Promises: Will the Trans-Pacific Partnership deliver?
Wharton experts consider the deal from a US perspective
This article is reprinted from Knowledge@Wharton, the online business analysis journal of the Wharton School of the University of Pennsylvania, which holds the copyright to this content.
The Trans-Pacific Partnership (TPP) that a dozen countries signed on October 5 in Atlanta is ambitious in that it aims to free 40% of world trade from tariffs and quotas, and elevate protection for the environment and worker rights, among other objectives.
Yet, in the US, opinion is sharply divided on the impact of the TPP in protecting and creating jobs, supporting the environment and safeguarding pharmaceutical innovation. Also in question is President Barack Obama’s wherewithal to get the TPP past Congress, given both the level of support he can expert there, and the high-decibel opposition that trade treaties typically face.
In any event, some broad outcomes of the TPP are undisputed. First, the dismantling of trade barriers across the TPP countries is bound to reduce transaction costs, increase ease of doing business for their companies and possibly benefit consumers with lower prices and more choice. (The treaty’s partners are the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.)
Second, it will allow the US to have a greater say in writing the rules of trade in the Asia-Pacific region, and counter-balance China’s writ there. As a White House note on the partnership puts it: “With the TPP, we can rewrite the rules of trade to benefit America’s middle class. Because if we don’t, competitors who don’t share our values, like China, will step in to fill that void.”
Third, the TPP could alter business structures within and outside its partner countries. Businesses from countries that are not part of the TPP may set up businesses within the TPP countries to take advantage of a friendlier business environment and lower costs. This could include companies from outsiders such as China and insiders such as Japan – which, incidentally, is billed as one of the biggest potential beneficiaries.
'With the TPP, we can rewrite the rules of trade to benefit America’s middle class. Because if we don’t, competitors who don’t share our values, like China, will step in to fill that void’THE WHITE HOUSE
Consolidation between companies through mergers and acquisitions is also a strong likelihood.
“As the treaty gets implemented, there will be a lot of M&A activity, both within and outside the TPP countries,” predicts Mauro Guillen, Wharton professor of international management and director of the Lauder Institute. “Also, European and Chinese firms may want to make acquisitions inside to take advantage [of the new business environment].”
Freer trade, lower costs
“The biggest gains will flow from the countries in the TPP agreeing to eliminating as many as 18,000 rules [or taxes on Made-in-America products],” says Guillen.
“They will reduce transaction costs and speed up procedures. Any attempt to reduce the complexity of trade is good because it reduces transaction costs. Hopefully, it will also create more jobs and reduced prices for consumers.”
According to Guillen, the TPP will also tend to increase the volume of trade between the countries in the partnership. This would occur in much the same way the North American Free Trade Agreement (NAFTA) increased trade between the US, Mexico and Canada since it went into effect in 1994, and the emergence of the European Union as a single market.
“You found Japanese and American firms started to invest in Europe, but they invested with a European logic in mind,” he says. At the same time, the TPP will “distort existing patterns of trade,” which means companies would have to make adjustments to survive in the new environment, he adds.
Strategically for the US, rebalancing its economic power in the Asia-Pacific region is critical. “The TPP is also a geopolitical play, and it has to do with China, essentially,” says Guillen. He notes that while China is not part of the TPP, it is the most important trading partner for many countries in Asia including those that are part of the TPP. “This agreement runs in the face of that. It is for the US to continue to be relevant in that part of the world.”
The TPP certainly helps advance the US’s geopolitical strength in the Asia-Pacific.
“It is a sucker’s bet for the US to underwrite the costs of security” in the Asia-Pacific region “while many of the economic gains in the region go to China,” says University of Pennsylvania Law School professor Jacques deLisle, who is also director of Penn’s Center for East Asian Studies.
Even as the TPP undermines China’s power in the region, China will not battle the TPP head on, according to Marshall W. Meyer, Wharton emeritus professor of management and a longtime China expert.
“It will not go ballistic over the TPP,” he says. “Instead, it will shift its focus in one direction – the ‘One Belt, One Road’ initiative, which is focused mainly at exporting China’s infrastructure capacity to countries that need the infrastructure. It will focus on its next door neighbours — the Central Asian states.”
(China’s 'One Belt, One Road' initiative aims to foster connectivity and cooperation among countries primarily in Eurasia.)
At the same time, Meyer does not rule out the possibility of China trying to find its way into the TPP at a later date.
‘[China] will not go ballistic over the TPP. Instead, it will shift its focus in one direction – the One Belt, One Road initiative’MARSHALL W. MEYER
Gainers and losers
Clarity on the specifics of the TPP will have to wait until the full text of the treaty is released. Meanwhile, the US Government and supporters and critics of the treaty have taken their respective positions. The TPP has become “something of a Rorschach test — a ‘flak catcher’ to use Tom Wolfe’s phrase — on to which people project their anxieties”, according to Meyer.
The Obama administration has begun making its case by highlighting that 95% of the world’s consumers live outside US borders. Last year, the US exported US$2.34 trillion in goods and services.
“The more American businesses are able to export, the more likely they are to expand and support high-paying jobs at home,” the administration notes on the White House website. “Companies that export pay 18% more than companies that don’t.”
Chiefly, the TPP will have its impact in the following ways, according to the US Government. It aims to advance workers’ rights in the TPP countries with measures including a ban on child and forced labour; a minimum wage; a ban on workplace discrimination; the right to collective bargaining and workplace safety standards.
