The High Stakes for the Trans-Pacific Partnership

By Lewis Leibowitz and Daniel Leibowitz

The TPP is a complex international trade agreement between the U.S. and 11 other countries in Asia and the Americas (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), could presage a new U.S. dynamism in international trade policy and geopolitics. The prospect of Congressional rejection of the deal presents a 1

very real danger to this dynamism.

What are the stakes? We argue that the most important consequence of success or failure of TPP is the effect on geopolitics in the Asia-Pacific region. Clearly, China is at the center of the Obama Administration’s thinking. China is an emerging powerhouse (already a power) in the region and indeed in the world. The stakes in directing China’s energy into economic rather than ideological and revolutionary directions detrimental to the U.S. and our trading partners and allies could not be higher. To do this, it is important to convince other major players in the region that, as a result of this trade-deal, economic progress will be in their future as well as ours.

Already, major players in the region have bought into the TPP. Australia, Canada, Mexico, Japan, Malaysia, New Zealand, Peru, Singapore, Chile, Brunei and Vietnam are signatories. 2

South Korea , Indonesia , the Philippines , Colombia , Thailand , Laos , Bangladesh , India 3 4 5 6 7 8 9 10

and Taiwan have expressed serious interest in joining, creating serious momentum for the 11

U.S.-led approach. But these countries are also talking about a competing vision China is pushing—RCEP, the Regional Comprehensive Economic Plan.12

Critics of free-trade contend that China benefits by infringing intellectual property of Americans, stealing trade secrets and other questionable practices. The TPP’s intellectual property protections will give advantages to countries that have agreed to compete without cheating.

"Summary of the Trans-Pacific Partnership Agreement". U.S.TR. 4 October 2015.1

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Nishikawa, Yoko (13 November 2010). "South Korea mulling U.S.-led TPP trade initiative: report". Reuters.3

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"Thailand's quest to join the TPPA 'will strengthen opposition'".7

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Kumar, Arun (2 August 2013). "'India's admission to TPP would be an economic coup'". Business Standard. 10

"Taiwan aims to join Trans-Pacific Partnership: minister". 10 November 2010.11

Green, Michael J.; Goodman, Matthew P. (2015-10-02). "After TPP: the Geopolitics of Asia and the Pacific". The 12

Washington Quarterly 38 (4): 19–34. doi:10.1080/0163660X.2015.1125827. ISSN 0163-660X.

The creation of the TPP regional trade area will reduce cheating by channeling activity in more lawful and transparent directions. It is self-evident that if the TPP is rejected, China will play a 13

larger role in influencing the developing rules of commerce and diplomacy through its own trade and investment initiatives, potentially creating regional rules and norms detrimental to U.S. interests, including (significantly) damage to intellectual property rights. The TPP is the way to set up a structure that works for the U.S. and its partners for the long term. There are critics of the deal, such as the Electronic Frontier Foundation, that contend the TPP doesn’t create enough plausibly enforceable restrictions in this area. However, although reasonable people 14

can argue about whether the progress is sufficient, the TPP is certainly a step in the right direction. Going back to the negotiating table at this point is a non-starter. The alternative, as it currently stands, is to leave intellectual property inadequately protected as it is today, so it seems apparent that any progress in this area will be beneficial to current victims.

While the geopolitics are most important, the TPP must also meet the economic needs of the countries, businesses and workers in the region. There are challenges in an agreement such as the TPP, which joins together developed and developing countries in a single structure. Critics rightly question whether the mix of benefits for developing countries and the export opportunities for developed countries is the best we can achieve. I personally think the agreement could be better, especially in trade remedies, a field with which I am quite familiar, and in which the TPP makes essentially no advances. But overall, despite this significant omission, the agreement makes a credible attempt to balance interests. And, further, it should be recognized that these negotiations have already taken 7 years. So, while further 15

augmentation to the regulation of trade should be considered in the future, it is counterproductive to kill the TPP now because it doesn’t go far enough.

