Will the Trans-Pacific Partnership Deliver on Its Promises?

TPP

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 U.S., 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. Firstly, 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 U.S., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.)

Secondly, it will allow the U.S. 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.”

Thirdly, 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 like China and insiders like 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.” –Note from 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,” predicted 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],” said 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 U.S., 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 said. 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 added.

Geopolitical Play

Strategically for the U.S., 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,” said Guillen. He noted 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 U.S. to continue to be relevant in that part of the world.”

The TPP certainly helps advance the U.S.’s geopolitical strength in the Asia Pacific. “It is a sucker’s bet for the United States to underwrite the costs of security” in the Asia-Pacific region “while many of the economic gains in the region go to China,” said Penn Law professor Jacques deLisle, who is also director of Penn’s Center for East Asian Studies, in an earlier Knowledge@Wharton article.

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 said. “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 neighbors — 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 did not rule out the possibility of China trying to find its way into the TPP at a later date.

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 U.S. 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 — onto which people project their anxieties,” said Meyer in the Knowledge@Wharton article referenced earlier.

“[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

The Obama administration has begun making its case by highlighting that 95% of the world’s consumers live outside U.S. borders. Last year, the U.S. exported $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 noted 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 U.S. government. It aims to advance workers’ rights in the TPP countries with measures including a ban on child and forced labor; 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 added that the TPP further aims to change the present situation where “U.S. 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 U.S. has much at stake in the TPP. U.S. trade with TPP countries was more than $1.6 trillion in merchandise in 2014 and more than $273 billion in services in 2013, the most recent periods for which data are available, according to a report by The Federation of American Scientists (FAS), a nonprofit in Washington, D.C., prepared for Congress. U.S. foreign direct investment (FDI) into TPP countries was nearly $86 billion in 2013, while TPP countries invested more than $69 billion in the U.S. that year, the report added.

Japan would absorb 70% of the $8.5 billion increase in agricultural trade among TPP countries in 2025, with U.S. agricultural interests capturing one-third of the increase in farm exports within the TPP, said the FAS report, which cited a U.S. Department of Agriculture note of October 2014. “Japan’s participation in the agreement has drawn the interest of a wide range of U.S. industries, including sectors like agriculture, automotive and services,” the report added.

Guillen was skeptical of Japan’s role within the TPP. “The Japanese have one problem — they always like to protect their domestic market,” he said. “Let’s see to what extent they implement all of these agreements.” He noted that Japanese companies that make their markets in Asia could benefit if the TPP helps economies in the region grow even faster.

Challenges Ahead

As the TPP ratification process gets underway, it will encounter issues raised by several industries and constituencies.

Labor: Slippages in implementing the TPP agreements within member countries could create problems. Labor rights advocates are concerned that if some countries fail to implement labor rights, “U.S. workers would be placed at a competitive disadvantage as they compete against low-cost, low-standard labor practices,” the FAS report said.

Richard Trumka, president of the AFL-CIO workers union warned 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 said.

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 said it is “deeply concerned about the lack of transparency … and the deal’s environmental implications.” Greenpeace New Zealand called the TPP “a shady deal cooked up behind closed doors” and said 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 Audobon Society has also been opposed to the TPP.

“In the long run, say 20 years down the road, [the TPP] will have mostly beneficial effects.” –Mauro Guillen

Agriculture: The U.S. 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 noted.

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 U.S. had sought 12 years of protection to encourage pharmaceutical companies to invest in expensive biological treatments like Genentech’s cancer treatment Avastin, it added.

Politics: Democratic presidential candidate Hillary Clinton has so far avoided taking a stance on the TPP, divided between her support for labor unions and loyalty to Obama. But this week she said she would make up her mind soon. Senator Bernie Sanders, her top opponent for the Democratic ticket, has strongly opposed the TPP. Said 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, explained 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 said. “There s a big danger here — these trade deals have always faced opposition both within the Republican and the Democratic parties.”

Guillen did not expect the TPP to become a raging issue in the run-up to the U.S. Presidential elections in 2016, but much debate will be centered on its impact on jobs. In the immediate future, he did 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 said. “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.”

 

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