Analysis and Recommendations
Teri Nolan Range | International Conflict G-40 | October 27, 2016
Word Count: 1800
What began as a request by President George W. Bush in 2008, to join negotiations with Vietnam, Malaysia, Mexico, Canada, and Japan, in trade negotiations, has developed into a full-scale international trade treaty with 12 countries that account for more than 40% of the world’s GDP, and 1/10th of the world’s population (Schmelzer).
Per the Congressional Research Service, “the agreement cuts over 18,000 tariffs. Tariffs on all U.S. manufactured goods and almost all U.S. farm products would be eliminated completely, with most eliminations occurring immediately and would be the largest U.S. FTA by trade flows ($905 billion in U.S. goods and services exports and $980 billion in imports in 2014)”. This agreement encompasses more than 40% of global GDP (Fergusson).
While the President has already signed the TPP, received Fast-Track Authority from Congress, and is lobbying the current Senate for immediate ratification, I propose that the President withdraw the legislation and work to draft a new trade agreement-outside of the TPP. The new plan would encompass regional reduction in trade barriers, but ignore the contentious non-tariff-barriers (NTBs) that are causing major pushback from industry and citizen protection groups, and causing the delay for ratification in Congress.
Figure 2 Source 2013 World Bank
In February of 2016, President Barack Obama signed the Trans-Pacific Pact, along with 11 other countries in Asia and Latin America. The countries include, Mexico, Chile, Peru, Australia, Brunei, Darussalam, Japan, Malaysia, New Zealand, Singapore, and Vietnam. These countries, together, represent 40% of the world’s GDP and per the Brookings Institute covers not only a substantial fall in trade barriers between these countries, but also covers complex issues such as investment, services, government procurement, SOEs, SMEs, labor, environment, competition policy, food-including GMOs- and privacy (Schmelzer).
What makes this deal contentious, however, is that corporate interest stepped in with demands that went far and beyond what is historically included in trade liberalization. Lobbyists referred to this as “trade for the 21st century” with demands for Union protections, for example. These demands ultimately did not get approved by the members of the World Trade Organization due to heavy input from India and other non-union participating countries.
China, has taken offense to the U.S. lead TPP negotiations and has suggested it is an attempt to block China and remove their economic power. Dong Tao, research analyst at Credit Suisse, conveyed in an interview with the Brookings Institute’s Mireya Solis, “judging from local press reports the initial reaction from China about TPP seems quite negative, with many apparently believing it was designed to contain China’s economic power.” Solis also reports that Goldman Sachs’ analysts say that even if China wanted to join the TPP, which is unlikely due to their protectionist policies, barriers to entry are high (Solis).
The final deal has now been brought to the U.S. Congress and has been approved for Fast Track Authority. It currently awaits Senate ratification. Depending upon the President elect, political analysts suggest President Obama may push for ratification in the lame-duck session.
Most of the Democratic and the Republican party leaders oppose this treaty. Hillary Clinton had been pro-TPP, even calling it the “gold-standard of trade deals,” but now waffles in the face of an election (Bader). Asian news reports and some U.S. policy advisors report they suspect she will push this ratification, once elected (Greenville). Further, economists presenting to the Council on Foreign Relations say, the winners from the TPP arrangement will be the ASEAN/Asian countries, including Vietnam.
Per the Office of the United States Trade Representative, the “TPP includes the most robust enforceable environment commitments of any trade agreement in history” (White House). China, although not part of the agreement, will benefit with positive spillover effects and that it will not have to comply with the overwhelming EPA/environmental mandates. Yet, the USA corporations (all) must comply with these new rules, adding significant cost to their production and bottom line.
While the TPP is reported by proponents to be of great benefit to the U.S. and other developed nations, the International Monetary Fund and others are showing data to the contrary. Reports are that the developed countries, such as the U.S., will have rates as low as .07% income growth, while the greatest beneficiaries like Vietnam, will enjoy growth above 22% (Cardeiro). Further, the countries that are more open and have stronger existing trade with TPP members tend to face larger negative spillovers. But, non-participating members may in fact, appreciate a great level of benefit (Cardeiro). (Note: Charts with the IMF statistics could not be copied from the available .pdf, but are available in works cited via links below)
Figure 3 Source World Bank Data on TPP Estimations of Growth. Numbers vary across studies.
However, non-tariff barriers (NTBs) are in many cases a bigger obstacle to trade than tariffs, per analysts in recent university studies (Alden). One of the larger concerns is that it would elevate individual corporations and investors to equal status with sovereign nations for enforcement, by way of an investor-state dispute settlement mechanism. In effect, this means that foreign corporations would be able to take the U.S. Government to international court -before foreign tribunals-to enforce its policy agreements that it feels are violated. There are no limits to the volume, frequency, or compensation that might be awarded in these international tribunals, and no protection in American courts.
Further, criticism comes from the political sector including Senator Bernie Sanders whom argues that trade agreements like the TPP “have ended up devastating working families and enriching large corporations (Sanders).”
Other non-tariff barrier concerns include:
*The ban on data (flow across international borders) aspect of the TPP, excludes privacy of personal financial and health data, and the full rights to all social media, which means that the information is available for transfer to foreign entities and governments. Social media firms, Health firms, and Banks are upset that this exclusion exists, having committed to Americans that their privacy would not be compromised. Canada and others in the TPP are also arguing as they do not want their own citizen data held in the USA, due to the NSA and other privacy breeches.
