How would the Trans Pacific Partnership help the U.S. economy? Are there potential costs of this agreement?

If you listened to Donald Trump in the republican debates you would know that he doesn’t like the TPP. Rand Paul also seems to be against it. I think Carly Fiorina may also have said some negative things. I disagree with these three candidates. In my view, the TPP will be good for the United States in several dimensions.

Freer trade generally benefits both participants by exploiting comparative advantage, by stimulating higher productivity among firms and by lowering prices for consumers. Using computable general equilibrium models, the payoff to the United States from the TPP, in terms of higher GDP, after TPP is fully implemented in about 10 years, is approximately $80 billion. Given the size of the U.S. economy, that’s not a large number, but it’s not trivial either. And the payoff lasts indefinitely --there is no reason why the benefits will melt away with the passage of time. I don’t claim that the TPP by itself will alter the trajectory of low productivity in the U.S. We have a lot of problems in our economy. Most, of them we have to deal with right here at home. But TPP would make a positive contribution to a stronger economy.

Secondly, the TPP opens the door for future agreements with other countries in Asia and, in fact, in the whole world, because the accession clause in the TPP has no geographic limitation. In theory, any country could join, but all the existing members have to agree on a new member. In the immediate future likely countries that might join are Korea, Philippines, Indonesia, Taiwan, Thailand and, in Latin America, Colombia and Costa Rica.

The absence of geographic limitation in the TPP potentially makes it a much bigger pact for the United States. For the United States, the existing TPP amounts to a new rule book for commercial relations plus a free trade agreement with Japan, Malaysia, Vietnam and New Zealand, because the U.S. already has free trade agreements with the other members. In terms of market access for U.S. companies, the TPP doesn’t add much to existing free trade agreements with Canada, Mexico, Peru, Chile, Singapore and Australian. Looking forward ten years, along with the other potential members I mentioned, it’s possible China will be a member of the TPP, or that a parallel accord will be negotiated between the U.S. and China. So the TPP offers pathway, a door, to broader U.S. engagement with Asia, which is a good thing.

The third benefit to the United States lies in the realm of commercial rules. Looking at the chapters, you find a lot of new rules as to how countries should respect the environment, ensure labor rights, intellectual property rights, how they should manage state-owned enterprises, data flows, investment and so forth. Many rules go far beyond what has been negotiated in the World Trade Organization. So, in terms of its framework, the TPP comes much closer to the U.S. commercial standards.

The final aspect of the TPP which is very important, is that it embodies U.S. geopolitical engagement with Asia. If the U.S. Congress rejects the TPP, as Trump, Sanders and some others have urged, Asians will view that vote not just as a rejection of a trade deal but as a broader rejection of Asia. That would not be good for U.S. relations.

Let me talk about transition costs. The first thing to observe is that expanded trade does unleash job churning. Expanded trade replaces jobs that are not so productive with jobs that are more productive. But a displaced person doesn’t usually move from one job to another quickly or directly. Rather, expanded trade sets in motion all the links in the labor market, with some workers ending up in new export jobs. The people who have to face more import competition are going to endure job losses for sure. But there will be job gains in the export industries. So there’s a burden on the people who lose their jobs. This is equally true of any new technology that’s coming down the pipe from Silicon Valley. On the other hand, some people will get better jobs. Society as a whole will gain as firms use their resources better, become more productive, and as prices at the checkout counter fall. We calculate the gains as ten to twenty times larger than the losses.

Greater import competition, and the job losses entailed, are the strongest political argument against freer trade. Additionally, some U.S. opponents of the TPP complain about the loss of sovereignty -- Senator Rand Paul is an example. However, the United States has thousands of treaties with other countries, and each one represents some loss of sovereignty because we promised another country we would do certain things or would not do certain things. In each case, the U.S. Congress has to decide whether restrictions on U.S. freedom of action are balanced, or more than balanced, by restrictions on the treaty partner’s freedom of action. In the case of the TPP, this should be an easy decision, because the eleven U.S. partners change their rules far more than the U.S. changes its rules.

