Twenty-one years after the enactment of the North American Free Trade Agreement (NAFTA), the debate over free trade has risen to the top of the U.S. political agenda once again, this time in the form of the looming Trans-Pacific Partnership (TPP), a 12-nation trade bloc that would bring the United States and 11 other Pacific Rim nations together in a wide-ranging pact that would establish the rules for international trade, investment and foreign investment during the coming decade and beyond. Total trade between the U.S. and the other TPP countries exceeded $1.7 trillion in goods and $260 billion in services in 2012, making the TPP the largest free-trade agreement in world history.
Like NAFTA, which brought together three neighboring nations — the U.S., Canada and Mexico — the TPP has become a divisive political issue, not only among the general public, but within both the Democratic and Republican parties. There are questions about what kind of impact the TPP would have on the U.S. economy, and on the competitiveness of U.S. multinationals in the years ahead, in addition to concerns related to job growth, and U.S.-China trade and political relations. For example, Public Citizen, a left-leaning advocacy group, stirred opposition to the TPP recently with this message: “In one fell swoop, this secretive deal” could “offshore American jobs and increase income inequality, jack up the cost of medicines, expose the U.S. to unsafe food and products, and empower corporations to attack our environmental and health safeguards.”
By contrast, supporters say the TPP goes well beyond making additional cuts in tariff and duties to include the implementation of higher standards for the protection of labor rights, intellectual property, foreign investment and other barriers that thwart further trade in high-value services in which the U.S. has a competitive advantage. Its provisions would likely cost the U.S. economy some additional jobs in certain areas, supporters say, but generate large numbers of new jobs by boosting exports of U.S. high-value goods, and attracting further investment by foreign manufacturers and service providers in the United States.
At the root of this fundamental disagreement is the unique nature of the TPP. Wharton management professor Mauro Guillen, who is also director of The Lauder Institute, notes that the TPP is a “very different kind of pact” from NAFTA. Tariffs don’t have a big role to play in the TPP because the U.S. has already instituted bilateral agreements with a number of countries in Latin America and the Pacific. “The issues of the day have shifted toward services; and all of these other ‘soft’ institutions or issues in the sense that they are intangible” such as intellectual property, Guillen notes.
A Rorschach test
Supporters of the TPP argue that by opening opportunities for more companies to engage in foreign trade, the agreement will boost incomes for substantial numbers of middle-income workers. According to the U.S. Business Coalition for TPP, companies engaged in international trade pay salaries that average 15% to 20% more than those firms that are not as engaged. The trade group argues that “global trade already supports millions of jobs for middle class families” and the “passage of additional free trade agreements, like TPP, provides the opportunity to provide over 10 million trade-connected jobs over the next decade.”
On the other hand, the TPP’s critics argue that the agreement will actually rob the U.S. economy of millions of middle-class jobs in coming decades, thanks to the new opportunities that it will open for non-U.S. firms to enter markets in the U.S. They also argue that the Obama Administration is being unreasonable in requiring that Congress grant the President what is known formally as “trade promotion authority” (TPA) — or “fast track,” in common parlance. Thanks to TPA, during both the Clinton and George W. Bush administrations, the U.S. Congress was not allowed to make any further amendments to any free-trade agreements negotiated by the executive branch. Congress had only the authority to vote a simple up or down (yes or no) on each deal, a process that accelerated the passage of those bills. That practice would simply be revived for the TPP, supporters note.
Many critics of the TPP are blinded by their ideological opposition to all free trade agreements, not just the TPP, says Rob Mulligan, senior vice president for policy and government affairs at the United States Council for International Business (USCIB), the American affiliate of the International Chamber of Commerce (ICC). Regarding left-leaning critiques who say the TPP doesn’t do enough to protect labor and the environment, Mulligan says, “The Obama Administration has made an effort to address a lot of these concerns that have been made in the past. And yet that doesn’t seem to be enough. Now there are complaints that this has all been done in secrecy, which is a disingenuous argument.
Labor unions have been on all the advisory boards that the business community is on. And the members of Congress get access to information; they get briefings regularly.”
