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Headwinds As US Moves Toward Secretive Trade Agreement – Analysis

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The TPP would deepen trade and corporate regulation for 12 Pacific Rim nations.

By David Dapice*

The US debate between President Barack Obama and Massachusetts Senator Elizabeth Warren over the proposed Trans-Pacific Partnership has spiced up a dense and hard-to-understand issue relating to a mainly secret bill about trade and regulations with trading partners. The debate draws attention to public distrust of government looking after public interest rather than that of corporations.

While the Senate Democrats initially blocked consideration of “fast track” authority – the ability of the Congress to vote the unchanged agreement either up or down – there was a reversal after some compromises on currency manipulation. The bill will not be secret when voted upon, but its provisions are not now widely known, except among corporate interests that helped draft the provisions relevant to them. The public knows what it does mainly due to WikiLeaks, which has published parts of the draft agreement concerning internet policies, pharmaceuticals and the rights of companies to sue governments. A difficult fight for acceptance of fast-track authority in the House of Representatives awaits, since many in the informal Tea Party share suspicions with liberals, like Warren, about the TPP.

The TPP process was launched in 2005 by four nations. The United States joined in 2008, and the group now includes 12 nations, most of whom are major US trading partners: Canada, Mexico, Chile, Japan, Australia and Singapore as well as New Zealand, Peru, Singapore, Brunei and Vietnam are in the negotiations which have gone through 19 rounds and are complex. The TPP does not currently include China, India, South Korea, the Philippines, Thailand or Indonesia, but in principle they could be accepted later subject to negotiation.

The TPP is perhaps better seen as a way to adopt common international regulations for businesses than a trade bill that simply lowers tariffs, though it does that too. It pushes a kind of “deep” integration such as that developed in NAFTA and the EU. Some ceding of national sovereignty is inevitable, though it may be limited and acceptable if the benefits outweigh the costs. Favoritism to state enterprises or in national procurement is discouraged and intellectual protection is advanced – a key concern of many multinationals.

Progressives – Senators Warren and Bernie Sanders of Vermont are good examples – express concern that corporate lobbyists heavily influenced the provisions and the agreement could thus fail to take into account the interests of ordinary people. Provisions kept secret or available on a limited basis to many in Congress are known to many lobbyists. Warren and Sanders question if international arbitration could trump domestic regulation of banks or the environment. Public interest activists worry about extreme anti-counterfeiting provisions that could impair many current internet activities. Public health groups worry that drug prices would rise because of stricter controls on patented drug production and trade.

In short, there are many objections based on the way the bill has been drafted, its current lack of public transparency, and specific provisions that reflect corporate rather than public priorities.

The centrists and conservatives who defend the bill argue that the entire bill will eventually be public and the Congress will know what it is voting on. While true, this does not necessarily allow sufficient time to evaluate the likely impact of complex provisions. They also argue that this is an attempt to have the US and its partners create the rules for companies to operate. If the US does not do this, it’s argued, then China will. Protections of intellectual property, for example, would be much weaker and that would hurt US interests. Finally, they argue that if US companies are to be protected abroad, then similar protections should be extended to foreign companies operating in the US.

TPP supporters do not say that US tariffs are already so low that any US concessions in this area would likely not have much impact – they will not mean much for US consumers. On the other hand, many trading partners have more substantial barriers so better market access would be meaningful for US farm interests and some exporters.

Many – not just Democrats – worry about currency manipulation by trading partners. This is not adequately covered in this agreement, so far as one can tell. There is no doubt that South Korea, Taiwan, Japan and China have managed their currencies in the past to boost exports. Japan is doing what the US Federal Reserve and the European Central Bank have also tried – engaging in massive bond buying to get their economy to expand, although Japan may be explicitly targeting a weaker currency in a way the Federal Reserve did not. In 2011 there were fewer than 80 yen per dollar and there are now nearly 120! If a product from Japan costs 1 million yen, the price in dollars has fallen from $12,500 four years ago to $8,400. Such monetary policy has the effect of depreciating the currency, aimed to make exports more competitive.

China is the main target of such concern but it is not even party to the agreement. The country had an undervalued currency but through a combination of modest nominal appreciation and aggressive wage increases, the real or inflation-adjusted yuan is now valued about right, at least according to the International Monetary Fund. China’s goal is to make the yuan an international currency so it keeps a stable value despite sluggish exports. In any case, figuring out if a currency is overvalued is difficult since that is a direct result of legitimate domestic monetary policy. Putting this into a trade agreement would be difficult to enforce without causing huge uncertainty.

Sluggish real wage growth in the US is feeding skepticism about the TPP. US manufacturing employment has not gained much – it had been more than 17 million in 2000 and fallen to 11.5 million in 2010 before weakly rebounding to 12.3 million recently. With non-agricultural employment of 140 million, most jobs are created in services rather than increasingly automated factory work. The main direct impact of TPP will be on how corporations operate, not on workers. On balance, the main impact will not be from lower tariffs but from uniform and generally more powerful corporate control of intellectual property. If a standard set of rules protects intellectual property without creating undue burdens of monopoly, then that should result in a net gain in productivity from research and development. But given recent trends in inequality, it’s not surprising that such abstract and indirect gains generate scant enthusiasm.

If the US wants to play a major role in Asia, it needs another component to its “pivot” than just military power. Ultimately, if US-based rules are fair and not arbitrary, they will garner more support from others than what are currently perceived as “Middle Kingdom” rules favoring China. But such a policy needs to be implemented. It’s hard to see what is left of the much ballyhooed Asian pivot without TPP. That concern about letting China set the rules, along with warm corporate support and lobbying, will probably see the trade agreement move through the Congress. Most other countries are also likely to approve the negotiated provisions, albeit with considerable opposition from parties who would be adversely affected.

*David Dapice is the economist of the Vietnam Program at Harvard University’s Kennedy School of Government.

YaleGlobal Online

YaleGlobal Online

YaleGlobal Online is a publication of the Whitney and Betty MacMillan Center for International and Area Studies at Yale. The magazine explores the implications of the growing interconnectedness of the world by drawing on the rich intellectual resources of the Yale University community, scholars from other universities, and public- and private-sector experts from around the world. The aim is to analyze and promote debate on all aspects of globalization through publishing original articles and multi-media presentations. YaleGlobal also republishes, with a brief comment, important articles from other publications that illuminate the many sides of this complex phenomenon. To the extent permitted by copyright arrangements, YaleGlobal archives such articles and makes them available for search and retrieval.

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