Hello or Goodbye to the Trans Pacific Partnership?
This article was first published in the Fall/Winter 2015 issue of Understanding Investments.
On July 31, representatives of the 12 core members of the Trans Pacific Partnership met for what was supposed to be the last time in Maui. They were trying to forge a trade pact that would be the largest free trade agreement ever and would include roughly 40% of the global economy. The delegates left Hawaii under a cloud but kept the date of the next negotiation session out of the public.
Like NAFTA before it, the TPP sparked fierce criticism at the heart of every member state. And as with any negotiation, the question was how much would each member be willing to cut its own existing protectionist practices? What length was each nation willing to go to see the deal through? Pretty far, it seems.
The negotiations have been held in secret. Until the announcement on October 5th of a final agreement, as we went to press, the only mention of TPP in social media has been by those who wish it would fall apart completely. Governments now have 3 months to review the deal and make a decision- so we can expect a great deal of public discussion as the full details finally emerge.
Nations generally restrict international trade to protect domestic producers, often at the cost of increased prices and inefficiencies for consumers. Traditionally, these industries have been protected through the use of tariffs, although recently, governments have switched to implementing local content rules: mandating a certain percentage of inputs be locally sourced. One result has been a drag on car sales in many Southeast Asian countries with those local content rules.
When a firm has no need to compete, the consumer often bears the largest brunt in the form of high prices. This is why free trade agreements are touted as the best way to promote economic growth.
The TPP is quite remarkable in its structure. It tackles not just the reduction of tariffs but includes a commitment to intellectual property rights, labor rights, environmental safeguards and limitations of subsidies to state-owned enterprises.
Optimistic estimates by the Peterson Institute for International Economics say that the member states will boost their economies a total of $285 billion in ten years. Modelling the effects of free trade agreements are difficult, however, and can easily over or under estimate the results by failing to take into account negotiated tariff exemptions or reduced revenue by excluded states (eg., if Southeast Asia gets a boost, is it at the cost of developing nations in Africa?).
A major bone of contention has been the push by American pharmaceutical companies to prohibit the sharing of data on biologics, a promising area of potentially less costly drug development, for 12 years. The negotiations in Maui fell through in part because of this and the final deal agreed to a reduced 5 year limit. Not ideal, but not the worst.
Clearly, mini-deals like biologic data protection are not in the true spirit of free trade or in the best interest of humanity as a whole (although arguments that it will make medicine in New Zealand more expensive are tenuous). Still, almost every member is pushing for the protection of at least one darling domestic industry.
In the long run, the present protectionist tendencies restrict economic growth. Quantifying how many jobs high import tariffs save versus how many jobs they cost is hard to do but one estimate on the recent foreign tire tariff, again by the PIIE, shows that in the end the tire tariff cost the American consumers $1.112 billion in higher costs and lost retail jobs. Therefore, any trade deal of this size that seeks to cut as many tariffs as possible is not something to be lightly dismissed. When results of the deal emerge, we will look at how well they tackled the equal reduction of protectionist practices.