According to Marshall Meyer, a Wharton management professor, the current flap over TPP is more about fast-track authority than the substance of the agreement. “It’s not clear that the substance has been decided, or that anyone understands how outstanding issues have been resolved.” Thus, he adds, the TPP has become “something of a Rorschach test — a ‘flak catcher’ to use Tom Wolfe’s phrase — onto which people project their anxieties.”
Meyer says he keeps telling his friends on the liberal side of the Democratic Party that “[the TPP] is good for workers.” But “they can’t grasp that.” They know that the U.S. Chamber of Commerce is very clear about its support for the TPP, he adds, and feel, in effect, that “‘if business wants it, we don’t want it.’”
Rules of engagement
Penn Law professor Jacques DeLisle, who is also director of Penn’s Center for East Asian Studies, agrees that reactions to the TPP are, in effect, a Rorschach test on attitudes regarding trade.
DeLisle adds that the argument in favor of the TPP is based in part on the classical theory of free trade, which holds that removing barriers to free trade is a good thing. However, he adds, “there is [also] a measure of Realpolitik” in the TPP — “a geopolitical argument that is fairly confrontational.” This notion is that the success or failure of the TPP will “go a long way toward determining who writes the fundamental rules of the global economy in the coming decades — the United States or China Twitter.”
Another major argument in favor of the TPP is that it would be the first free-trade pact between the United States and Japan — the world’s third-largest economy, measured by nominal GDP, despite the ascension of China in recent decades. “While the economic argument behind the TPP is central, it is also about strengthening ties between the U.S. and Japan, which has never been involved in a free-trade agreement with the United States,” DeLisle notes. “It is a sucker’s bet for the United States to underwrite the costs of security” in the Asia-Pacific region “while many of the economic gains in the region go to China.” That could well become the case if the TPP fails, and China gets to write the trade rules of the future.
In such a case, notes DeLisle, there could be a “tug of war for who will be at the center of gravity” — the TPP versus the Regional Comprehensive Economic Partnership (RCEP), a proposed free trade agreement between the ten members of the Association of Southeast Asian Nations (ASEAN), and the six nations that have existing free trade agreements with ASEAN — China, India, Japan, Australia, South Korea and New Zealand. Negotiations for RCEP were formally launched in 2012.
Beyond strengthening U.S. ties with Japan, the TPP also promises to bring stronger and closer ties between the U.S. and its other friends in the region, such as Australia, New Zealand and Singapore. DeLisle notes that these countries are more likely to believe that the U.S. won’t disappear from the region — in terms of playing a role in regional security — if the U.S. shows itself to be fully committed to strengthening its economic ties in the region, via the TPP. DeLisle says that there has been some skepticism in the Asia-Pacific region regarding the U.S. government’s talk about “re-pivoting” toward Asia, and some understanding that the U.S. is “resource-constrained” because of costly wars in Iraq and Afghanistan.
Guillen adds that it is “in the best interest of the United States to push the agenda” of trade in intellectual property and services so central to the TPP “because the United States continues to be the world’s leading technological power.” He adds that, in the long run, this will ultimately benefit everyone — including Japan and even China — “because China is very quickly becoming a technological powerhouse.”
The impact on jobs
What impact would the TPP have on jobs? Analysts at Wharton and elsewhere agree that the low-end jobs that largely disappeared from the United States following the implementation of NAFTA are never going to return to the U.S., TPP or no TPP. But how much impact might the TPP have on job growth in higher-skilled labor categories?
“It is undeniable that whenever you make a change in a trading regime — whenever you change the rules of trade either for greater trade or more restrictions on trade — there are always winners and losers in the short run,” Guillen notes. “NAFTA was no exception — so the issue [with the TPP] is, what happens in the long run? In the long run, we know that free trade is good, and the important political issue is how do you make sure that whoever loses has the resources to overcome that particular situation?”
Guillen adds that if the TPP is enacted, “everyone is going to benefit” in the long run, including consumers who gain access to foreign goods at lower prices, improving their purchasing power. In the shorter run, however, the key is whether “we can take care of those people who suffer as the result of free trade,” rather than “let the winners hijack the entire process.”
