Free Trade Run Amok: TPP

I described the then three pending free trade agreements (FTAs) with South Korea, Panama and Colombia as "clunkers."  Each failed to meet the only standard which matters: Is it in the best interests of American workers and the U.S. economy?  Regrettably, these three agreements won Congressional approval, despite the fact that the promises of job and net exports growth from all eleven previous FTAs, dating back to the first one in 1985, have proven to be empty ones indeed. 


Now the U.S. is aggressively trying to advance, by the end of this summer no less, the ‘mother of all FTAs’ to date:  the so-called Trans-Pacific Partnership (TPP).  The TPP would be an agreement among the U.S. and the Pacific Rim nations of Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Canada, Mexico and Vietnam.  Every Pacific Rim nation – including, notably, Japan, China, Russia, Indonesia – could eventually be included.  [Ed. note: Japan has joined the TPP negotiations since this was written.]


But if advanced, I believe that TPP could very likely dwarf the negative impacts from all prior FTAs combined, including the still notorious multilateral NAFTA (which went into effect in 1994) and the multilateral CAFTA (signed in 2003). 


While every promise associated with FTAs is impossible to assess, looking back at NAFTA and CAFTA as primers for TPP, these are the facts:


·         Neither Agreement has come close to meeting the fundamental promises made to the American people about the increase in U.S. net exports and the creation of American jobs which it would produce. 


·         “One size never fits all” in multilateral trade agreements, especially when the differences in the states of development are extreme (NAFTA) or when the export mix among the countries is extreme (CAFTA, which includes Costa Rica, El Salvador, Guatemala, Nicaragua and Honduras).  For example, from 1993 when NAFTA was signed to five years later, the U.S. trade deficit with Canada widened from $10.8 billion to $16.7 billion; during the same period, America’s trade balance with Mexico went from a surplus of $1.7 billion to a deficit of $15.9 billion.  By 2011, the U.S trade deficit with Canada and with Mexico was $35.6 billion and $65.6 billion, respectively, or, in the aggregate, an almost unbelievable $92.1 billion more than when the Agreement was signed.



FTAs were a popular mainstay of the last three Republican Presidents, and regrettably even President Clinton, urged on by the consummate free-trader Bob Rubin, embraced them as well, especially in his case, NAFTA.  Now the Obama administration, against the advice of economists from the left almost universally and from the right in increasing numbers, seems similarly anxious to drink the free traders’ Kool Aid, with the deeply flawed TPP as the straw in the drink.


In a compelling Council on Foreign Relations posting ("U.S. Trade Policy: Is America AWOL?, 7-18-11), Stewart M. Patrick praised the restraint showed by major trading nations in avoiding "a descent into 1930s-style, beggar-thy-neighbor trade discrimination." And my criticism now of TPP is not born out of a desire for protectionism.  Rather, like Mr. Patrick, I believe that "the developed versus developing country dichotomy at the heart of the Doha Round [and now of TPP] obscures the surging global importance of the biggest emerging market economies (EMEs)," especially China, India and Brazil.


What the Obama administration should be doing, rather than rushing pell-mell into TPP, with its own extreme mix of economic maturity and exports, is acknowledging the near impossibility of negotiating complex multilateral trade agreements that prove fair to American workers.  Instead it should be spearheading more realistic efforts that reflect the growth of the emerging market economies and demand more burden-sharing by them.  To this point, China’s GDP already exceeds that of Japan and is second only to our own, just as India, now among the world's largest economies, will soon overtake in the Pacific Basin each of Australia, Canada, Indonesia and Mexico and in the Greater Atlantic Basin the major countries of Europe. 


Bilateral and thoughtfully constructed ‘smallish’ regional agreements are always preferable to massive multilateral agreements among widely disparate trading partners.  In fact, the only reasonable justification for such multilateral agreements is to address security and common defense concerns, but this particular justification, no matter how well intentioned, is insufficient to warrant such a dramatic mixing of trade and economic practices as is TPP. 


Some fear that the demise of multilateral agreements will erode global support for the dispute settlement mechanism of the WTO, but this concern would be better addressed by reforming and strengthening the WTO than by further capitulating to ill-conceived multilateral FTAs.  The esteemed Jagdish Bhagwati of CFR and Columbia University worries that if multilateral agreements such as Doha and TPP collapse, then the world will be “overtaken by regional trade agreements and other bilateral arrangements which will be discriminatory.”  I dispute his conclusion that such agreements will inevitably be “discriminatory” – they needn’t be – and if effected without discrimination, they are, Mr. Bhagwati, far preferable to inherently and structurally flawed multinational agreements.


President Obama has said that TPP would be a template for a “21st-century [trade] agreement” which would eventually be open to all the countries of the Pacific region.  But the United States already has FTAs with four (Australia, Chile, Peru and Singapore) of the eight other countries included in the current talks, and these four nations plus the U.S. already account for more than 85% of the total trade at stake in the TPP.  Do we really need to start down such a slippery trading slope for codified trade relations with the four disparate countries of Brunei, Malaysia, New Zealand and Vietnam, which while significant in their combined GDP ($891 billion) are relatively insignificant in combined non-energy trading 


The reality is that too many of the eight non-U.S. first-stage signatories see TPP as a way to ensure a long-term American security commitment to the greater Pacific Basin, against the growing military power of China, while continuing to free ride on America’s more open markets and lock in their access to them.


