Obama Trades Against China
The Trans-Pacific Partnership is certainly a mixed bag.
On a positive note, it steals a march on China for influence in Asia. In a way, it also advances the liberal world economic order on which this country’s prosperity rests, its global influence depends, and with which its fundamental national interest has long identified.
But the agreement also misses much, muddles many critical issues, and even contradicts itself. Such an uneven picture makes it difficult for an honest analysis to arrive at a net assessment, not the least because its complexity also promises any number of unintended consequences. The only thing left, then, is to track where the positive promise lies and where the thing falls especially short.
Matters are clearer from a geopolitical than from an economic perspective. Linking Japan, Brunei, Malaysia, Singapore, Vietnam, Australia, and New Zealand in an extensive trade agreement with the Unites States along with Canada, Mexico, Chile, and Peru, cannot help but leverage this country’s influence in the region and accordingly diminish China’s. It may do nothing to address China’s very real military challenges in the Western Pacific, but the economic edge is no small thing.
In this way it does much to support the administration’s “pivot” toward Asia. Indeed, its promise in this regard has become evident in just the last few weeks as India, South Korea, and Taiwan have expressed interest in the agreement. Even Beijing, which seemed largely uninterested in the effort as it was negotiated over these many years, has hinted that it, too, might have an interest in joining or arranging some kind of association. That is no small thing either.
The agreement promises a welcome way to discipline Chinese practice. It is hardly news that Beijing frequently violates international norms in trade, finance, and in its currency policies. It manipulates the value of its yuan to gain an artificial advantage for its exports. It regularly violates copyright and patent protections and uses trade to reinforce its otherwise flagrant military bullying in the western Pacific, most prominently with the Philippines and Vietnam but with other countries as well. And it does so despite its membership in the World Trade Organization (WTO). This agreement, of course, will have no binding influence on China, but by enshrining rules on trade, environment, labor practice, and intellectual property among many of China’s trading partners, it will tend to impose a constraint on Beijing, an added inducement to stay in line with international norms or at least not violate them quite so flagrantly as the country has in the past. Were the agreement to have enough success to impel Beijing to join, presumably in the hopes of countering American influence, that disciplinary effect would only gain strength.
Contrary to more tendacious commentary, the treaty manages to secure these advantages without compromising U.S. sovereignty. Complaints along these lines note the TPP’s demand that the United States adjudicate disputes in an international setting instead of within its own judicial institutions and that the treaty, if signed, would force this country to alter its laws according to the agreement’s text. These points, though true, hardly constitute a threat to American sovereignty. Every international agreement, much less a treaty, makes demands of this kind on its signatories, including the WTO and its predecessor the General Agreement on Tariffs and Trade (GATT), NATO, the UN, NAFTA, and the many bilateral agreements this country has with any number of nations. The TPP is no different. The sovereignty test is not, as these critics seem to contend, that the nation has to abide by its agreements but rather that the United States can withdraw any time it wants. It is no more a threat to the country’s sovereignty than a person’s decision to sign an employment contract is a threat to his or her basic individual freedom.
But if the TPP has things to recommend it from a geopolitical standpoint, it fails on the economic side in critical ways. One is its exclusiveness. It may promote a liberal economic order among the signatories, but by its nature it resists one among others. If U.S. interests really are served by a global liberal economic order, then this agreement does as much to thwart them as to advance them. At one time, U.S. policy avoided such contradictions. In the 1950s, ’60s, and ’70s, this country, realizing that its political-economic needs were best served by free trade everywhere, eschewed exclusive agreements and consistently sought a reduction of trade barriers across all nations. Through the GATT, which the United States created for this purpose, it succeeded, too. Those years saw widespread tariff cutting and some of the greatest gains in both American and global growth.
That older, inclusive approach and its success prompted the great international economist, Charles Kindleberger, to describe the United States as “the altruistic hegemon.” The departure from this policy began in the 1990s with the exclusive NAFTA treaty. The TPP extends and exaggerates the trend toward treaties that liberalize in one sense but seek partisan advantage in another, muddling U.S. interests and adding an element of hypocrisy to Washington’s claims.
The other great disappointment is the TPP’s silence on the subject of currency manipulation. Probably the single largest distortion in world trade today comes less from overt trade restraint than from some countries’ efforts of to gain an unfair pricing advantage for their exports by artificially depressing the foreign exchange value of their respective currencies. The United States accused Japan of pursuing such policies in the 1980s. More recently, many countries have accused China of it. Not too long ago, a group of emerging economies accused the United States of currency manipulation, pointing to its policy of quantitative easing as a way to flood the world with dollars and so effectively depress the currency’s foreign exchange value. The International Monetary Fund (IMF) and the WTO, both pillars of the liberal world economic order and products of early U.S. efforts to promote it, pressed TPP negotiators to rid the world of such distortions by writing strictures against currency manipulation into the agreement. No doubt these international bodies hoped that such rules might influence nations like China, even though they stand outside the agreement. The lack of any such effort in the TPP weakens its ability to promote the liberal world economic order that at least rhetorically constitutes part of its purpose.