Guillen cautions against forgetting that free trade agreements like NAFTA and TPP are not just about free trade but about protectionism. “These agreements are always a mix of free trade within the bloc and more protectionism relative to third countries.” In the case of NAFTA, what the U.S. got was, essentially, low-end jobs moving to Mexico from the U.S. It was a loss for U.S. workers, but a gain for U.S. consumers because they could get products at lower prices. “But it was also a loss for the Japanese and the European manufacturers who, in the wake of the establishment of NAFTA, had to establish factories in the United States in order to overcome the additional hurdles,” Guillen points out.
Will the TPP have a similar protectionist impact on manufacturers outside the new 12-nation bloc of member states? “I don’t think the impact will be as large as the one from NAFTA because this agreement is not going to be as comprehensive,” Guillen says.
“[Moreover,] the migration of jobs from one country to another is going to happen anyway. You are just changing the timing.” With or without TPP, “low-end jobs in China are either [moving] to the interior of the country, where wages are lower, or moving to Vietnam or Bangladesh or to some other place. That’s going to happen regardless of whether the TPP moves forward or not.”
Much as in the case of NAFTA, many of the TPP’s proponents and detractors are making exaggerated claims either about its marvelous virtues — or its horrendous defects. However, DeLisle argues that “the economic analysis is that the impact [of the TPP] on growth will be not very large.” Whereas NAFTA furthered the economic integration of three neighboring countries that already had intimate ties on multiple levels, the TPP will bring together countries that are far more distant from one another. Moreover, as DeLisle points out, “A lot of the countries in the TPP are already involved in free trade agreements with the U.S.,” including Australia, Canada, Chile, Mexico, Peru, Singapore and South Korea.
All the more reason why the participation of Japan — which has never before signed a free-trade pact with the U.S. — is so critical to boosting the TPP’s potential impact on the global economy, he adds.
“It is undeniable that whenever you make a change in a trading regime — whenever you change the rules of trade either for greater trade or more restrictions on trade — there are always winners and losers in the short run.”– Mauro Guillen.
The secrecy question
Mulligan says that it is “a bit disingenuous” to argue that the TPP negotiations have been too secretive. “It is hard to negotiate if all of your positions are public, and all of the other side’s positions are public…. I am not sure that some of the people in Congress who are complaining do all of their negotiations in public. But they also have access. I haven’t seen the language [of the text]; I have sat in on briefings that the government has provided. They provide those briefings to NGOs and to unions — [and] the unions have cleared advisors who are able to see the language.
There are members of Congress who are able to see the language to the extent that it is not finalized. When it is finalized, there will be access to the final documents before Congress acts on it.” He adds: “There is a 90 day notice, and then 60 days before they vote on it. It will be many months before this will be pushed through.”
Almost all trade experts agree that “fast-track” authority is required if the TPP is to be negotiated wisely. Although not a trade expert himself, Meyer says his “instinct” is that this view is correct. The TPP text, he notes, “is so complex; it is hammered out over years, and if you start tinkering with one part of it, you have to go back to all your negotiators.” Guillen agrees that it would be “really hard” to achieve Congressional approval in the absence of “fast track” authority. On the other hand, he adds, “I don’t think that the Republican Congress wants to give the President fast-track authority on anything.”
To win stronger support from anti-trade Democrats, might President Obama opt to make some sort of concession regarding one or more details of the TPP text? Guillen recalls that “when the NAFTA negotiations were going on, the Democrats were also split. It was [President Bill] Clinton who made the final concessions to the more pro-labor wing of the Democratic Party,” which involved adding provisions regarding the protection of labor and environmental rights to the text of the agreement.
Given the complexities of the TPP, a far more multilateral agreement, might Obama be willing — or able — to make such a concession to win support from stubbornly anti-trade Democrats? Since the TPP already incorporates many protections that were intended to win over labor unionists and environmentalists, what might such a concession involve? Guillen says that a concession “may be necessary, but who knows what that may be?”
(Courtesy Knowledge Wharton)