If a country violates a treaty, there are usually adverse consequences, which means that countries lose some sovereignty every time they enter into a treaty or executive agreement with another country. And that’s true with TPP as well. I don’t place such a high value on the rights of the U.S. Congress or the rights of the state of California to do whatever it wants regardless of the consequences for other countries in the world. But those who buy into the illusion that a country is a kingdom with a king who can say one thing today and another tomorrow, and equate that freedom with “sovereignty,” will not be happy about any international agreement.

Will TPP trade partners have to adopt higher American standards on labor law and environmental protections?

These features, which are reflected in one chapter on labor and another on environment, will require really big new obligations from some countries. However, they will not require anything new of Canada, for instance, because in many respects Canada has higher environmental standards than the U.S. For example, the First Nations in Canada are relatively poor, but on the whole Canada doesn’t have the poverty we have in this country. The same observation could be made about Japan. No major changes are required in Canadian, Japanese, Australian or New Zealand labor or environmental standards. In any respect, those countries’ standards are better than or at least as good as the United States.

So, the main countries to consider in this respect are Malaysia and Vietnam and, to a certain extent, Mexico, Peru and Chile. However, the Latin countries already have agreements with the U.S. Those agreements have standards, but not as strong as the TPP standards. So what are the new obligation for these countries? First, the TPP has a requirement for a minimum wage. I think Malaysia already has a minimum wage but Vietnam does not. The actual minimum wage is up to each country but there must be some minimum. Each TPP member also has to allow independent labor unions. In Vietnam, that’s a big change. Vietnam has a single government run labor union, so in a sense there is no labor union. Allowing labor unions is a big change, especially for Vietnam.

Enforcement on these requirements can be strong. Previous U.S. free trade agreements with, for instance, Mexico and Peru, make it hard to reach a dispute settlement process which ends up in a binding arbitration. These previous agreements basically provide “consultation,” which means that government diplomats go back and forth to talk and exchange views. However, the talks never lead to a hard decision that one country’s practices are wrong and should be improved with respect to labor standards in such-and-such a factory or industry. The TPP is different: it has arbitration, and the labor and environmental chapters are subject to the same dispute settlement mechanism as any of the commercial obligations. That is a big step —most countries do not want their labor and environmental practices to be judged by an external body of arbitrators.

If a country doesn’t respect the decision of the arbitrators, its trade benefits – in terms of to the markets of other TPP countries -- can be withdrawn, which is a pretty big penalty. So, these are big commitments in the labor area that go far beyond anything that’s been accepted in the WTO or prior free trade agreements.

On environment: again, the TPP goes beyond what has been previously done in the WTO or US free trade agreements. The environmental chapter requires TPP members to subscribe to international conventions, like CITES and the Montreal Protocol on Ozone. Most TPP countries have already subscribed and I think that the provision is really speaking to Vietnam and Malaysia.

The TPP dispute settlement mechanism will ensure that members both subscribe to international environmental conventions and enforce the obligations, as well as enforce their own environmental laws. This didn’t exist in previous U.S. free trade agreements.

I want to emphasize that the environmental chapter did not address carbon emissions. That’s obviously a huge international issue, addressed as much as possible by the United Nations. If the UN process ever ripens into binding obligations on national carbon emissions, then the TPP enforcement mechanisms might play a role, but that’s for the future. Meanwhile, there are a lot of other environmental problems, including those of a local nature, that are addressed by the TPP. Overall, the environment and labor chapters are pretty far-reaching.

Will the TPP hurt Chinese competitiveness and market access? Will the agreement put checks on Chinese regional influence?

I go to China fairly often, and some of my colleagues go more often than I do. Amongst the elite economists and officials we talk to – Chinese who speak English and hold high positions -- they is a lot of receptivity and interest in the TPP. We wrote a book titled “Bridging the Pacific,” published a while back, that advocates closer US-China trade and investment relations. We threw out the idea that China may join the TPP at some point. This was written more than a year ago, when we didn’t know exactly what would be in the TPP. However, that idea now has gathered some traction amongst the Chinese elite. I know that there are other Chinese who view TPP as a “contain China” maneuver by the U.S.That view was strong about three to four years ago when the TPP was just getting started. The view has weakened over time, and now it’s only espoused by professors outside of Beijing. In other words, the “contain China” criticism of TPP is not voiced nearly as strongly as it once was.