The TPP agreement looks to the future of international trade as a development tool for both rich and poor countries. For the developed country members, the TPP promotes export opportunities by reducing tariffs and non-tariff barriers in expanding markets in the developing world (Malaysia, Vietnam). Currently, China has a significant but diminishing competitive edge in those markets. The U.S. clearly needs goods from low-cost countries and China is the most important source. The TPP will encourage other Asian members to compete more vigorously with China for low cost production inputs for factories in the region, as well as consumer goods.16

The TPP would reduce tariffs and other barriers to imports from member countries. While opponents fear that these reductions would increase competition for some U.S. industries in our home market, the fact is that we live in a global economy and will continue to do so. Imports are a vital component of competitiveness, which is often overlooked in political discussions. Competition is beneficial for 310 million U.S. consumers. U.S. businesses seeking export markets must compete globally and that requires world-price components. U.S. businesses clearly benefit from competing rather than being sheltered from international competition, as, in

"Summary of the Trans-Pacific Partnership Agreement". U.S.TR. 4 October 2015.13

Malcolm, Jeremy (2015-12-09), The Final Leaked TPP Text Is All That We Feared, Electronic Frontier Foundation, 14

retrieved 2015-12-16

"Summary of the Trans-Pacific Partnership Agreement". U.S.TR. 4 October 2015.15

Id.16

the future, they will inevitably face this challenge. Protectionism doesn’t work, and the longer we have that mentality in international trade, the less prepared U.S. businesses will be.

In summary, the TPP presents an opportunity to U.S. businesses that want to compete in an expanding international market. Whether or not the TPP is ratified, U.S. manufacturers will inevitably have to compete internationally. And U.S. service industries, including finance and the “learned professions,” have grown continuously in the U.S., and American youth should keep this in mind when deciding on a career. Instead of trying to artificially retain manufacturing jobs that, arguably, might become obsolete we should urge our youth to get training and experience in industries that aren’t on the brink of extinction in the U.S. In addition to this, historically U.S. businesses are among the most innovative and vigorous competitors in the world market. As a nation we must embrace what we, as a people, thrive at rather than clinging to prevalent occupations of the past.

Congress faces a major decision in whether to ratify the TPP. I see three major concerns:

First, the TPP goes beyond tariff reduction to non-tariff considerations, such as intellectual property and foreign investment. These create obvious concerns about national sovereignty not only here but in other TPP members as well. But this more comprehensive coverage promotes trade in knowledge-intensive services in which U.S. companies excel.

Second, certain U.S. manufacturers worry that their sector does not benefit from the TPP, because developing countries and their low labor costs will flood the U.S. with cheaper goods. Frankly, one cannot help but notice that this is already happening. Manufacturing employment is down in the U.S., not just because of increased competitiveness but because of technological advancement. For example, steel workers are about five times more productive than they were 30 years ago. Manufacturing employment will continue to decline as workers are supplanted by technology. But the remaining workers, both salaried and hourly, will have better and more sustainable jobs. Whether TPP accelerates these trends or not is a close question. But defeat of the TPP will not arrest or even significantly change these trends.

Third, Congress must consider whether the concerns about China and its future activities will be affected by the passage of the TPP. Although China is not a party to the TPP, ratifying the agreement would raise regulatory standards for several of China’s key trading partners. As a result, the TPP could pressure China to meet some of those standards. TPP member 17

countries would be unlikely to tolerate violations of international rules that affected their access to developed markets, including the United States. This kind of progress is not fully satisfying and frustrating “incremental” progress to some. But incremental progress is better than no progress. And U.S. interests would clearly benefit by recruiting other TPP members in this effort.

Many opponents of the TPP deal are concerned about manufacturing jobs and U.S. sovereignty—these concerns are significant. But rejecting the TPP would certainly not make U.S. manufacturing more competitive or preserve U.S. manufacturing jobs. At best, rejection of the TPP might reduce the rate of decline of some manufacturing industries and accelerate the decline of others that could benefit from the opening of export markets for the U.S.

"What Will the TPP Mean for China?". Foreign Policy, Oct. 7, 2015.17

The Peterson Institute, in an analysis of the economic benefits of the TPP agreement, points out that the TPP would “lower trade and investment barriers that will enable competitive firms [in the U.S.] to move into new markets, hire workers at better wages, cut prices and improve the range of quality of goods and services available to households and firms.” This will increase demand 18

for U.S.-produced goods and services without the detriment of inflation. 19

Clearly, there will be some losers from this process. The TPP agreement itself does not adequately address the losers from trade expansion, a process described famously by Joseph Schumpeter as “creative destruction”. Uncompetitive firms will disappear and, as a result, jobs will be lost. This will require transition assistance for displaced workers. We have these programs, but they could be improved for many.

