The Obama administration is currently seeking “fast-track” authority from Congress to negotiate on the Trans-Pacific Partnership – a sweeping free trade agreement among 12 Pacific countries that has the potential to transform economic ties in the world’s fastest growing market.
The trade pact is a big opportunity for the United States; TPP countries represent almost 800 million people and roughly 40 percent of the world economy. And the White House considers the accord a strategic counterweight to China, which isn’t party to TPP negotiations. But it is also highly controversial.
UConn Today asked Francis Ahking, an associate professor of economics who specializes in international finance and international economic growth, about the pros and cons of the agreement.
Q. What is the Trans-Pacific Partnership? And who’s in it?
TPP’s objective is to promote free trade and investments among its partners by removing barriers such as tariffs and quotas. But TPP’s coverage is much broader than previous trade accords, as it also covers currency manipulations, state-owned enterprises, regulatory protocols, and intellectual property rights, to name just a few. The proposed agreement is an outgrowth of the 2006 Trans-Pacific Strategic Economic Partnership Agreement between Brunei, Chile, New Zealand, and Singapore. The U.S. began talks with these countries in 2008, to liberalize trade in financial services. Those talks evolved into negotiations for the TPP. Currently, besides the U.S., seven other countries are seeking to join the partnership: Australia, Peru, Vietnam, Malaysia, Mexico, Canada, and Japan. Several other countries have expressed varying degrees of interest but are not parties to the negotiations.
Q. China, the world’s second largest economy, largest exporter and manufacturer, and holder of the largest cache of foreign reserves, is excluded from the TPP. Last year China imported a reported $124 billion of U.S. exports, and American companies have more than $70 billion invested in China. Why isn’t China involved?
It’s a misconception to suggest that China is excluded from the TPP. As a member of APEC (Asia-Pacific Economic Cooperation), China can seek entry into the TPP, provided it agrees to meet the partnership’s standards. Although some suggest that TPP provisions on currency manipulation and state-owned enterprises will, in effect, keep China out. The most likely reason China is not part of the current negotiations is to wait and see whether the accord will further its national interests. China’s leader, Xi Jinping, views Chinese membership in the TPP as consistent with his goals for economic reform. It is entirely possible that down the road, China may yet become a partner of the TPP.
Q. Where does the U.S. want freer trade? Japan?
The U.S. does not have a free trade agreement with Japan, the world’s third largest economy. So a successful conclusion of the TPP negotiations holds tremendous potential for both countries. This was made clear during Japan’s Prime Minister Shinzo Abe’s address to a Joint Session of Congress – the first ever by a Japanese prime minister – during his recent visit to Washington D.C. While Japan may want to use the TPP in part to check China’s ambitions, its overriding interest in the accord is to kick-start the Japanese economy. Prime Minister Abe sees expanding trade as one way of achieving that goal after the so-called lost decade of little or no economic growth. But the road forward for the U.S. and Japan is not going to be easy. Two contentious issues are Japan’s high tariff on U.S. agricultural exports, such as rice and beef (up to several hundred percent on rice); and tariffs that each country maintains on automobile exports to the other. Moreover, while Japan is a very important trade partner, China is even more important. China is the world’s second largest economy after the U.S. American access to China’s huge domestic market for goods, services, and investment is currently limited, so freer access is potentially very beneficial to the U.S.
Q. A leading critic of the TPP – Connecticut’s U.S. Rep. Rosa DeLauro (D-3rd District) – says our state has lost 96,000 manufacturing jobs since the North American Free Trade Agreement, or NAFTA, was approved by Congress 21 years ago.
It is important to be clear about what is meant by “a loss of 96,000 manufacturing jobs since NAFTA” in Connecticut. Are these job losses all directly attributable to NAFTA? Could other factors, local and/or national, such as the Great Recession of 2007-2009, have led to manufacturing job losses? I suspect China’s economic rise rather than NAFTA may be more responsible for Connecticut job losses due to trade. Furthermore, focusing only on job losses overlooks jobs created in expanding sectors of the economy because of free trade. This is not to say that job losses and the associated human costs are not important considerations. When discussing free trade agreements: (1) it is important to identify the true causes of job losses so that appropriate public policies may be implemented, or policy failures rectified; and (2) it’s important to examine both the costs and benefits, to properly assess the agreement’s true value to the economy.
If we consider potential losses, some economists have argued that the TPP will increase income inequality, widening the gap between the poor and the rich. Doctors Without Borders has expressed concern that intellectual property rights provisions in the agreement may slow the development of lower-cost generic drugs and could have catastrophic consequences in developing countries. This is why a clear-headed discussion is necessary and vital.
Q. Connecticut supporters of the TPP – including some of the state’s largest manufacturing companies, such as Sikorsky Aircraft and General Electric – maintain it will significantly boost growth in high-tech industries. What’s the upside from this trade deal?
Currently, the U.S. has free trade agreements (FTA) with six of the potential TPP partner countries including: Australia, Canada, Chile, Mexico, Peru, and Singapore. A recent Business Roundtable study showed that in 2011, exports and imports to and from these six countries supported 191,100 jobs in Connecticut (or 9 percent of the jobs in the state), accounting for 30 percent of Connecticut’s foreign trade. In addition, the six countries have investments in more than 210 companies in our state. Clearly, trade with these countries is important for Connecticut, and we could benefit in several ways from a finalized TPP agreement.
Where I see the most potential for Connecticut is to expand trade with non-FTA countries, particularly Japan and Malaysia, who are already important trade partners. Furthermore, large public companies are not the only ones that stand to benefit in our state; a recent U.S. Trade Representative study predicts that 89 percent of Connecticut’s small and medium-sized firms will be beneficiaries of the TPP. Finally, many current imports from the TPP countries are intermediate inputs of raw materials; eliminating trade barriers could lead to lower production costs and prices of some goods for consumers. This could also create jobs and support higher wages. Growth of companies because of the TPP will increase the taxes paid by these companies. Many who own stocks in public companies, stand to gain either directly or through the growing value of retirement portfolios because of the TPP.
Q. Are there potential risks to striking a deal?
The risk in any trade agreement is that the costs are higher than expected while it fails to deliver on many of its promises. We can’t know, of course, until the TPP becomes a reality. The biggest risk right now, I think, is being left behind by not finalizing the TPP. If the U.S. does not become a TPP partner and China becomes one later, we’ll have missed a great opportunity to level the playing field between us in trade in goods, services, and investments.
Q. Would a successful TPP reassert U.S. economic leadership in the Asia-Pacific region?
Without a doubt, the TPP is important for the U.S. A recent op-ed by Robert J. Samuelson in the Hartford Courant on May 4 suggested that although the economic gain from the TPP to the U.S. is relatively modest, the larger payoff is probably in demonstrating that we are still a Pacific power to be reckoned with.
Meanwhile, Congress has yet to re-authorize President Obama’s Trade Promotion Authority, the so-called fast-track legislation, and it promises to be a very tough struggle ahead, interestingly, not against the Republicans but against President Obama’s own Democratic Party.