*Pharma patents will extend to 8 years (and may increase to 12) and will prohibit generics from entering the market which will drive health care costs up dramatically. Currently, the U.S. is facing a health care cost crisis placing many in further hardship, and this legislation appears as though it will make room for further price controls by the big corporations (Bollyky).
*Wage equalization will occur between developed markets and under-developed. American labor will be forced to compete in the fair and open market with China, Vietnam, Singapore, etc. without the “protections” of tariffs that we have enjoyed up until now. Unions are fighting against the TPP for this reason (Sanders).
*The open market benefits to the US are incremental. Economic studies show that the net positive effect for the US is a mere .7%. Vietnam and other asian markets will see a net effect of approximately 22%. China has the greatest gain but the number is so large it is not calculated (Alden).
*Currency Adjustments: Ford Motor Company and other manufacturers are fighting against the agreement as the TPP does not protect the USA from foreign countries purposely manipulating their currency and making their products more attractive to the international market(Alden). But, university professors like Daniel Drezner (Tufts) and Jeffrey Frankel (Harvard) report that the trade deal should not include these protections as it would also restrict U.S. monetary policy and also, that it is impossible to distinguish between artificial and true currency adjustments, so making a case against a country for fraud would be difficult (Prasad).
*Industry bias subsidies are being granted to Dairy and others, to make up for the severe cost burden the TPP will impose. Other industries, such as the American automotive firms, however, are left without such protections.
There are more debated issues with this agreement, however, despite these George W. Bush contends the TPP is extremely important to America’s continued leadership in the world’s economic forum. Recently, he said, “If we don’t act, it will create a vacuum. These economies are not going to stand still…China will step in” (Reuters). Which may be true, but the U.S. must decide how to approach its relationship with these other countries and if merging a plethora of interests and institutions comes with more risk than benefit. Moreover, we might question whether tying ourselves to global government oversight may relinquish our own sovereignty.
Having the support of leading American policymakers on both sides of the aisle, as well as the support of leading corporations, is an important aspect of treaty passage and subsequent success in implantation and long-term success. Thus, my recommendation would be to create a regional trade agreement -outside of the TPP-that encompasses tariff and other trade barrier reductions, but that eliminates the points of domestic contention, to the greatest degree possible. Those might include:
*Fix the sensitive data privacy issues within the TPP context, including financial, health, and social media privacy.
*Move away from environmental mandates within the trade agreement and leave that aspect to each country to discern based on domestic capabilities and needs.
*Remove extended protections for Big Pharma (even though they want longer protections) to continue to allow generics to enter the market and drive prices down to benefit the citizenry and reduce insurance costs.
*Impose a currency adjustment limit plus or minus (+/-) a pre-determined variant. This will protect industry destruction with major currency adjustments in foreign markets.
*Encourage open ended communications with China to bring them to the table and expand the benefits of free-trade.
*Expand protections/subsidies beyond the Dairy industry to the automotive firms and any other that are severely at risk for low-trade barriers.
Moreover, work to eliminate strong objections within both American political parties, ensuring that Congress understands the positive effects of the TPP, while eliminating the high risk for their constituents.
Given the challenges and the data that shows the estimated economic benefits as incremental, it would behoove us to reconsider our commitment to the TPP. Additionally, criticisms that world-renowned economists, such as Avery Shenfeld (CIBC World Markets) say, that the “TPP is not going to suddenly boost trade for Canada or anyone else, as the problems are not trade barriers, but “weak global growth and tumbling commodity prices (Shenfeld)” -I strongly urge the President to consider embarking upon this new route to increase trade with our Asian and Latin American partners through the traditional style trade agreements that has, in the past, brought great prosperity to America and the world, without exacerbating other current domestic and international tensions.
Alden, Edward. TPP’s Big Ambition Could be its Undoing. Nikkei Asian Review. February 02, 2016. Web. 11 Oct 2016.
Bader, Jeffrey A. and David Dollar. Why the TPP is the Linchpin of the Asia Rebalance. Brookings Institution. July 28, 2015. Web. 10 Oct 2016.
Bollyky, Thomas J. A Dose of the TPP’s Medicine. Council on Foreign Relations. March 23, 2016. Web. 12 Oct 2016.
Cerdeiro, Diego A. Estimating the Effects of the Trans-Pacific Partnership (TPP) on Latin America and the Caribbean (LAC). International Monetary Fund. WP/16/102 .pdf 23 Oct 2016.
Fergusson, Ian F. Mark A. McMinimy, and Brock R. Williams. The Trans-Pacific Partnership (TPP) Negotiations and Issues for Congress. Congressional Research Service. R42694. March 20, 2015. .pdf. www.crs.gov. 24 oct 2016.
Greenville, Stephen. The US Election is Putting the TPP Trade Ageement in Doubt. Nikkei Asian Review. October 20, 2016. Web. 21 Oct 2016.
Prasad, Eswar. TPP Hearing on Currency Manipulation. Brookings Institute. January 07, 2016. Web. 12 Oct 2016.
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Solis, Mireya. Order From Chaos: TPP: the End of the Beginning. Brookings Institution. October 05, 2016. Web. 10 Oct 2016.
Solis, Mireya. The Containment Fallacy: China and the TPP. Brookings Institution. May 24, 2013. Web. 09 Oct 2016.
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