It aims to help the environment by combating illegal wildlife trafficking and logging; preventing overfishing; and protecting the oceans. In addition, it will seek to protect a free and open internet; protect consumers from fraud and deception; require comprehensive anti-corruption and transparency measures; and help simplify export rules for small businesses.
The government adds that the TPP further aims to change the present situation where “US business and workers are at a disadvantage with higher costs for American goods, more barriers to trade, and lower standards for workers and the environment abroad than we have at home.”
The Obama administration sought to explain the TPP’s benefits through a video that tracks the journey of an American cherry grown on a family farm in Washington state. That cherry attracts a 20% tax in Vietnam, where cherries from Australian farmers will be sold with zero taxes next year, the video says, adding, “Trade agreements can help”.
The US has much at stake in the TPP. Its trade with TPP countries was more than US$1.6 trillion in merchandise in 2014 and more than US$273 billion in services in 2013, the most recent periods for which data is available, according to a report by the Federation of American Scientists (FAS), a non-profit in Washington, DC, prepared for Congress.
US foreign direct investment (FDI) into TPP countries was nearly US$86 billion in 2013, while TPP countries invested more than US$69 billion in the US that year, the report adds.
Japan would absorb 70% of the US$8.5 billion increase in agricultural trade among TPP countries in 2025, with US agricultural interests capturing one-third of the increase in farm exports within the TPP, says the FAS report, which cites a US Department of Agriculture note of October 2014. “Japan’s participation in the agreement has drawn the interest of a wide range of US industries, including sectors like agriculture, automotive and services,” the report adds.
Guillen is sceptical of Japan’s role within the TPP. “The Japanese have one problem – they always like to protect their domestic market,” he says. “Let’s see to what extent they implement all of these agreements.” He notes that Japanese companies that make their markets in Asia could benefit if the TPP helps economies in the region grow even faster.
‘In the long run, say 20 years down the road, [the TPP] will have mostly beneficial effects’MAURO GUILLEN
As the TPP ratification process gets under way, it will encounter issues raised by several industries and constituencies:
Labour: Slippages in implementing the TPP agreements within member countries could create problems. Labour rights advocates are concerned that if some countries fail to implement labour rights, “US workers would be placed at a competitive disadvantage as they compete against low-cost, low-standard labour practices,” the FAS report says.Richard Trumka, president of the AFL-CIO workers union, warns against haste in pushing through with the TPP and called for more clarity in a statement after the deal was signed. “Rushing through a bad deal will not bring economic stability to working families, nor will it bring confidence that our priorities count as much as those of global corporations,” he says.
Environment: The White House website displays support notes from the World Wildlife Fund, the Nature Conservancy and the National Small Business Association, among others. It also features positive comments from Pro’s Closet, an online store in Colorado that trades in used bicycles, a greeting card company and a specialty tea company, both in Oregon.However, not all environmentalists are on the same page. The Sierra Club says it is “deeply concerned about the lack of transparency … and the deal’s environmental implications.” Greenpeace New Zealand calls the TPP “a shady deal cooked up behind closed doors” and says it is “bad news for New Zealanders, for the seas in which we swim and fish, the air we breathe, and even for our health.” The National Audubon Society has also been opposed to the TPP.
Agriculture: The US agricultural sector is divided on the dismantling of all trade barriers. The dairy and sugar industries do not want import competition from TPP countries, especially Australia.Trade in services: The TPP comprises countries that are developed, developing and under developed, which creates problems. In trade in services, developed countries want more access, while developing countries want to go slow on that, as they are worried about job losses and the political implications of “forcing open sectors that are often controlled by politically powerful interests”, the FAS report notes.
Pharmaceuticals: The TPP negotiators have sought to balance a need to provide greater access to medicines and adequate patent protection for pharmaceutical companies. For example, negotiators have been deadlocked over the issue of the minimum period of protection to the rights for data used to make biologic drugs produced by companies including Pfizer Inc, Roche Group’s Genentech and Japan’s Takeda Pharmaceutical Co, according to an NBC report. The US had sought 12 years of protection to encourage pharmaceutical companies to invest in expensive biological treatments such as Genentech’s cancer treatment Avastin.
Politics: Democratic presidential candidate Hillary Clinton had avoided taking a stance on the TPP, divided between her support for labour unions and loyalty to Obama. But she has since announced that “based on what I know so far, I can’t support this agreement”.
Senator Bernie Sanders, her top opponent for the Democratic ticket, has strongly opposed the TPP. Says Guillen: “In the current climate, Obama has a bad relationship with Congress and passing these things is always difficult.”
It helps that in June, Congress handed Obama the powers to “fast track” the TPP. Essentially, it means that he can negotiate its ratification with the role of Congress limited to only have an up or down vote, but not make amendments, explains Guillen.
“It is fast track if the majority agrees in Congress that this should pass, but it is not fast track if the majority is not there,” he says. “There’s a big danger here – these trade deals have always faced opposition both within the Republican and the Democratic parties.”
Guillen does not expect the TPP to become a raging issue in the run-up to the US presidential elections in 2016, but much debate will be centred on its impact on jobs. In the immediate future, he does not expect the TPP to protect and grow jobs.
“[However], in the long run, say 20 years down the road, it will have mostly beneficial effects,” he says. “But the problem with trade agreements always is what happens in the first three or five years – some jobs will be created and some jobs will be destroyed.”