Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

American Involvement in the TPP

by Sean Wright

 

President Obama negotiating the Trans-Pacific Partnership. (Image via Business Pundit)

President Obama negotiating the Trans-Pacific Partnership. (Image via Business Pundit)

In his Farewell Address, George Washington wrote: “Even our Commercial policy should hold an equal and impartial hand: neither seeking nor granting exclusive favors or preferences; consulting the natural course of things…in order to give trade a stable course.” Considering Washington’s famed protectionism when it came to foreign affairs, it makes sense that he would encourage natural free trade without the use of international trade agreements.  In present-day America, Washington’s words are still very relevant. After a long period of pioneering trade agreements, the United States may be trending towards a policy of isolationism, as evidenced by their recent decision to abandon the Trans-Pacific Partnership, a controversial 12-nation agreement that would create a trade network similar to that of the European Union.

For over 130 years, American leaders generally followed Washington’s advice regarding international trade. However, this policy was abandoned after the disastrous Smoot-Hawley Tariff of 1930. Smoot-Hawley raised tariffs considerably, against the pleas of a large majority of economists at the time who said that it would be detrimental for the nation’s economy. Predictably, they were correct, as imports and exports fell by over 50%, starting a calamitous period that many economists today consider a cause of the Great Depression.

Only four years after the passage of Smoot-Hawley, the Reciprocal Trade Agreements Act marked a new era of United States trade policy. For the first time, the President was given the power to levy tariffs and negotiate bilateral trade agreements without congressional approval. This was essentially so that the President could hastily renegotiate all of the trade deals that had been soured by Smoot-Hawley, without having to be saddled by an obligation to Congress. Critics said that the bill gave the President too much power, and it was eventually amended so that trade agreements created under these terms had a three-year expiration date.

In 1947, the United States furthered extended its commitment to international trade agreements by involving itself in the General Agreement on Tariffs and Trade. The body conducted eight rounds of talks, over the course of almost 50 years, addressing various trade issues and resolving international trade disputes. The Uruguay Round of 1993 created the World Trade Organization, which to this day provides a forum for 117 countries to negotiate additional tariff reductions, settle disputes, and enforce rules.

Presently, the United States has the 2nd largest export economy and 5th most complex economy in the world. Its top exports are refined petroleum (7.1%), cars (4.2%), and planes (3.7%). The top imports are crude petroleum (11.1%), cars (7.1%), computers (4.2%), and vehicle parts (2.9%). These statistics are reflective of the US’s general policy of importing raw materials and exporting finished products, a policy that has been embraced by its top trading partners: China, Canada, Mexico, Japan, and Germany. Canada and Mexico are both involved in a large trade agreement with the United States, the North American Free Trade Agreement (NAFTA) that has shaped much of the countries’ economic policy since its inception in 1994. NAFTA eliminated almost all tariffs between the three nations, which has greatly increased trading levels. However, the agreement also makes it easier for companies to move operations from the United States to Mexico, as evidenced by Carrier Corporation’s production move earlier this year.

The United States currently has trade agreements in place with over 20 countries, including Australia, Chile, Israel, and Singapore. This global involvement represents a massive deviation from the protectionist tariffs that dominated American trade policy up until the 1930s. Recently, however, a movement of isolationism has been gaining momentum. The American Recovery and Reinvestment Act of 2009 is an example of this protectionist push. The act prohibits the use of recovery funds for work on a public building, unless all of the steel, iron, and manufactured goods used on the project are from the United States. This legislation clearly encourages the production and sale of American-produced goods over foreign products. Even more indicative of this new wave of isolationism are the anti-trade sentiments expressed during the 2016 U.S. presidential election campaign. Presidential candidates Donald Trump and Bernie Sanders, who are by no means political allies, both railed against free-trade agreements past and present throughout their campaigns. Trump, the eventual winner and president-elect, has sworn his administration will tear up deals like NAFTA, which he blames for the loss of American jobs and prosperity.

Another deal loathed by the incoming president-elect is the Trans-Pacific Partnership. Twelve countries, including the United States, Japan, and Peru, signed TPP in February 2016. The partnership aims to increase economic activity between the countries through the reduction of more than 18,000 tariffs. The potential members make up 40% of the world’s economy, meaning that the deal would be the largest of its kind in over two decades.

