Trading Worth Billions: Can We Manage?
It is human instinct to trade. But in the 21st Century, how do we manage trade with other large economies?
Trade happens, and will continue to do so. Free Trade agreements – touted to be the best mechanism for fair trade practices –have their share of winners and losers. They open up markets and encourage exports at lower costs with no/less tariffs. Some sectors/industries may become less competitive without the tariffs and eventually lose business and jobs to other countries. Typically, these are the ones that have controlled trade previously or those that have got away thus far through outmoded, not smart, unsustainable operational strategies. Historically, those hurt by evolving trade patterns are the minority calling for protection. Championing the cause of such businesses will not help the economy in the long run, and shutting free trade is surely not the solution to their problems. Free trade brings in innovation and specialization.
In January 2017 the Trans Pacific Partnership Agreement (TPPA/TPP) created quite a hue and cry in the country: not just among the business and trade circles, but also among common interest groups and citizens. The provisions of the deal were made public much later in November 2015 and formally signed in February 2016. A large number of leaders from both sides of the political aisle joined the protests, claiming it to be either unnecessary and dangerous, or indispensable for the economy.
‘Treatment of TPP’ was probably the only item on which both Hillary Clinton and Donald Trump had some semblance of an agreement during the bitterly fought campaign of 2016. Both purported to completely do away with the deal. There were, nonetheless a few important politicians who wanted to see this deal executed. Among the champions were President Barak Obama and a good number of Republican leaders. When the political tables were turned with Mr. Trump’s election as President, the fate of TPP was sealed. President Trump, on his first full day at office on January 23, 2017, signed the Executive Order withdrawing the US from the TPP.
This article critically reviews if US’s withdrawal amounts to an opportunity lost or a danger averted for an economy which is still recovering from the effects of the financial crisis of 2008.
What is TPP?
The Trans-Pacific Partnership (TPP) is a trade agreement that was signed between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam on February 4, 2016. These twelve countries, located along the Pacific rim, represent a market of more than 800 million people, account for almost one third of global trade and about 40% of global Gross Domestic Product (GDP). The Pacific country which was conspicuously not included was China, the largest economic power in Asia.
TPP: A Long-drawn Process
TPP took a long time to materialize in the form we knew it. It began as the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP) signed by Brunei, Chile, New Zealand and Singapore in 2005, which was later expanded to include the remaining eight. Each of these countries needed to ratify for it to come into effect within two years of its signing. Japan was the only nation to have done so, as of January 20, 2017. In the event of not meeting the two-year deadline, the deal would have come into effect if it gets ratified by at least six signatories which together constitute a GDP of 85 % of the total GDP of all twelve members. With US pulling out, even a six-membered-ratification is not possible. The table here shows why.
Why was President Obama so pro-TPP?
President Obama pushed for the agreement, despite opposition from his own party, as he considered TPP a keystone to his 'Pivot to Asia' foreign policy. He considered the agreement a way to secure American interests and dominance in this region of the world. China's refusal to play by the rules of international trade exacerbates the situation. Currently, Asia is the largest export destination for the US. With South China Sea, one of the world’s busiest shipping lanes, increasingly becoming the bone of contention between China and US, President Obama saw a continuing US presence in this region through a comprehensive free trade agreement to be the best bet.
The Pivot to Asia strategy represented the shift in American foreign policy from a Middle Eastern/European focus to an East/South Asian one. The strategy aimed to concentrate US economic, military and diplomatic resources toward strengthening its dominant position and undercutting China’s rising influence in the region. As part of the military strategy, Washington installed an advanced missile system in South Korea, increased its air and maritime armada and expanded military bases in Australia, Japan and Philippines.TPP, on the other hand was slated to be the strategic economic intervention in the region.
How could TPP affect US Economy?
The United States International Trade Commission, an independent-quasi-judicial Federal agency with investigative responsibilities on matters of trade, studied the likely impact of TPP on the US economy in May 2016. The Commission used a dynamic computable general equilibrium model to determine the impact of TPP relative to a baseline projection that does not include TPP. According to this study, TPP could have positive effects on the US economy, although not a significant game changer. By year 15 (2032),
- US annual real income could be 0.23% higher than the baseline
- Real GDP could be 0.15 % higher
- Employment could be 0.07 higher (128,000 full-time equivalents).
- US exports and US imports could increase by 1.0 % and 1.1%respectively.
The study emphasized that TPP is expected to establish trade-related disciplines that strengthen and harmonize regulations, increase certainty, and decrease trade costs for firms that trade and invest in the TPP region.
Responding to the findings of this study, TPP protestors remarked that in an age of slow growth and economic uncertainty, such small percentage increases are nothing to report home about. The study projects extremely modest gains and these too, only after 15 years. While the protagonists held that the results of TPP might not be very obvious, they would be strategically important in establishing American prowess in the Asian continent.