For China, as well as for most countries, the main economic problems are domestic, not strongly related to the international side of the economy. For example, China needs to improve dramatically the low productivity in its services industries. China is very strong in manufacturing, obviously, but it is weak in delivering services compared to the U.S. or Australia. There is broad recognition in China that TPP reforms could help improve the domestic services industry.

The TPP also has a investment standards that China would benefit by adopting. For example, several chapters deal with state-owned enterprises. Even Chinese ministries recognize that the powers of the state-owned enterprises should be curtailed and their financial accounts should be more transparent.

The computable general equilibrium (CGE) models estimate that China will experience trade diversion as a result of TPP. China will lose some trade advantages because it is now selling into markets that will adopt lower trade barriers with other TPP partners. Chinese exports will not be getting those advantages and they will probably sell less into TPP markets. China will probably feel the strongest new competition from Vietnam and Malaysia. Those countries will attract investment that would have otherwise gone to China. China will lose some supply chain links that might otherwise have operated in China.. We estimate that China may lose as much as $100 billion of exports in 10 years’ time. That’s a big number, though relative to Chinese trade it’s not huge.. However, nobody likes to lose potential exports, so that is a modest concern, for Chinese officials.

How much increase in trade will the TPP result, at initially?

The numbers are posted on our website under Peter Petri’s name. He is updating those statistics right now. We estimate that the total increase in exports will be about $r00 billion. This is when TPP is phased in (about 10 years) for all 12 members. The increase in imports will be about the same, so the total increase in two-way trade will be about $800 billion. We expect that all the countries in the TPP will be growing -- even Japan, which is moving pretty slowly, would be growing to some extent. However, on account of TPP, extra GDP growth for all members combined will be about $300 billion.

Among the TPP members, who will benefit and who will lose?

We didn’t find any countries that will lose, though the benefits differ quite a bit between countries if you express them as a percent of baseline exports. My memory is that Vietnam will enjoy a huge percentage increase in its baseline exports. I think Malaysia’s increase was the second-biggest in percentage terms.

Export increases for the U.S. will be about $123 billion, imports will rise by about the same amount, and U.S. GDP will rise about $77 billion. Current U.S. exports of goods and services are close to $3 trillion, and in 10 years’ time will obviously be more, so that percentage export gain for the United State is much smaller than for Vietnam.

What makes the TPP different from other trade agreement and systems (i.e. WTO)?

The TPP is an impressive document. I’ve read several chapters rather closely. The total page count, including all the annexes and schedules, exceeds 5000 pages. In terms of chapter text, I believe the page count is about 700 pages, and divided into 30 chapters, that averages 20 or 25 pages per chapter. Compared to prior U.S. free trade agreements, the TPP goes much more deeply into several areas.

Regarding the subject matter, I’ve already mentioned labor and environment. Those chapters are much more extensive than in recent U.S. free trade agreements, such as those with Korea and Colombia. The TPP also has chapters on several aspects of services that are more detailed than previous U.S. free trade agreements and the World Trade Organization’s General Agreement on Trade in Services (GATS). There is one chapter on cross-border trade in services, another on financial services, another on temporary entry for business purposes, another on telecommunications, and a new chapter on electronic commerce. We had a flavor of some of the mentioned chapters in previous FTA’s, but until now there was no electronic commerce chapter.

There is also a chapter on competition policy. I haven’t gotten a chance to read that one in detail, but it goes into monopoly problems. There’s a chapter on state-owned enterprises, which we never had before; and there’s a chapter on intellectual property that is more extensive than prior versions. There is a chapter on cooperation and capacity building, which is a promise of assistance to the developing members. There’s one on development, and there’s one on small- and medium-sized enterprises. What these chapters actually promise, I don’t know, but I know the U.S. never before had chapters on those topics. Additionally, there is a chapter on regulatory coherence, as well as one on transparency and anti-corruption. TPP members promise to combat corruption. These chapters all contain new rules.

What happens if there are problems in dispute resolution mechanisms, and what are those mechanisms?