The agreement, which is essentially an extensive loosening of trade barriers and business regulations, would be a dream come true for the profit-maximizing producer. They would have access to a single market that would allow their goods to reach far more consumers, enabling them to achieve lower per-unit production costs. Some experts predict that TPP would increase American exports by 9.1%. The decline in prices of imported raw materials, caused by a mass lowering of import tariffs, would further decrease production costs. These conditions would result in a large increase in production, which would allow producers to specialize in what they produce, leading to more efficiency and a higher production capability.

Another benefit that producers would receive has become a controversial sticking point for the agreement. Investment-state dispute settlement, or ISDS, would create an international tribunal court of sorts, allowing producers to appeal policies made by foreign governments that hurt their profits. It permits corporations to challenge any governmental decision—whether it be a law, regulation, or judicial ruling, among others—in front of a panel of three “neutral” corporate lawyers. A similar institution created by NAFTA has yielded troubling results, exemplified by Metalclad v. Mexico, a case in which Mexico was ordered to pay $16.7 million in damages to a toxic waste company. The presence of this sort of institution in TPP has caused lots of public outcry, and this clause alone has provoked opposition to the entire agreement.

American laborers will likely see far more negative consequences from TPP than positive ones. The international labor pool will become far more competitive as a result of the deal, thanks to lower wages and far less regulations. Additionally, TPP includes investment rules that make it easier to invest overseas, which would encourage more foreign rather than domestic investment by American corporations. This could consequently cause some companies to move production away from the United States in search of cheaper labor. It’s the basic rules of supply and demand: Option A (domestic labor) becomes far less desirable when producers are presented with a cheaper Option B (foreign labor). Demand for American labor will decrease, but the supply will remain the same, leading to a surplus of labor, otherwise known as an increase in unemployment. A wide-scale shift in production away from the United States would lead to the loss of millions of manufacturing jobs, crippling many middle-class families and damaging the entire American economy.

Trump and Sanders are right: as currently written, the Trans-Pacific Partnership will not, and should not, be passed. There are far too many controversial measures that simply will not succeed under the same umbrella. However, the TPP should not be completely scrapped. Instead, sensible changes should be made to the agreement so that it is the most beneficial that it can be to all parties involved.

For example, the investor-state dispute settlement (ISDS) needs to be removed from TPP. It is a corrupt, unjust system of conflict resolution that favors the corporations and circumvents the countries’ authorities. Judgments like that of Metalclad are harmful to investor-state relations because it develops an attitude of mistrust, and it is unfair that a government should have to pay millions in damages and legal defense for proceeding according to their own law.

Another change that must be made to TPP is the addition of incentives for companies to maintain production in the United States. The labor forces of other countries will become more competitive under TPP with lower wages and less working regulations, so it is important that the U.S. keeps its workers competitive. By adding a small incentive for companies to keep production in the United States, such as a minor tax break, the government will be able to minimize the amount of jobs leaving the country. This will allow the country to reap the benefits of TPP, while keeping American jobs intact.

Obviously, these changes would have consequences. Most notably, the policy tweaks would potentially irritate the other nations involved in the deal. Countries seeking to create a more business-friendly environment would balk at the proposition of removing ISDS, and countries looking to cultivate a more competitive labor force would be irked by the addition of incentives for American companies to keep production domestic. However, as displeased as they may be, there is a large possibility that they agree to the new terms. This is because the Trans-Pacific Partnership needs the United States in order to be successful. Without the strength of the world’s largest economy, the trading bloc created by the agreement would be too weak to be sustainable. Donald Trump, the incoming president-elect, has vowed to never sign the TPP, leading the current Obama administration to announce that they are abandoning the deal. At this point, after public acknowledgment that the current form of TPP will never be passed, it is worth it for the U.S. to at least propose these changes that would lead to more favorable terms for the United States. If the other countries involved want a serious chance at making this deal happen, they should consider the new terms proposed by the United States. With these changes, the Trans-Pacific Partnership would be a trade agreement for the people, not the corporations, and could potentially become the driving force behind a period of American economic prosperity.

 

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