactment, while developed CPTPP countries (Australia, Canada, New Zealand, Japan, and Singapore) actually saw their unemployment rates decrease substantively more than other developed countries. Developed CPTPP countries had notably lower unemployment rates on average both before and after enacting CPTPP than developed non-CPTPP countries. The mean unemployment rate among developed CPTPP countries in 2019 was approximately 4.08%, compared to 5.71% among all other developed countries. This gap narrowed slightly in 2020 when unemployment in developed CPTPP countries spiked marginally more sharply than in other developed countries, but while developed non-CPTPP countries saw their unemployment rates plateau in 2021 at roughly the 2020 rate of 6.62%, developed CPTPP countries experienced a decrease in unemployment from 5.48% in 2020 to 4.54% in 2021. Due to the timing of this change in trends, it is entirely possible that this difference is in part the result of different responses to the COVID-19 pandemic rather than of permanent trends in employment due to enhanced trade conditions with countries with less labor laws, but it certainly calls into question claims that the deal would rob involved developed countries of their jobs in any significant way, at least in the short-run.
This finding is consistent when controls were added for varying levels of education; adults with a basic level of education (primary education only) in CPTPP countries, both developed and developing, fared notably better than adults with basic education in the non-CPTPP countries with the same industrialization levels after the deal’s enactment. Adults with a basic education in developing CPTPP countries saw remarkably constant levels of unemployment after 2018, maintaining mean unemployment rates between 2% and 3% even through 2020, while those with a basic education in other developing countries saw their unemployment rates increase from 8.94% in 2018 to 11.2% in 2020 and 2021. Contrary to the predictions of opponents of TPP, workers with a basic education in developed CPTPP countries actually saw their average employment rates decrease to 9.22% in 2021, down from 9.91% in 2018 just before the deal’s enactment, even as unemployment rates for these workers in other developed countries increased over the same timeframe from 11.19% to 12.69%. As with unemployment overall, workers with a basic education in developed CPTPP countries fared better in 2020 than in other developed CPTPP countries:
CPTPP appears not to have been notably impactful at all for workers in either developed or developing countries with an intermediate (secondary) education. For developed countries, trends existing prior to the deal’s enactment continued for both CPTPP and non-CPTPP countries in 2019, and while CPTPP countries saw their unemployment rates spike in 2020 and 2021 relative to other developed countries, this is again likely due to external factors such as the global pandemic. If this increase in unemployment were the result of jobs fleeing to lower-income CPTPP countries due to less trade restrictions, then these countries should have experienced an equally-significant decrease in unemployment relative to other developing countries at the same time, but this does not appear to be the case; trends in unemployment for workers with an intermediate education were nearly identical after the deal’s enactment between developing CPTPP and non-CPTPP countries through 2021.
Unemployment rates among workers with an advanced education (bachelor’s degree or higher) reflect a similar story; as with workers with an intermediate education, highly-educated workers in developed CPTPP countries experienced increases in unemployment despite decreases in other developed countries:
The opponent of TPP might point to the increases in unemployment among developed CPTPP countries as unemployment decreases in developing CPTPP countries as evidence that the deal has harmed American industries. However, the decrease in unemployment among developing CPTPP countries reflects a trend also present among other developing countries, and if this theory were correct, the increased unemployment should be concentrated among the adults with low or intermediate education levels, as they are typically the ones who work manufacturing jobs. A more likely explanation for lagging employment in 2021 among highly-educated workers in developed countries is that many of them, being on average wealthier and therefore not as dependent on a consistent source of income, chose not to return to work amid continuing uncertainty regarding the COVID-19 pandemic. It seems, then, that CPTPP’s effect on employment in the short-run for developed countries has in fact been mostly beneficial, with benefits concentrated among low-education workers.
Finally, in order to estimate whether the generally positive effects that CPTPP appears to have had on its members’ labor market conditions would be replicated in the United States had it remained a member of the deal, I ran a difference-in-difference estimator comparing the United States’s unemployment rates before and after CPTPP’s enactment to New Zealand’s. New Zealand was an ideal choice for this test given its membership in CPTPP, generally strong economic position, and highly similar levels of and trends in unemployment to the United States’s after 2014:
Because breakdowns by education levels reflected similar trends in both countries, I chose to use unemployment overall as the variable of interest for this test. As previous results indicated, the difference-in-difference estimator found CPTPP membership to be associated with a lower unemployment rate, in this case a massive difference of 1.83%. While this outcome is certainly interesting, it is difficult to tell how much of this difference is actually the result of CPTPP membership; because the United States was hit so much harder than New Zealand by the COVID-19 pandemic, it seems reasonable to assume that much of the difference in the two countries’ unemployment rates following CPTPP’s enactment is down to stricter shutdown measures and decreased consumer demand brought on by the pandemic, especially in 2020. Without more post-pandemic data, it is difficult to estimate how much of an effect TPP would have had on the United States’s labor market specifically. Still, given that global unemployment trends indicate that low-education workers in developed CPTPP countries on average recovered faster from the pandemic than in developed non-CPTPP countries, it is unlikely that CPTPP’s role in New Zealand’s more favorable unemployment rates is negligible, and these comparatively better trends are driven by low-education workers.
In being followed by better trends in unemployment rates for developed countries in which it was enacted relative to the rest of the world for the lowest-education workers, at least in the short term, data on CPTPP’s aftermath contradicts arguments often made by American opponents of TPP—that the deal would lead to higher unemployment by making it easier for developing countries with looser labor laws than the United States to out-compete American workers in manufacturing industries, at least in the short-run. This, and the far more encouraging trends in New Zealand specifically, whose unemployment rates strongly mirrored the United States’s pre-CPTPP, relative to the United States, suggests that the United States labor market would have benefited in the short-run from remaining a member of TPP.
Importantly, these results should not be interpreted as an all-encompassing endorsement of the economic effects of CPTPP or of free trade generally. National unemployment rates are affected by so many factors that it is extremely difficult to definitively trace trends in any of them back to a single source, especially over a shorter time frame. It is certainly compelling that CPTPP countries on average seem to be performing better than other countries with similar economic circumstances after the deal took effect, but proving to what extent that CPTPP is directly responsible for these positive trends is near-impossible. There are also many other purported economic implications of free trade deals outside the scope of this blog post on factors such as average wage levels, GDP, average price levels, and government spending, that ought to be taken into consideration when calculating any deal’s overall economic ramifications. It should also be noted that while initial outcomes seem mostly positive, it remains to be seen whether these trends will continue in the long run. This is important to remember with regards to unemployment, as companies moving their factories and other inputs overseas is a process that takes time, especially when interrupted by a global pandemic.
Still, CPTPP’s initial outcomes appear to be relatively positive, which, even if not a reliable estimate of future prosperity, is a useful finding. It is not uncommon for politicians opposed to trade deals to portray their purported effects as near-instantaneous; in his 2016 presidential campaign, for example, President Trump famously derided TPP as “a continuing rape of our country” and promised he could “turn around” the purported negative effects of free trade in general “fast”. Hopefully this analysis shows, though, that this rhetoric is misguided, and those sympathetic to Trump’s position on TPP should, in the face of future trade deals, take solace in the fact that the industry-wide layoffs that he warned of will take time to happen, if they occur at all. The destruction of entire industries, even if it doesn’t happen right away, is still certainly a cause for concern, so these preliminary results do not by any means disqualify the entire protectionist economic view. Nevertheless, the generally positive aftermath of CPTPP so far indicates that TPP would not be quite as destructive as its opponents suggested, and that the United States might have been better off, at least in the short run, remaining in the deal after all.