The fact that the TPP dispute settlement mechanism covers nearly all of the chapters is innovative. There is a common format of holding consultations to try to work problems out before resorting to arbitration. The procedures to adhere to models that already exist within the WTO and the International Center for the Settlement of Investment Dispute in the World Bank. So the procedures are not new.

In terms of remedies, if a country doesn’t abide by an adverse arbitration decision, the standard TPP remedy is the same as in virtually all trade agreements. Other countries can withdraw the concessions they made, such as lower tariff and non-tariff barriers. There is no such thing as money fines in most international trade agreements including the TPP. The remedies are of a civil nature, not criminal penalties, and the arbitration panel has no power to compel a country to change its laws or regulations.

Why were negotiations particularly secretive, and is this a new norm for global legislation?

I did negotiations when I was younger, and I can say that the TPP negotiations were no more secret than in the past. However, non-governmental organizations and unions are far more interested in negotiations now than in the past, and they clamor for more real-time notice, because what they want to do is influence the outcome of negotiations. If these parties can see the negotiating drafts as they are being written, they have a better chance of mobilizing forces either in the Congress or in companies or states, to try to persuade the USTR to change its negotiating position. For these reasons, there’s more demand for transparency now than there was 10 years ago, much more than there was 30 years ago.

So why didn’t the negotiators just publish all the drafts as they were being negotiated? There are a couple of powerful reasons. Every negotiator faces domestic pressure groups that want the negotiation to go one way or another in terms of more or less liberalization at home and abroad. Facing a lot of pressure groups, the negotiators try to find that sweet spot where they can get agreement on the extent of obligations each country must undertake on each subject. When negotiators face more real time pressure from their own constituents, it is harder to discover that sweet spot.

The second and related reason is this: negotiations are obviously a give-and-take proposition. In the TPP the negotiators went through, I believe, 30 negotiating rounds. I mentioned that the document has 700 pages of text, plus thousands of pages of annexes. That required a lot of give-and-take drafting, so every country had to agree to things it didn’t like. If drafts were made public while being written, it would put a lot more pressure on individual negotiators not to budge. It would make the negotiation a lot more difficult. We see the problem in high profile the current presidential debates. When any candidate has changed his position from a year ago, a moderator flags him on the issue, and other candidates assail him as a flip-flopper. Well, in international negotiations, a lot of flip-flopping goes on because, as I say, it’s a negotiation. It would be harder to flip-flop in the glare of public light, so that’s a powerful reason for some degree of secrecy.

I was bemused by the cry for transparency because those who bothered to read reports in the trade press got a pretty good idea about the terms of the agreement after each round of negotiations. Let’s compare that with what goes on in the Supreme Court. No one knows how Court decisions will come out until the nine justices have announced their opinion. There’s zero transparency in the give-and-take of judicial deliberations. Yet not many people are asking for transparency within the Supreme Court. According to my lawyer friends, justices do change their minds – no doubt a good thing. Another example of secrecy would be the U.S. Congress. As legislation is being cooked up congressmen have to compromise. But they do so secretly and finally a bill comes out of committee for floor votes in the House and the Senate. Evidently some degree of secrecy has its uses.

 

China is talking about its own free-trade zone as a counter measure to the TPP. Do you think China can actually pull it off?

There are a couple of layers to that answer. The first one is that China has free trade agreements with some of its Asian neighbors. Compared to the TPP, they’re not deep or extensive –basically they are political agreements. But currently China is negotiating a deeper agreement with Korea and Japan. This is pretty spectacular, given that Japan and China do not have warm historic relations, nor do Korea and Japan. The fact that those three countries are coming together in a substantial CJK agreement is impressive.

In addition, China is the foundation t member of something called the Regional Comprehensive Economic Partnership, RCEP, with about 20 Asian countries. RCEP includes several TPP members, so it is worth following. The drafting hasn’t gone very far, but China will push it.

China also has its One Belt, One Road initiative with its Asian neighbors, buttressed by the Asian Infrastructure Investment Bank, the AIIB. China can offer a lot of infrastructure help both in terms of money and in terms of companies that are expert builders of ports, airports, railways and roads. The Chinese economic initiative in Asia is centered on the One Belt, One Road concept, flanked by the CJK and RCEP pacts. So yes, China has plenty of alternatives.