At 5:00 am on October 5, after several all-night sessions ensconced in the Peachtree Plaza Hotel in Atlanta, trade negotiators from the U.S., Canada, Australia, Japan and eight other Pacific Rim economies announced the completion of the Trans-Pacific Partnership (TPP).
This agreement, in the works since at least 2009, creates a free-trade zone among the dozen nations and harmonizes regulations and rules in a variety of areas. It has also attracted significant criticism among those who see it as a give-away to corporate interests or a vehicle eroding national sovereignty. The leading presidential candidates of both parties – Hillary Clinton and Donald Trump – have denounced the deal, raising concerns that it could be held up in Congress despite the passage of “fast-track.”
Now that the ink has dried a little bit, and new battle lines have been drawn, it’s worth taking a closer look at what this deal really means and what challenges remain.
The economic impact
The 12 countries making up TPP collectively represent 40% of world economic output, eclipsing the North American Free Trade Agreement and the E.U. as the world’s largest free trade zone. The precise effects of TPP, as with any trade agreement, are difficult to predict. Neoclassical trade theory would certainly expect an increase in aggregate income across the trading zone, as countries are able to specialize in what they do best and firms must improve their performance in the face of stronger competition.
But, while the partnership will certainly have many benefits, the size and distribution of these benefits, along with the identity of the potential causalities, is more controversial. At the heart of the TPP is the agreement to eliminate thousands of existing tariff and quota lines on a wide variety of products. Many on the left, and especially labor unions in the richer TPP states, fear that easier access to foreign markets will induce employers to offshore jobs. Supporters of the agreement point to the benefits of freer trade for consumers and exporters.
It may take a while, however, to see either of these potential effects. Tariff and quota reductions are not scheduled to take place all at once, because participating states have negotiated different grace periods for full compliance based on the sensitivity of the product. For example, the U.S. will have 25 years to open its market fully to Japanese automobiles.
Not only that, but three of the biggest economies among the 12 – the U.S., Canada and Mexico – have already been members of a free trade zone (NAFTA) since 1994. From the perspective of these three countries, therefore, the most significant economic outcome of TPP is surely the integration of Japan into this zone. Otherwise, the aggregate trade effects of TPP for North America are likely to be small. The absence of China, by far the biggest Pacific economy apart from the U.S., also limits the scale of the agreement.
That said, some of the rules of the free trade zone were quite hard fought. Canada and New Zealand were deadlocked until the last moment on the issue of dairy exports, with Canada ultimately deciding to compensate its dairy farmers for the limited market opening required by TPP. Japan successfully insisted on lower local content restrictions on automobiles, which will allow it to source more components from outside TPP and still count the end product as originating inside the zone.
Beyond free trade
Other elements of TPP have attracted more attention than its implications for trade openness. The partnership follows other recent agreements in establishing a procedure for investor-state dispute settlement. This procedure creates an international arbitration panel to decide on cases brought by corporations against TPP member states for any violations of the agreement that may harm their interests.
While this panel would only be empowered to award damages, not to order regulatory changes, some fear that it could undermine the legal systems of member states. Indeed, a number of lawyers have argued that the provision may violate the U.S. Constitution by bypassing the federal courts. Others see the mechanism as a way for corporations to use TPP to get around the environmental or labor rules dully passed by member state legislatures.
Taken all together, however, it seems unlikely that arbitration panels will make controversial rulings that could endanger the legitimacy and viability of TPP. The TPP is very much a state-dominated agreement, and states will remain in the driver’s seat. While national governments do generally comply with the legal decisions of international bodies, evidence indicates that, even in the much more integrated European Union, supranational courts sometimes adjust their rulings to the interests of member states.
Labor and the environment
The agreement contains a number of labor and environmental provisions that may help offset some opposition on the left. For example, it bans child labor in the member states and contains provisions that would protect endangered wildlife. Still, many labor unions and environmental groups in member countries remain skeptical, arguing that standards have been watered down and that domestic laws can now be challenged by businesses in the arbitration panels. Concerns about human trafficking have focused on the Southeast Asian members, especially Vietnam and Malaysia.
Clearly, the TPP agreement does tackle labor and environmental issues, but just as clearly it leaves much undone. How observers will perceive TPP on these issues depends on their judgments about the proper scope of trade agreements. Is the international system so interconnected that trade cannot be considered apart from its ethical implications for workers and the earth? Or would trying to address such complex topics in a trade agreement scuttle any chance for achieving legitimate commercial objectives?
Intellectual property and the internet
One worry among developing countries and their advocates relates to intellectual property protection on complex biologic drugs. The US demand for a 12-year embargo on generics was rejected by other countries, and a final minimum of five years was agreed under TPP.
But even five years is more intellectual property protection for these drugs than many member states had previously, causing some to worry, with good reason, that the price of necessary drugs could increase. Meanwhile drug manufacturers have indicated they aren’t happy either, leading some to speculate this could present a problem for final passage.
Some of the more interesting provisions of TPP relate to the internet. Member states are required to allow free transfers of data within the zone, which will make it more difficult to enforce national privacy standards. At the same time, open data transfer has the potential to improve access to information in more authoritarian countries like Vietnam. But not all elements of TPP tend towards greater openness on the web. Many net freedom advocates are opposed to TPP because, they say, it would force tough American intellectual property rules on other countries, requiring internet service providers to police their own content.
Despite the obvious economic significance of the TPP agreement, from the U.S. perspective its most important implications may be strategic. The U.S. makes up more than half of the total economic size of the partnership, and it is already in a free trade zone with its two biggest TPP trading partners, Canada and Mexico. Why, then, do we see the Obama Administration’s emphasis on the importance of TPP?
The lack of Chinese participation in the agreement may provide a clue. The partnership is seen by many in the administration as a central element of the US “pivot” towards Asia and as a way of shoring up US economic influence in the face of a rising China. While Chinese opposition to TPP has recently softened, it is hard to avoid the conclusion that the partnership is, at least to some degree, a soft form of containment.
Is TPP, then, an effective instrument for strengthening the US role in Asia? Only to a limited extent. China’s sheer size, particularly in its own region, cannot be eclipsed by a trade agreement. The power of TPP, therefore, is more symbolic. Without being aggressively anti-Chinese, it sends a message that the US continues to act as the leading power in the Pacific.
The road ahead
Of course, the completion of the TPP negotiations doesn’t mean that the agreement is a done deal. It must still be ratified in each of the 12 participating countries. And we may need to wait until the final text of the agreement becomes public to gauge what reception it will receive. That said, strong executives mean that the ratification process is likely to be smooth and uneventful in most countries, though there are two where things may get complicated.
Canada is in the midst of an election season that could result in the ouster of the pro-TPP conservative government. If a left-leaning government were to take power in the country, its support of the agreement could not be taken for granted. In the U.S., Congress has already given President Obama fast-track negotiating authority, which means that it is bound to take an up-or-down vote on the pact with no amendments. This rule limits the risks of a congressional veto, but it doesn’t automatically mean that the approval process will be quick and smooth.
The partnership agreement has already become a political football in the U.S. presidential elections. Given that leading candidates from both parties are now opposed to TPP, a rejection of the agreement, or at least a long delay, is not out of the question. To make matters worse for the president, some business groups are also withholding support until the text of the agreement becomes public.
In the end, the most likely scenario is that Congress will vote in favor of the agreement sometime next year. But much will depend on the contents of the agreement yet to be disclosed and how it plays publicly in a highly politicized environment.