Following are the some of the main views held by TPP protagonists.
- The FIRST of its kind
TPP was one of the most comprehensive trade deals in the history of world trade.
- It included 30 chapters covering a comprehensive list of trade and trade-related issues. It included provisions on electronic commerce, government procurement, small business inclusion, intellectual property, labor, environment and so forth. TPP would have outlined high-standard objectives and priorities to pursue in trade agreements for not only US negotiators but leaders across nations.
- Also, TPP was designed to unite a diverse group of countries – diverse by geography, culture and history, size, and levels of development. It factored capacity-building for the lesser developed TPP countries - in some cases special transitional periods offering additional time to develop capability to implement new obligations.
- A share of the ‘Asian’ pie
Asia is the fastest growing economic region and the largest continental economy by GDP in the world. Earlier, Japan and South Korea, and now China and India, are the prime drivers of this boom. Though only Japan was a TPP member, the other three had expressed interest in joining, subject to their agreement to the rules -based trading system set in TPP statutes. With TPP withdrawal, not only did the US exclude itself from Asia’s ongoing economic integration, but also lost an opportunity to convince that part of the world to comply with and enforce standards of free trade established by World Trade Organization (WTO).
- Boost US Exports and lower trade deficit
Exports account for about 13% of US GDP and support 1 in 12 jobs. According to the International Trade Administration, workers in export-intensive manufacturing industries earn 18% more on average, than their manufacturing sector counterparts. than their manufacturing sector counterparts.
- According to the Business Roundtable, the value of goods and services exported to TPP countries from the US could have been to the tune of $904.8 billion, accounting for 45% of the total exports.
- As per the TPP Fact Sheet published by USTR, the agreement could have added $223 billion a year to incomes of workers in all the member countries, with $77 billion going to US workers per year.
- The TPP could have eliminated around 18,000 tariffs, making US exports less costly and more competitive, thereby sustaining more good-paying jobs at home.
- The TPP had given the US an opportunity to address the problem of an overvalued dollar. An overvalued dollar makes ‘Made in America’ goods relatively expensive at home and abroad. This in turn makes the US import dependent and our exports dearer to foreigners. The result is an ever increasing trade deficit – which some consider as the main reason for loss of employment. US currently has a trade deficit of $500 billion a year. TPP could have helped lower this.
- Industries that benefit
- The agriculture sector/ food industry - our farmers and ranchers - were expected to gain the most from this deal.
- Tech companies could also have gained through less regulations and entry into new geographies.
- Research and Development departments of pharmaceutical companies could have received more years of patent protection, which could have lessened the competition from generics in Asia.
- US automakers hoped to increase exports as a result of slashed tariffs in Asia.
- Other industries, including aerospace and apparel, could have also been benefited.
The increase in Internet usage creates significant economic potential, particularly for small businesses. TPP was expected to put in place the most comprehensive set of rules addressing digital trade and the promotion of Internet-based commerce. TPP was designed to preserve the single, global, digital marketplace to ensure the free flow of global information and data that drive the digital economy, which in turn would have promoted trade and investment that enhances online speed, access and quality.
All member countries had agreed to cut down on wildlife trafficking and adopt conservation measures, particularly for elephants, rhinoceroses and marine species. It aimed to prevent environmental abuses, such as unsustainable logging and fishing. The environmental chapter had clauses on enforcement, as well as punitive measures for countries that do not comply.
- World trade does not stop
Currently, more than 250 trade agreements are being negotiated between countries. These are not the high standard agreements outlined in the TPP. These informal agreements give the industries of participating countries better and cheaper access to markets, which places US workers, businesses and farmers at a relative disadvantage. China and Europe are currently negotiating agreements with other Asia-Pacific partners that could displace the US goods, services and agriculture products and set standards that exclude the US exports from their markets.
Contenders of TPP had the following issues with the deal.
- The Secrecy
The deal was shrouded in secrecy for a good amount of time, translating into public confusion, suspicion and anger. Many civil action organizations believed that if the administration was so sure of protests when the document were made public, the deal could not be good for a good majority of Americans. This – the secrecy- has been a contentious issue for most trade deals in recent history. This is because leaders of the participating countries are fearful of the dissuading and disparaging uproar that ‘parts’ of the deal would create. They don't want the details to be revealed until the full package is completed.
- Unequal Partners
The United Nations designates six of the 12 TPP members — Brunei, Chile, Malaysia, Mexico, Peru, and Vietnam — as ‘developing countries’. Each is at a different stage of economic development. The TPP forces equal rules on unequal partners, creating a level playing field between developed and developing nations that have divergent needs and aspirations.
