Wednesday, September 14, 2016

Trans-Pacific Partnership: To Ratify or Not Ratify, That Is The Question

Remember all the hoopla surrounding the North American Free Trade Agreement (NAFTA) during the 1992 presidential election? Former presidential candidate Ross Perot famously said that the "giant sucking sound" would symbolize the negative effects of NAFTA if passed. Over 20 years later, and NAFTA has had a net positive effect on the United States economy, as well as for the Canadian and Mexican economies. 24 years later, we are seeing the populist anti-trade sentiment kick in this presidential election with the Trans-Pacific Partnership (TPP) [see searchable version here]. Donald Trump and Bernie Sanders have gone on an anti-trade, protectionist tirade. Hillary Clinton has distanced herself and even flip-flopped on the issue. What about the TPP is so controversial?

The TPP is a trade agreement among 12 Pacific Rim countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. In 2014, the TPP member countries accounted for about 40 percent of the world's GDP and 25 percent of global exports. The purpose of the TPP is to promote "economic growth; support the creation and retention of jobs; enhance innovation, productivity, and competitiveness; raise living standards; reduce poverty; promote transparency, good governance, and enhanced labor and environmental protections." 

With over 5,000 pages and 30 chapters, the TPP is the largest trade agreement in United States history. Given the length of the trade agreement, there is bound to be at least one provision in the TPP that annoys all sides of the political aisle. With over 5,000 pages, the TPP would not pass a free trade litmus test. There are going to be certain provisions that liberalize trade, and others that restrict trade. The TPP is not so much a free trade agreement as it is a preferential trade agreement. Nevertheless, the question we shouldn't ask ourselves "Is there something bad in the TPP," but rather ask "Is the TPP an overall force of economic progress?" Let's take a look to see what preliminary research has to say.

Perceived Benefits
  • Peterson Institute: According to the Peterson Institute (Petri and Plummer, 2016), annual income gains by 2030 are expected to be $492 billion, $131 billion of which is for the United States alone. The TPP is also expected to increase US exports by $357 billion (by 9 percent) in 2030.
  • Net Economic Liberalization: The Cato Institute released a chapter-by-chapter analysis of the TPP earlier this week, and was done so from a pro-free trade/libertarian standpoint. Yes, the Cato Institute did find that five chapters in the TPP that Cato Institute considers protectionist: Textiles, Trade Remedies, Intellectual Property, Labor, and Environment. Overall, Cato Institute did find that the TPP is net liberalizing and will expand economic freedoms. 
  • Tariff Rates: Since the U.S. already has small tariff rates, the impact of the TPP on imports will be relatively small. However, the other countries have some high tariff rates. Tariff reductions will represent 10 percent of the gains mentioned in the Peterson Institute study. Many tariffs among these countries will either be greatly reduced or eliminated, which will provide member countries greater access to other member countries' goods, thereby increasing trade flows. TPP is expected to remove 18,000 tariffs on American goods. Seven out of twelve countries will eventually eliminate tariffs, whereas all twelve countries will eliminate export subsidies. 
  • USITC: The U.S. International Trade Commission (USITC) found that by 2032, TPP will add real annual income of $57.3 billion (0.23 percent higher), add $42.7 billion to the real GDP (0.15 percent), and employment would be 0.07 percent higher (128,000 FTE). On the whole, these gains are relatively modest for the United States. 
  • World Bank Study: The World Bank finds that the TPP has the potential to lift the GDP by 1.1 percent by 2030 (10% in Vietnam, 8% in Malaysia). Aggregate GDP losses for non-members is at an average estimate 0.1 percent loss. 
  • International Monetary Fund: The IMF recently published a paper primarily focusing on the effects of Latin American countries. The IMF concluded that the Asian TPP members countries benefit the most, while the benefits for Latin American member countries are much more modest.
  • Canada: The Office of the Chief Economist in Canada found that signing the TPP would generate GDP gains of $4 billion by 2040, whereas not signing the TPP would create GDP losses of $5.4 billion by 2040.
  • Fair Use Provision for Intellectual Rights: Although intellectual rights provisions are sub-par (see below), there is at least a fair use provision (TPP, Article 18.66) to temper it a bit. 
  • Rules of Origin (ROO): These are rules for customs authorities to determine whether a given imported good originates from a TPP country or not. On the one hand, these laws are more liberalizing than they have been in past trade agreements. On the other hand, these rules limit free trade, particularly in the auto and textiles industries. 
Perceived Costs
  • Two economists from Tufts University (Capaldo and Izurieta, 2016) found that the TPP would actually reduce the United States GDP by 0.5 percent over the next decade, as well as create net job loss of 448,000 jobs. 
  • Intellectual Property and Digital Rights: The intellectual property laws will force customers to pay more for movies, medicine, and other goods under the IP provisions. With regards to copyright laws, it does not impose additional copyright laws not the United States since the United States already has laws extending to the author's life plus another 70 years. However, it will impose additional strictures on other countries. The silver lining for the United States is that patent laws really will not change all that much because the TPP is not more stringent than current United States law. 
  • Investor-State Dispute Settlement (ISDS): An ISDS essentially is an alternative judicial system for multinational corporations who think they are being treated unfairly by more local governments. ISDS provisions are not particularly controversial since they are standard in trade agreements. As a working paper from the Center for Strategic and International Studies (CSIS) points out, about 90 percent of trade agreements do not even invoke ISDS provisions. Most of the time, ISDS claims take place in countries with weaker legal institutions. States are twice as likely to win, and even when corporations win, they tend to get less than 10 cents to the dollar on their initial claim. In short, ISDS provisions play a minimal role in TPP considerations.
  • Textiles Industry: The fact that there is a separate chapter for the Textiles and Apparel industry is an affront to the idea of free trade. While the idea is to eliminate trade barriers in the textiles market, the entire chapter mitigates the effects that free trade in the textiles market that would have existed otherwise. Given that Vietnam is the second-largest exporter of apparel to the United States, the added access that removing tariffs will have is expected to boost the Vietnamese economy, which would explain why the World Bank (see above) found that Vietnam is one of the larger beneficiaries of the TPP in terms of GDP growth. 
  • American Enterprise Institute (AEI): AEI released a paper on the TPP late last year grading and evaluating major provisions within the TPP. While it does note some positive aspects, AEI has more reservations than even the Cato Institute. AEI is not only worried that the provisions around agriculture have no bite, but also that the rules of origin (ROO), nonconforming measures, and provisions on state-owned enterprises (SOEs) will distort trade. 

In its analysis of economic reports measuring economic benefits and costs of TPP, the Congressional Research Service asks for better data and understanding of supply chains to support Congress' decision (p. 31). In a similar vein, I do want to iterate that the results of these studies are preliminary and ex-ante. There is also need to reiterate that because of all the provisions, this is not a free trade agreement. This is a question of whether the costs of protectionist provisions are outweighed by the more liberalizing aspects of the TPP. Based on preliminary research, the answer is that the TPP does more good than harm. There are certainly portions of the TPP which are decidedly unsatisfactory, but we don't want to be in a situation where we can't see the forest from the trees. As much as I would love to see a TPP with unfettered free trade, the truth is that we don't live in that world. We live in a world in which compromises are made, and certain aspects of the agreement are unsavory. Nevertheless, I have to say that having the member countries ratify the TPP is better than maintaining the status quo.

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