In other matters economic, the agreement truly resembles a mélange. It reduces tariffs and other trade restraints among signatories. While such moves have varied effects on producers according to how otherwise competitive they are, their biggest single benefit is to improve living standards across these nations by offering their business and consumers a greater variety of cheaper goods and services than they had previously.
The agricultural settlement stands out in this regard. For decades, the United States, an agricultural powerhouse, has fought to remove barriers to food imports in other nations, especially Japan. This agreement at last does so. U.S. farmers will benefit greatly, perhaps enough even to make them less dependent on the taxpayer than heretofore. Asian consumers in particular will see their incomes go further as the price of groceries there falls. The American consumer, who has long enjoyed a great variety of relatively inexpensive food products, will gain less in this. Also, because the agreement phases in the changes over such a long time, these benefits, wherever they fall, will emerge only gradually.
As with agriculture, the general consumer benefits from easing trade restraints will accrue more to others than to Americans. Because the United States has long had lower trade barriers than most other nations, the American consumer has accordingly long enjoyed access to the world’s goods at cheaper prices than if such barriers had existed. The general elimination of trade restraint elsewhere does him and her little additional good, in this regard at least. The U.S. Trade Representative (USTR) more or less acknowledges this fact. In its review of the agreement, it estimates that the TPP will give American consumers the equivalent of a $77 billion boost in real incomes. That sounds like a big figure but it amounts only to about a 0.5 percent rise. Indeed, the relatively small benefit secured for the American consumer suggests that Washington always had a more geopolitical than economic motivation in its pursuit of this agreement.
Nor does the agreement offer the United States much in the way of job creation, or the job protections many had hoped it might. The USTR estimates that the agreement will add 650,000 jobs on balance, only a 0.4 percent increase in overall U.S. employment.
In particular, the agreement does little to stop the by now decades-long migration of lower skilled jobs from this country to Asia and Latin America. Vast wage differences between the United States and many of these less developed countries have simply made it impossible for U.S.-based enterprises to compete in lower value-added, labor-intensive efforts, such as textiles, toys, straightforward assemblies, and much furniture making. The jobs have left either through off-shoring by American produces or straightforward competition from foreign-based enterprises.
The TPP, by imposing labor and environmental standards abroad, would eliminate some of the cost savings that have tipped the competitive advantage away from this country, but the wage differences remain so vast that even with introduction of such standards, the agreement cannot promise even to slow the tendency for these jobs to migrate abroad. It is on this basis that the AFL-CIO and other pro-labor groups have criticized the TPP so thoroughly.
A recognition of this unavoidable reality no doubt explains the stress American negotiators have placed on protections for intellectual property. These enable the United States to hold areas where it can compete effectively and warrant its relatively high wage structure, in higher value-added, capital- and technology-intensive endeavors, such as sophisticated services, pharmaceuticals, specialty metals and plastics, and the like. In this realm, the U.S. negotiators had some but not complete success. The deal, for example, gives biotechnology producers five years of exclusive use before they must share their data. Because that brief monopoly will hold up the prices of such products and give the advantage to the largely U.S.-based firms in the field, Australia in particular but also many other signatories wanted a shorter period of exclusive use. They imposed on the United States, as the agreed exclusive-use period is considerably shorter than the 12 years currently in use here. A similar compromise on patent protections has at once left other nations frustrated at U.S. gains but also U.S. producers, the pharmaceutical industry in particular, disappointed that the negotiators could not get more. The United States did prevail on copyright law. The agreement has adopted the U.S. practice of giving 70 years after the author’s death, forcing other nations to alter their domestic law accordingly.
If the package is a mixed bag, any negotiations would have been. It does serve Washington’s geopolitical interests, at least opposite China, at least to a degree. But it is disappointing that the effort from the start carried less of the earlier, truly free-trade efforts that once characterized American policy, and so clearly and straightforwardly supported the liberal world economic order that so underpins this country’s fundamental national interests. Still, within the 12 signatories, the agreement does advance free trade, if unevenly and with major elements missing and grossly imperfect. In assessing the net effect, all could have wished for more, but they also could have gotten a lot less.
Milton Ezrati is a contributing editor to The National Interest, senior economist for Lord, Abbett & Co., and an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY). His most recent book, Thirty Tomorrows, describes the challenge of aging demographics and how the world can cope.