While it is appropriate to consider non-trade related strategic and security factors associated with small FTAs, provided U.S. values are not compromised, large-scale multilateral FTAs should stand on their own and not be afforded this 'backdoor' justification for their promulgation, which is how in part NAFTA and CAFTA were advanced and TPP is now being characterized


In writing about why U.S. trade policy to date has largely failed, Clyde Prestowitz (“The Pacific Pivot”, The American Prospect, 2 April 2012) says that all the trade deals to date – and now TPP – have served two clear purposes.  “The first is the geopolitical grand strategy objectives of the United States. By making the United States the market of last resort, the trade agreements have helped persuade allies to accept U.S. hegemony. The second purpose served is that of U.S. businesses that profit immensely from outsourcing and offshoring to Asia but that need the security provided by Uncle Sam to do so. These realities reveal the flaws in U.S. trade efforts – misplaced priorities, a false doctrine, and false assumptions.”


The Obama administration is absolutely right to be seeking a comprehensive 21st-century U.S. trade policy.  And it is just as right to be seeking comprehensive 21st-century security arrangements for the greater Pacific Basin.  But neither objective should lead our nation into adopting TPP, which, unless materially changed from the draft now in circulation, appears to have the following major flaws:


1.      It pays short shrift to the issues consumer safety and environmental practices and to the concerns of organized labor.


2.      It breezes through intellectual property protection, regulatory coherence, and antitrust enforcement, especially of state-owned enterprises (SOEs). 


3.      It allows for even more extreme financial industry deregulation while allowing for equally extreme foreign investor protections that in the past have helped American multinational corporations offshore American jobs.  A proper trade agreement – multilateral or bilateral – should limit the massive investment incentives that many nations (although not the U.S., of course!) now use to draw jobs to their shores and thus have cost America millions of manufacturing jobs in just the last decade.  These indirect export subsidies are nothing more than a highly effective way to circumvent WTO’s prohibition of direct export subsidies.


4.      It bans “Buy American”, which would give all companies operating in any signatory country equal access to U.S. government procurement contracts (even though none of these other government’s procurement comes even close to matching ours in amount).


5.      It gives America’s “Big Pharma” companies patent extensions while at the same time limits our ability to cut costs through ‘drug formularies’, even though such formularies are now deeply embedded in our Medicare, Medicaid and VA programs.  The only possible result is much higher drug prices for American consumers.


6.      It allows TPP’s signatory nations to export the products of their highly subsidized State-Owned Enterprises (SOEs), contrary to the objections of every small and medium sized American manufacturer, all of our non-service labor unions, and every right-minded trade economist in America.  Nor are there likely to be appropriate limits on major foreign SOEs investing directly in the United States.



Compounding the myriad problems and the unacceptable loopholes going in, TPP’s terms, once enacted, will be very hard to change – and yet changes will inevitably have to be made.  And with only the [majority?] consent of the initial signatory governments, any other nation in the Pacific Basin can readily join the pact.  While this latter “all-for-one” premise is in keeping with the administration’s stated objective of TPP being the first encompassing 21st century multilateral trade agreement, it only confirms the fallacy of the “one size fits all” approach to negotiating FTAs. How can any agreement be considered thoughtful when it can accept at once into membership such diverse Pacific nations as Japan and Brunei?

Of the nations now negotiating TPP, Singapore and Malaysia embrace strategic industrial policy and export-led growth, and Vietnam is dominated by state-owned enterprises.  Should Japan – with its own commitment to export-led growth and to state-influenced (if not necessarily owned) enterprises – be allowed to enter the process, TPP will be even more problematic for American companies and workers.  As Mr. Prestowitz has written, “As a member of the WTO, Japan has long been pledged to follow free-trade rules yet [it] has managed to do so without opening its home market to imports; should it join TPP and still maintain its closed economy, Japan will make the accord even more dangerous to the American economy.” 


The United States has no better friend than Japan today, albeit with some serious trade issues around autos and agriculture to be resolved between the two countries.  But TPP is simply not the ‘place’ to seek resolution, and there is no better example of the peril of using a single agreement to establish a fair trading regimen for disparate economies than thinking that TPP could at once fairly address the needs of the United States, Japan and Brunei.


Leo Hindery Jr. is chair of the US Economy/Smart Globalization Initiative at the New America Foundation, co-chair (with USW President Leo Gerard) of The Task Force on Jobs Creation, founder of Jobs First 2012, and a member of the Council on Foreign Relations.  He is the former CEO of AT&T Broadband and its predecessors, Tele-Communications, Inc. (TCI) and Liberty Media, and is currently an investor in media companies.