Again, according to the Peterson Institute, national economic gain through lower prices, more highly paid in export jobs, and better quality of goods and services (among other things) will exceed $400,000 annually for every displaced worker. The key is to get more of that $400,000 20

to the displaced workers rather than to punish all Americans by foregoing the economic advances to slow the decline of a small percentage of workers and businesses. 21

Although organized labor has not exactly bought into the assessment from the Peterson Institute, the facts seem to support the study’s conclusion. The U.S. has important trade and investment ties with TPP countries. According to a study from the Business Roundtable, in 2014 trade with partner countries supported an estimated 15.6 million U.S. jobs. The 22

agreement will build on these trade and investment relationships and support these U.S. jobs. 45% of goods exported from the U.S. are bound for TPP countries and over 14,000 TPP businesses have investments here in the U.S. The TPP creates an opportunity for the U.S. to 23

increase its goods and services trade with several existing bilateral FTA partners and will help to ensure that this trade remains open, competitive and rule-based. Of the 11 current TPP partner countries, 6 of them (Australia, Canada, Chile, Mexico, Peru and Singapore) are current FTA partners, generating sizable trade in goods and services. Not only will the TPP help to further 24

expand trade, ensuring fair practices; it will provide the opportunity to open up the same kind of opportunities for additional countries.

Dominguez, Gabriel (April 2, 2016). “The pros and cons of the Trans-Pacific Partnership pact”. Interview with Gary 18

Hufbauer.

Schott, Jeffrey; Kotschwar, Barbara; Muir, Julia (2013). Understanding the Trans-Pacific Partnership. Peterson 19

Institute for International Economics. pp. 17–18. ISBN 978-0-88132-672-7.

Id.20

Id.21

“Trade with Trans-Pacific Partnership Countries Supported 15.6 Million American Jobs”. Business Roundtable. 22

January 14, 2016.

“The TPP Agreement: An Opportunity for America”. Business Roundtable. 23

Id.24

More importantly, TPP will aid U.S. businesses in buying the materials they need to manufacture products competitively in the U.S.. According to the U.S. Census Bureau, roughly 64 percent of all U.S. imports from TPP countries consist of raw materials, components, machinery, and other goods used to grow crops or make products in the United States. Canada and Mexico already serve key roles in global supply chains. 71% and 61% of the value of U.S. imports from Canada and Mexico respectively consists of intermediate inputs for making finished U.S. products. 25

Obviously competing producers of these raw materials, components and machinery would prefer making these imports more costly through higher tariffs. However, that would negatively effect far more U.S. businesses that provide far more U.S. jobs by hindering their ability to be competitive in the U.S. market and abroad.

In addition to more competitive prices for raw materials, components, and machinery, the TPP would open new markets in countries that are not current FTA partners. This trade works both ways: further opening export markets in TPP partners, and attracting new investment from those countries into the United States. Companies headquartered in TPP countries have already invested nearly $600 billion in the U.S. and employ more than 1.5 million Americans. TPP will 26

increase opportunities for additional investment through the reduction of barriers, including improved dispute settlement procedures in these partner countries as well as the United States. By removing trade barriers, this agreement will encourage countries based in TPP countries to increase business investment in the U.S., supporting both economic growth and job creation in the U.S..

The Trade Partnership derived from Department of Commerce, U.S. Census Bureau data.25

U.S. Department of Commerce, U.S. Census Bureau and U.S. Bureau of Economic Analysis Data.26

Opponents of the TPP have criticized the lack of growth in employment and wage increases through international trade. The studies available rebut this concern effectively. The studies predict that wage growth will slightly exceed gains for capital. Thus, workers will benefit slightly more than the ownership class from TPP. Moreover, the percentage net gains for poor and 27

middle class families will be greater than the top of the economic scale. This evidence 28

suggests that the problems of income inequality will be reduced by the approval of the TPP. The gains are small, but they exist. And the gains to the country from the deal will be greater than the costs.

The AFL-CIO has opposed the TPP, claiming that it will extend the off-shoring problem caused by the North American Free Trade Agreement (NAFTA), pushing more manufacturing jobs overseas where wages are substantially lower than in the U.S..   For example, Vietnam, one of 29

the partner countries of the TPP, the average worker earns less than those in China.   30

Organized labor is worried that this trade deal will encourage U.S. businesses to move manufacturing to TPP partner countries where wages are lower by reducing or eliminating tariffs associated with bringing products back to the U.S. market, causing more job-loss in manufacturing here. 

Dominguez, Gabriel (April 2, 2016). “The pros and cons of the Trans-Pacific Partnership pact”. Interview with Gary 27

Hufbauer.

