The TPP: A big deal, but how big?
The net effect of the Trans-Pacific Partnership will likely be to increase total income in Canada, but the real question is what kind of an increase it will be: a one-time shift in the level of income, or a sustained increase in its rate of growth? It’s hard to distinguish between the two concepts in the short term, but the distinction is crucial in the long term.
A permanent, one-time increase of (say) one per cent in total income in Canada would be equivalent to an additional $20 billion in GDP, or about extra $550 in average per capita income, year after year. This isn’t so small as to be insignificant or not worth picking up off the table, but it’s not transformative change, either.
This has to be kept in mind when discussing the gains to be had from trade liberalization. On the import side, increased access to cheaper foreign suppliers will improve consumers’ purchasing power. And on the export side, the efficiency gains obtained by shifting employment and investment to sectors where Canada has a comparative advantage increases total productivity and income. But even though these gains are permanent, they only occur once. From this perspective, the TPP — like the other trade agreements that Canada has signed — is not that big of a deal. And since trade barriers have already been reduced by decades of multilateral negotiations, the gains from further reductions are modest. Trade liberalization increases the level of income, not its longrun growth rate.
If a one-time increase of one per cent is a relatively minor change, a one percentage point increase in the growth rate of income is a very big deal indeed. In an economy where incomes are growing by one per cent a year, incomes double every 70 years. If that growth rate could be increased to two per cent, that length of time is halved: incomes would double every 35 years.
The only way to generate sustained increases in per capita incomes is by increasing the rate of technical progress: increasing the stock of physical capital eventually runs into diminishing returns, and finite life spans impose their own limits on how much training workers can profitably absorb. We hear a lot about how modern trade agreements are about much more than simply lowering tariffs and other barriers to trade, and part of this is due to an increased recognition of how they can also affect growth rates.
These concerns go a long way in explaining why intellectual property (IP) rights have become so important in trade agreements.
Because research and development (R&D) activities are an important source of the new ideas that make sustained technical progress possible, R&D plays a key role in modern theories of economic growth. And IP rights play a key role in supporting R&D.
In his seminal 1990 article, Endogenous Technical Change, Paul Romer identified a couple of crucial features about new ideas. Firstly, they are what economists call non-rival goods: more than one person can share a new idea without affecting its usefulness to other people. In the absence of at least some IP protection, it would be almost impossible for firms or researchers to cover the costs of R&D. IP devices such as patents give their holders a temporary monopoly in the use of a certain technology, and those monopoly profits can be used to cover the costs of R&D.
Secondly, the development of new technologies generates positive spillovers: people
Trade deals boost per capita income. But the real hope is that it increases the rate of income growth, too
who are exposed to new ideas are more likely to come up with new ideas of their own. Because firms engaging in R&D have to absorb all the costs, but only receive some of their benefits, they will underinvest in R&D; this is an argument for government support for R&D. (The same logic is used in reverse for activities that generate negative externalities, such as pollution.)
These two points work against each other. If IP protection is too weak, firms can’t cover the costs of R&D, and technical progress slows. If IP protection is too strong, other researchers can’t take advantage of the positive spillovers from new ideas, and technical progress slows.
Removing trade barriers will provide a one-time boost to incomes.
But whether the TPP increases growth rates comes down to how well it balances these competing arguments. We still don’t know what the TPP says about IP, or if Canada will have to change its laws to conform to the TPP. But we should be careful about assuming that stronger — or weaker — IP rules are necessarily a bad thing.