Home' Trinidad and Tobago Guardian : June 4th 2015 Contents JUNE 2015 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
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The Trans-Pacific Partnership, a proposed trade
agreement, would ease commerce between
America, Japan and 10 other countries that
between them account for two-fifths of global
GDP. How beneficial would it be to these
economies, though? Advocates claim that it
would boost their output by nearly US$300 billion in a decade.
Critics say that it would make little or no difference. The dis-
agreement reflects the difficulty of gauging the impact of free-
Almost all economists accept the benefits of free trade as
laid out in the early 1800s by David Ricardo. Countries do
well when they focus on what they are relatively good at pro-
ducing. However, Ricardo looked at only two countries making
two products, at a time when few non-tariff barriers such as
safety standards existed. This renders his elegant model about
as useful in analysing contemporary free-trade deals as a horse
and carriage are for predicting the trajectory of an aircraft.
Instead, most economists use what is known as computable
general-equilibrium analysis. CGE models are built on a
database that seeks to describe economies in full, factoring
in incomes, profits and more. Researchers line up things so
that the model yields the same output as a real benchmark
year. Once that is achieved, they "shock" the model, adjusting
trade barriers to see how outcomes shift, both immediately
and in the long term.
There is much to recommend CGE. It is the only trade
model broad enough to encompass services, investment and
regulations, all of which lie at heart of the TPP debate. It also
generates predictions that policy-makers want: which sectors
will do well and how incomes will change.
CGE has big drawbacks. First, it is dependent on data, which
can be patchy in some areas. Second, faulty assumptions can
lead forecasts quickly astray.
Studies of the TPP illustrate these strengths and weaknesses.
The most influential, by Peter Petri, Michael Plummer and
Fan Zhai for the East-West Center, a research institute, forecasts
that the deal would raise the GDP of the 12 signatories by
US$285 billion, or 0.9 per cent, by 2025. It is their numbers
that America s government cites when it says that the TPP
would make the country US$77 billion richer.
Their model tries to avoid some of the common failings of
CGE Their assumptions are transparent, include a range of
scenarios and are often conservative, for example, they expect
only slow and partial implementation. That makes the results
Subjective elements of the model still have a huge impact,
however. The authors use a new approach to predict that more
companies will become exporters as the costs of trade decrease.
That may be an improvement over previous theories, which
assumed a constant number of exporters, but this one tweak
greatly changes results: It makes the benefits some 70 per
cent bigger, according to a study for Canada s CD. Howe Insti-
tute by Dan Ciuriak and Jingliang Xiao.
Some assumptions also are debatable. The researchers cal-
culate that increased protection of intellectual property is ben-
eficial for all countries. A review of studies of the TPP funded
by the British government, by Ciuriak, Badri Narayanan and
Harsha Vardhana Singh, questions that: Stronger protection
for intellectual property should spur more investment by pro-
ducers, they write, but it also can raise costs for consumers
beyond what is necessary to encourage innovation and slow
the spread of technology to developing nations.
That also points to one of the many blind spots in CGE
models. Most use figures from Purdue University s Global
Trade Analysis Project, the best database available. Since
initially it was developed for agriculture, however, it is skewed.
It has separate categories for raw milk and dairy products, but
lumps pharmaceuticals into one overarching category for
chemicals; a problem for models, since the TPP deals extensively
with drugmakers intellectual property. Given that uncertainty,
Ciuriak and Xiao exclude any impact from enhanced protection
of intellectual property.
They also use a more conventional model for exports. They
calculate that the TPP would raise the GDP of the 12 countries
by only US$74 billion by 2035, a mere 0.21 per cent higher
than baseline forecasts. Others see an even smaller impact.