- Loss of Manufacturing Employment
TPP could continue a trend of shifting American manufacturing jobs overseas to nations with lower wages and fewer labor protections, much like NAFTA. According to the Global Development and Environment Institute at Tufts University, TPP would lead to employment loses in all member countries with a total of 771,000 lost jobs. The United States would be the hardest hit, with a loss of 448,000 jobs. Developing economies participating in the agreement would also suffer employment losses, as higher competitive pressures force them to curtail labor incomes and increase production for export.
Another major reason for skepticism has been the problem of enforcement by member countries. For instance, there are extensive, well-documented labor problems in at least four TPP countries (Mexico, Vietnam, Brunei and Malaysia). The deal did not have clarity regarding punitive measures (such as economic sanctions) in the event of non-adherence by a member country.
- Currency Manipulation
TPP was silent on currency manipulation. Several members of the TPP, including Japan, Malaysia, and Singapore are well-known currency manipulators, and other currency manipulators, South Korea, Taiwan, and China had expressed interest in joining the agreement. When a country ‘manipulates’ its currency, it distorts international trade by artificially devaluing its own currency while raising the value of dollar. Thus, purchasing with US dollars (i.e. imports) becomes more expensive. This leads to reduced demand for goods produced by US manufacturers, both at home and abroad (exports). All these cumulatively affect the US trade balance and labor market negatively. Both the International Monetary Fund and the World Trade Organization have been quite ineffective in reigning in currency manipulation. American manufactured goods exports might be higher with TPP than without it. However, TPP contenders believe that this gain would be eclipsed by the $39.2 billion increase in imports.
- Life Saving Drugs could cost more
The patentability provision in TPP is expected to extend monopolies of large pharmaceutical companies by at least five years. During which time the prices of such drugs would soar. Production of generics will be delayed and patients, particularly in poorer member countries, would have to wait longer for affordable treatments.
- Weaker ‘Rules of Origin
In comparison to the NAFTA, TPP has weaker rules of origin requirements. For example: 45 % of vehicles and 35- 45 % of auto parts must be manufactured within TPP borders in order to be eligible for reduced tariffs. NAFTA, in contrast, mandated that over 60 % of automobiles and auto parts must be manufactured within the partner countries’ borders. Under TPP, goods from countries such as China and other non participating countries could have been incorporated into products assembled in the TPP region, and thereby enjoy the benefits of tariff-free access to the US market without sharing any of the responsibilities of TPP membership.
Despite the fact that the TPP is quite vocal on ‘Environment Impact’ -with a complete chapter devoted to it - it doesn’t contain any enforceable climate change commitments or border fees to offset the cost of environment-damaging imports. It also does not delineate any punitive measures to discourage US manufacturers from moving their factories to TPP countries with weak climate regulations.
Since the deal was not signed, there is no immediate impact of the withdrawal for the economy. By pulling the United States out of the deal, President Trump fulfilled a campaign promise in the very first week of his presidency, and ended all hopes of an Obama trade legacy. Also, Trump’s willingness to walk away from the deal could be seen as his ability to convince countries desiring a deal with US to come to the table at his terms, which would be a big win for the new President. How it plays out in the long run, it is to be seen. Concerns for the future include:
- A similar fate for TTIP: Continuing the current administration’s position against multilateral free trade agreements, there is a high chance that Transatlantic Trade and Investment Partnership (TTIP) - the proposed trade deal between European Union and the US, will not be signed. Possibilities of a NAFTA renegotiation cannot be ruled out too.
- Trade relationship with Japan: Japan was extremely pro-TPP as the deal was expected to boost its lack luster economy. Japan was to gain the most from the deal in absolute currency terms. In fact it was the only country to have ratified the TPP. Both the US and Japan have shown interest in forging bilateral trade relationships with the primary aim of trumping China in the region. However, any such deal would benefit Japan more than the US. Japan’s economy has virtually flat lined in the past decades. With an aging population and an ever- decreasing domestic demand, it is desperate for exports.
- An impetus to China’s trade plans: The most alarming impact of TPP withdrawal would be the fact that it has left the door open to China to expand its economic might across Asia and the Pacific with its own trade deal, the Regional Comprehensive Economic Partnership (RCEP). The RCEP is composed of the 10 member states of the Association of Southeast Asian Nations (ASEAN) and six states with which ASEAN has existing free trade agreements. The deal does not include the US, but both Japan and Australia - signatories to the TPP, are involved. If the RCEP is approved, it would create one of the world's largest free-trade zones. The RCEP countries make up 46% of the global population and are worth 24% of global GDP. However, the deal lacks the protections for labor, human rights and the environment as in the TPP.
Free trade has been the slogan for economic advancement by every US administration in the modern history so far, but for the current one. TPP was an opportunity to establish US dominance in Asia by US rules. With the intention of going ahead with TPP without US in some form, Malcolm Turnbull, Prime Minister of Australia put it quite aptly, “Protectionism is not a ladder to get you out of the low growth trap. It is a shovel to dig it deeper.”