Id.28

“Ten Critical Problems with the Trans-Pacific Partnership”. AFL-CIO. 29

Id.30

While organized labor is opposed to the TPP, the National Association of Manufacturers (NAM) has backed it.  They point to the fact that modern trade deals have increased opportunities for American manufacturers, promoted middle-class prosperity, and supported American workers.   NAM points out that, since the turn of the century, the U.S. has improved its trade 31

balance in 13 of 17 countries that it has partnered with in trade deals, meaning that we now manufacture and export more than we import 76% of the time since 2000.   The U.S. went from 32

a $2.8 billion trade deficit to a $30.9 billion surplus with these 17 countries due to the fact that after implementing these free trade deals, we increased U.S. exports of manufactured goods at double the rate of imports (52% to 26%).   While the U.S. increased efficiency in manufacturing 33

these goods via technological and process improvements and not employment growth, the deals benefited manufacturing and the overall economy.  And reduction in U.S. tariffs benefit U.S. manufacturers by cutting the cost of their imports, many of which must be imported to maintain international competitiveness in the U.S. and foreign markets.

The reality is that few U.S. tariffs are genuinely “protective” of domestic companies. The average U.S. tariff on industrial goods is less than 2 percent, hardly a protection for the American worker. The TPP deal eliminates low U.S. tariffs but in return eliminates very high tariffs in other TPP countries. That trade-off is a good deal for workers in export-oriented industries, and a very small price to pay for workers in industries that don’t export. On balance, this is most-likely a beneficial deal for the country as a whole.

More importantly, there is not much evidence, at least outside political campaigns, that past trade deals have been disastrous for American manufacturing activity or employment. While many U.S. manufacturing jobs have disappeared since NAFTA went into effect in 1994, the fact is that manufacturing employment has been declining for the last 70 years. The principal cause is not trade deals. Largely, the decline in manufacturing employment is due to technology in the form of automation and improved efficiency. To lay the decline solely at the feet of trade expansion is clearly unreasonable.  

The key question for me is what to do about the decline in manufacturing employment and its impact on those who have lost their jobs. There are unfortunately no easy answers. But pretending that rejecting trade deals will help matters is the clearest path to decline. The trends toward automation and technology will not turn around but will increase. As a country, we need to embrace these changes and exploit them, while doing our best to retrain workers to acquire newly relevant skills to adapt to a changing market.  

The decision of the people of the United Kingdom to withdraw from the European Union is a clear signal that popular frustration with the global economy is not a uniquely American attitude. The “Brexit” vote means that trade relationships will be on the table for reconsideration and possible revision. This is why the strategic implications of TPP are important to consider. Friendships with other nations are the best insurance against conflict in the future. Trade furthers those friendships. The reality we see is that these very same trade relationships will not hurt U.S. workers, not even manufacturing workers. The benefits of agreements like TPP

“Manufacturers Endorse Trans-Pacific Partnership”. Drogue, Jennifer. January 4, 2016.31

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benefit more Americans than they hurt—but the results are not dramatic in nature.

To reject TPP on the assumption that it is bad for American workers is to wrong two constituencies—those who favor increased engagement as important to a peaceful future, and those workers whose future is put in doubt by factors other than trade deals. We fear that they will be put off the scent of real solutions to their problems and fuel future radicalization both here and abroad.

The global economy is now a reality, and its dynamic change will impact U.S. markets with or without the TPP. The economic benefits to the U.S. from the deal are relatively small (perhaps .5 percent added to gross domestic product after 20 years), but they do outweigh the costs.

However, it is important not to oversell the benefits of the TPP. Approval of TPP will further U.S. foreign policy objectives and will benefit the U.S. economy, albeit only slightly. While small, they represent important progress.

As a 21st Century world agreement, the TPP relies on negotiations between countries acting as equals. The agreement is the work of humans, and therefore imperfect. On balance, despite its flaws, it advances the agenda of the United States geopolitically and economically, along with those of many other countries, both parties to the deal and others, as evidenced by the long line of countries looking to join the group.

Political considerations related to the TPP are understandable. Many constituents do not like TPP and therefore their representatives do not like it either. Politicians need to weigh those considerations carefully and negotiate features to the implementing legislation that help their constituents. But on balance, the evidence suggests the deal should go through. It is a significant step in the right direction, first, in opening up global trade under a system of rules consistent with the WTO rules and, perhaps more importantly, curbing China’s ability to capitalize on inaction by introducing their own trade network based on different rules benefits Chinese interests more than those of the U.S..

The current U.S. presidential candidates have their own views on the TPP, and, for at least one candidate, opposite views (the other has yet to explain his opposition beyond his disgust for the Obama Administration). From where an admitted globalist sits, the TPP is worth doing economically, because it will help create the jobs of tomorrow; and geopolitically, it will shape the Pacific Region in ways that further the U.S. way of dealing—mutual prosperity and progress. While there will be some American losers, it seems there will be many more American winners.