In a paper for the Asian Development Bank Institute, Inkyo
Cheong forecasts that America s GDP would be entirely
unchanged by the TPP
That raises the question of whether the TPP is worth pursuing
at all. As complex as the CGE studies are, they are only models,
peering into the future through a haze of assumptions. It is
thus important to buttress them with studies of completed
The Asia-Pacific region is an ideal laboratory, because it
went from five free-trade agreements in 1990 to more than
200 in 2015. A new Asia-Pacific Economic Cooperation study
finds that, in the five years after an agreement, participants
exports increased on average by nearly 50 per cent relative to
the five prior years. The researchers then control for factors
such as GDP and distance, isolating free-trade deals as a
variable. Those with the biggest impact share certain features:
They have more members, bring together developed and devel-
oping economies, and aim to eliminate non-tariff barriers as
well as tariffs.
This suggests that the gains to be had from freeing trade,
even if diminishing, are far from exhausted. That does not
necessarily make the TPP the right way forward, however.
Almost all studies agree that its principal limitation is size:
It is not big enough. Specifically, the exclusion of China is
costly. The Petri study concludes that a more inclusive Pacific
free-trade deal, with weaker rules on state-owned companies
and intellectual property, would lift income gains for the
original 12 TPP members, including America, to US$760 billion,
more than double the boost from the TPP.
Such precise CGE forecasts ought to be taken with a pinch
of salt. The moral is clear enough, though: The objective should
be to bring more countries into the tent, not to push for overly
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million and invests in some smaller Puerto Rico agencies.
Each of the funds is wagering in one way or another that
Puerto Rico and its public agencies can raise revenue and cut
costs before the Government Development Bank, lender to
the commonwealth and municipalities, runs through its cash.
Angelo Gordon, Knighthead, DE Shaw & Co and units of
Goldman Sachs Group Inc. are among 11 firms that agreed to
delay a default on nearly US$5 billion of Prepa s debt until
Thursday. In a restructuring plan presented to creditors Monday,
the power agency said it can t support its debt service through
existing cash flow and recommended at least US$2.3 billion
of investment to modernise operations and restore its finances.
Bondholders said the proposal is a basis for further talks, while
calling some aspects "unworkable."
"While elements of the plan were positive from our per-
spective, there were also aspects that were unworkable and
will require further negotiation," Stephen Spencer, a managing
director at adviser Houlihan Lokey, said in an e-mailed state-
Knighthead s Tom Wagner said in a statement that the firm
continues to "believe that a constructive solution can be found
that will result in Prepa receiving the capital funding needed
to modernise its infrastructure" in a way that provides "more
reliable service to consumers."
Representatives for Angelo Gordon, DE Shaw and Goldman
Sachs declined to comment.
During Lehman s bankruptcy, Angelo Gordon, Knighthead,
DE Shaw and Goldman were among investors that railed
against a restructuring plan advocated by a group of creditors
led in part by Fir Tree and Canyon Capital Partners, court
Fir Tree, the New York-based investment firm founded by
Jeffrey Tannenbaum, aligned with Monarch Alternative Capital
and Stone Lion Capital Partners in other parts of the Lehman
bankruptcy, the records show.
Fir Tree is now helping to lead a group of 35 firms that
mostly own general obligation bonds. That also includes
Monarch and Stone Lion. Canyon is also in the group, according
to two people with knowledge of the matter.
Representatives for Canyon, Monarch and Stone Lion didn t
respond to telephone and e-mail messages while a spokesman
for Fir Tree declined to comment.
If the commonwealth can t come to an agreement with that
group on a planned sale of US$2.9 billion of new debt backed
by oil taxes, the GDB will run out of money by September
30, according to the commonwealth s latest quarterly filing
on May 7.
"We just blew the whistle of the first quarter of what will
be a full game in Puerto Rico," Michael Lipsky, a partner at
MatlinPatterson Global Advisers, said in an interview at his
New York office. Matlin, which manages $5.8 billion, is invested
across Puerto Rico debt, Lipsky said. "The cadence will quicken."
The TPP: A weighting game
A constructive solution
From Page 18
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